Addressing corona-induced recession
In the wake of declaration of coronavirus outbreak as a global pandemic by the World Health Organisation (WHO) on March 11, the world economy is now facing the most serious challenge since the global recession of 2008. Earlier, the year 2020 had started with the negative impact of a trade war initiated by the USA. Despite that, some people were optimistic that a reversal of US brinkmanship might still prevent that disaster.
But now, that cannot be said with confidence. In fact, some former International Monetary Fund (IMF) economists are already claiming that the world has once again entered a recession.
In the backdrop of coronavirus becoming a pandemic, a price war centring on petroleum oil has already started resulting in plummeting of the oil price as well as plunging of the stock prices all over the world. Amid lockdowns and shutdowns all around, there is now a near-consensus about the onset of another global recession. It is claimed worldwide that the economic risks of Covid-19 are higher than its health-related ones. This is because compared to the number of coronvirus-related fatalities, the global trade regime is undergoing such severe disruptions that many more people are becoming bankrupt and innumerable people are losing their jobs.
Although the time has not yet come to make a final assessment of the resultant economic ills, Bloomberg has estimated the potential losses to be US$2.7 trillion. The rich nations' club OECD (Organisation of Economic Cooperation and Development) has projected the likely losses to be up to 1.5 per cent of the global GDP (gross domestic product). But proving Bloomberg wrong, retail sales in China already fell by 20.5 per cent instead of the predicted 4.0 per cent, and her manufacturing, mining and utilities activities shrunk by an alarming 13.5 per cent during January-February period alone.
With regard to Bangladesh, the Asian Development Bank (ADB) says that employment may shrink by 900,000 over one year and the loss to the country's GDP may total $3.02 billion, which translates into 1.0 per cent of GDP. The trade-commerce and services sectors would suffer most with likely losses of US$1.14 billion. Besides, the losses accruing to the agriculture sector would be US$630 million; hotels-restaurants and related services would lose US$510 million; manufacturing and construction sector about US$400 million; and the transport sector US$330 million.
The main avenue for earning foreign exchange in Bangladesh is exports, which has been severely hit by the pandemic. Almost all exportable commodities have been adversely affected by the dearth of imported Chinese raw materials and supply chain disruptions. The sales of commodities have also declined drastically due to travel restrictions all over the world.
As a consequence, the purchase orders have gone down steeply, including 25 per cent for the readymade garments (RMG) sector. This is quite ominous when we take into account that 83 per cent of Bangladesh's export receipts come from the RMG sector. A major cause of disruptions in RMG production has been the decline in imported Chinese fabric and other raw materials for local factories. All these have made it extremely likely that the purchase orders would fall even further in the coming days. Therefore, to make the RMG sector sustainable, Bangladesh has no other option but to aggressively pursue local and foreign investments in the textile sector in order to reduce dependence on external supplies.
Travel and tourism is another sector that has already taken a big hit, as the period between January and March (also December in previous year) is usually its peak season. It may become even more difficult to keep the national airliner Biman Bangladesh Airlines afloat, as the Biman authorities are apprehending a loss of Tk 2.50 billion in March alone. On the other hand, the hotels, motels and resorts in Cox's Bazar are expecting their worst loss in a decade as the flow of tourists has gone down dramatically.
The leather industry is another sector that has taken a hit due to over-dependence on China. As most of the Bangladeshi tanneries have failed to get approval from the Leather Working Group (LWG) mainly due to lack of central effluent treatment facility at the Savar Tannery Estate, they often rely on imported leather which is not forthcoming now. Besides, due to limited scope for exporting leather and leather goods to Europe and the USA, China had become a major importer of Bangladeshi leather. But the Chinese importers have temporarily suspended imports due to Covid-19 outbreak. This has posed a threat to the tannery industry and the government is left with no other choice but to expedite the installation of a full-fledged ETP plant at Savar in order to obtain LWG approval.
A recent study by the IMF has found that the Covid-19 pandemic has caused a spike in option-implied volatility in equity markets signalling higher uncertainty about the future. Spreads of emerging and frontier market bonds have widened indicating the investors' declining appetite for riskier investments. Tightening of financial conditions has erected problems for future economic growth. There have also been sharp drops in government bond yields as investors readjust their expectations; and the sharp re-pricing of bank shares indicate investor worries about profitability.
There is no easy way out from this global crisis for policymakers. The governments, economists, researchers and entrepreneurs should sit together to decide on policies that would minimise slippages. The measures that can be taken by our government on an urgent basis include: deploying more resources for healthcare; supporting affected families by offering cash-help; creating short-term job opportunities; reducing tax burden on the sectors suffering maximum losses; enhancing liquidity and credit supply for affected firms; paying back outstanding public sector debts to non-government and private entities; taking measures to enhance liquidity of banks; and raising volume of investments.
Quantifying economic impact of a pandemic is quite complex. This has led to considerable uncertainty about economic outlooks as well as associated downturn hazards, which may put growth prospects and financial stability at great risk. Therefore, the right monetary and financial stability policies as well as targeted fiscal measures will be crucial in overcoming the challenges.
Dr. Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly.