The state of recovery of the manufacturing and services sectors in view of the Covid-19 pandemic may be judged by assessing the nature of changes in business activities against pre-pandemic level. During recovery from a recession, manufacturing and service sectors tend to undergo a process of adaptation and adjustment to new conditions -- labour, capital goods, and other productive resources that were tied up in the businesses are re-employed in new activities. Recovery of Bangladesh's manufacturing and services sectors in the backdrop of the pandemic needs to be examined from these vantage points.
With the gradually declining intensity of the pandemic and simultaneous opening of various economic activities, Bangladesh's manufacturing and service sectors can be expected to enter the post-Covid recovery phase. Given the differences in the level of disruptions caused by the pandemic, and also different levels of opening up of local and global economies, the pace of recovery is likely to be different for different sectors of the Bangladesh economy. Indeed, the nature and paces of recovery are expected to be different for different categories of enterprises within a particular sector. Fiscal and monetary policy support targeted at different sectors and enterprises is also likely to have a varied level of impacts and implications in view of the recovery process. Hence, it is important to identify the level of recovery in the manufacturing and service sectors and the factors driving the process.
Both primary and secondary data were used to conduct the analysis as regards the recovery of Bangladesh's service and manufacturing industries. Based on a structured questionnaire, primary data were collected from a selected number of enterprises to generate necessary inputs for calculating the indexes. Questions were divided into five broad sections: (a) New orders, (b) output, (c) employment, (d) suppliers' delivery times (inverted), and (e) stocks of purchases. Changes in the performance have been analysed for three different periods. These refer to - period 1 (December 2019 compared to December 2018), period 2 (June 2020 compared to June 2019) and period 3 (December 2020 compared to December 2019).
This section discusses the performance of important indicators related to manufacturing and service sectors since January, 2020, to appreciate the level of changes that would help delineate the industries' pace of recovery.
PERFORMANCE OF PRODUCTION: Manufacturing sector's performance evinces an indication of recovery in terms of production. From the dip in April, 2020 when the growth of QIP was -23.5 per cent the manufacturing production has gradually improved over the following months - in June, 2020 the growth in QIP was 18.3 per cent. However, in the following months, the production growth has slowed down and somewhat stagnated below the 10 per cent level. The latest available monthly data (September, 2020) portrayed positive growth (9.4 per cent); however, the level of growth was much lower compared to the pre-Covid months (January-February, 2020) when it was about 22 per cent. This is largely attributed to sluggish growth of export-oriented ready-made garments (RMG) and non-RMG industries as well as domestic market-oriented food products and non-metallic products. However, pharmaceutical sector has performed exceptionally well during the pandemic period thanks to the rise in the demand for medicine and other medical equipments. A slow rise in consumer demand, both at local and global markets, meant that concerned industries did not get enough new orders; prices offered were also not attractive. Consequently, manufacturing production suffered.
Uncertainties arising from the second wave of the pandemic, with consequent fall in income, loss of employment and other adverse impacts across major export destinations of Bangladesh, could induce further detrimental supply-side response. In view of the ongoing vaccination across almost all parts of the world, uncertainties as regards the pandemic are expected to decline in the near future. This may impact production positively. However, it will take more time to trigger consumers' confidence in key partner countries which is needed to stimulate Bangladesh's export. Losses in employment (around 10.1 million became unemployed in April, 2020) and income (65 per cent lost their income) in the early months of the pandemic were significant, and it will take some time for the economy to fully recover. The consequent sluggish growth in domestic consumer demand will likely have adverse implications for industrial production in the near term.
It is to be noted that the pace of recovery is different for different categories of enterprises. In case of the RMG industry, capacity utilisation for all types of enterprises has increased during April-September, 2020 period. However, the pace of growth has varied widely between small scale enterprises, vis-à-vis medium and large scale enterprises. Indeed, this gap has been widening over recent months. In other words, small scale enterprises are lagging behind in terms of recovery in capacity utilisation compared to medium and large-scale enterprises. According to the resilience index, estimated for 600 RMG enterprises (CPD, 2021), while the overall score was 43.4 (out of 100), the index values for small, medium and large-scale enterprises were 37.8, 49.2 and 54.2 respectively. The RMG industry, in general, is lagging behind in terms of resilience and within RMG smaller enterprises are in a more disadvantageous situation.
ELECTRICITY USE ACROSS ECONOMIC ACTIVITIES: Electricity use is a good proxy indicator to understand the state of economic activities, particularly in manufacturing and service-oriented industries, and could therefore serve as an indicator of economic recovery. Electricity generation has maintained a positive growth during January, 2020- August, 2020 period compared to that of the previous year. However, growth has slowed down and, since September, 2020, it has gone negative (except during the month of October, 2020). In other words, sluggish rise in electricity demand commensurate with slow recovery did not continue since September, 2020. Overall, manufacturing and service-oriented industries are yet to create adequate demand for electricity due to the slow rise in the activities.
INVESTMENT PERFORMANCE: Uncertainties caused by economic disruptions owing to Covid-like pandemic tends to have a serious adverse impact on private investment. Industrial term loan, which indicates long term investment in manufacturing and service-oriented activities, has experienced a significant fall during the early period of Covid pandemic (April-June, 2020). However, small scale industries were more severely affected (-71.2 per cent) compared to the medium and large-scale ones (-37.8 per cent and -43.2 per cent respectively). There was no sign of recovery in the first quarter of FY2021 (July-September, 2020) since the negative growth has continued though it has shown some sign of improvement (-29.65 per cent) in July-September, 2020. Indeed, the decline in investment by large scale enterprises (34.03 per cent), which accounted for 76 per cent of total industrial term loans, portrays a medium-term recovery challenge for manufacturing and service-oriented industries.
Quarterly growth in advances made to different sectors has tended to vary across sectors during the first three quarters of 2020 (end of March, June and September, respectively). Stagnation of the manufacturing industry in the post-Covid recovery phase could be observed in case of the performance as regards advances as well. The growth of advances for the industry sector was declining in 2020 compared to 2019. On the other hand, the advances growth of construction sector was also stalling. However, a different scenario may be observed in case of trade and e-commerce, and from the transport sector. The pandemic came as a blessing for the e-commerce industry which took off at a very fast pace as consumers started to make greater use of it. This is reflected in the high and consistent growth rate in advances. Advances to transport sector picked up in the early months, till June, 2020 but fell significantly in the third quarter of 2020.
The changes in opening and settlement of LCs at import stage is a good indicator to understand the state of production based on demands for working capital and term loan by different manufacturing and service-oriented industries.
The ratio of opening and settlement reflects the rate of settlement against the opening of import LCs during a specific time period. A ratio value closer to 1.0 reflects businesses respond quickly in terms of settling their import payment given the demand for the imported goods. As analysis of opening-settlement ratio depicts that the ratio has been gradually declining in case of industrial raw materials, intermediate goods and capital machineries (Table-1). However, the ratio fell to a lower level for industrial raw materials compared to intermediate and capital machinery. In other words, importers are not quickly responding to settling the LCs, particularly in case of capital machineries given the uncertainties in future demand for goods and services. This may be indicative of businesses in manufacturing and services sectors are struggling more to ensure their existing capacities thus are responding slowly to settlement of LCs, particularly for capital machineries which would further rise the capacity.
OPINION OF ENTREPRENEURS AS REGARDS BUSINESS RECOVERY PROSPECTS: An attempt was made to capture entrepreneurs' perception as regards prospects of business recovery through a small sample survey which was undertaken during February 1-4, 2021. Following the Purchasing Managers' Index (PMI) method to assess the level of business recovery, a similar index for manufacturing and service industries was developed for this purpose. Following sections highlight the key findings of the survey.
Entrepreneurs felt that the industrial enterprises, in general, are in the process of recovery from the Covid-19 induced crisis. However, the process of recovery is slow, and enterprises are lagging far behind when compared to the pre-Covid-19 situation. Table-2 portrays the overall status of recovery of the sample manufacturing and services enterprises. The index values reveal that enterprises were hit hard by the coronavirus pandemic but had rebound rather quickly. The overall index value for industries was 65 out of 100 in December 2019 compared to that in December 2018. However, the level declined to almost half in June 2020 compared to what they were in December 2019 (32 in June 2020 vis-à-vis 65 in December 2019). Since June 2020, the enterprises have shown signs of a rebound, and after six months (December 2020) the level reached 43, which was 34.4 per cent higher than the level in June 2020. Despite the pace of recovery appears to be slow - the overall level is 57 per cent lower than what this was in December 2019.
The pace of recovery is found to be different for manufacturing and services enterprises. A drastic fall is seen in case of manufacturing enterprises during the lockdown phase (69 in December, 2019 vis-à-vis 28 in June, 2020). The state of service sector enterprises was to some extent better in comparison (from 63 in December, 2019 to 39 in June, 2020). A somewhat faster recovery is also seen in case of service sector enterprises compared to that of manufacturing ones. The PMI was 37 in December 2020 for manufacturing enterprises whereas it was 53 for service sector enterprises. Thus, the state of service sector is perceived to be better, albeit only marginally, than that of manufacturing sectors though both are still lagging behind their respective performance level in 2019.
RECOVERY SITUATION OF DIFFERENT COMPONENTS: The index was calculated based on five headline sub-indexes/components: new orders, output/business activities, employment, backlog of works and stocks of purchases. Each of the components is separately showing signs of recovery from the Covid-19 shock (Table-3). Immediately after the pandemic induced crisis, the component 'new order' fell drastically. Major manufacturing and service sectors have experienced a significant decline in new orders. In case of the RMG sector, a part of existing orders was either cancelled or postponed/deferred. However, the fall was rather moderate between December, 2019 and June, 2020 in case of output/business activities, employment, backlog of works and stock of purchases. Towards the end of the year 2020, enterprises started recovering, as is seen from movements in the index values. Nevertheless, the pace of recovery is still very low in case of new orders. While the output/business activities, employment and stocks of purchases have made a moderate level of progress, the other components such as backlog of works are almost stagnant. In case of some components such as employment and backlog of workers, service-oriented enterprises have almost reached the pre-Covid level. However, manufacturing sector enterprises are way behind as regards most of the components except backlog of works.
RECOVERY OF DIFFERENT CATEGORIES OF ENTERPRISES: In general, it is found that the recovery from the Covid-19 crisis is not of the same type for all categories of enterprises. Compared to other categories of enterprises, the medium-sized enterprises suffered the most during the pandemic; on the other hand, there are the enterprises which are in the front in view of the recovery process. However, micro and small enterprises are facing formidable problems and difficulties in view of getting into the recovery phase. According to the PMI index, no sign of recovery of micro and small-scale enterprises is discernible even after almost one year after the pandemic had first struck in Bangladesh.
FACTORS RESPONSIBLE FOR CHANGING RECOVERY SITUATION: The recovery of the manufacturing and service sector is likely to be hinge on a number of factors. First, it is sluggish rise in consumer demand, both in local and global markets, which is the key factor responsible for the slow recovery. The economy has indeed benefitted significantly thanks to the government's risky decision to open up economic activities at an early phase of the pandemic. This had helped the economy's quick rebound by June, 2020. However, as far as industrial service sectors were concerned, recovery will primarily depend on market signals, particularly rise in consumer demand.
Since the private sector is still struggling in making full use of their existing capacities, let alone going for substantial new investment, the government will need to do more incentivise investment and stimulate domestic demand. Public sector investment in projects/activities which is capable of generating high employment within a short time, in both urban and rural areas. For example, rural infrastructure development programme, ministry-wise employment generating programmes for different areas, training and capacity building for self-employed youth and implementing 'Amar gram Amar shohor' type of projects on a large scale, across the country, will be important. The upcoming national budget (FY2021-22) should put a focus on this type of activities.
Second, the stimulus package in the form of a waiver of VAT payment, allowing delayed payment of utility bills and bank loans etc had helped enterprises cope with the immediate adverse effects. However, the stimulus package mainly in the form of subsidised credit support was likely to have a limited role in ensuring a robust recovery in the manufacturing and services sectors. As is known, the government has announced 21 stimulus packages for different sectors, including the manufacturing and service industries towards mitigating the negative impacts and recovery of the economy (Table-5). The stimulus package of BDT 10,500 crores for the export-oriented industry could be considered the most successful in this connection. The repayment of credit could prove to be challenging for small-scale enterprises, particularly because reaching the pre-Covid level of production and employment is likely to take more time for these enterprises, as our preceding analysis reveals,
In terms of disbursement, the stimulus package of Tk 200.0 billion announced for CMSMEs may be considered to be the least effective support. CMSMEs have been one of the most affected sectors due to the pandemic, yet the allocation of the package for this huge sector of critical importance in the economy was significantly low. On top of that, almost after one year of the announcement of the package, as of January 2021, only 58.0 per cent of the funds could be disbursed. The second stimulus package announced by the government in January 2021 targeting MCSMEs, to be disbursed through an alternate channels other than the banks, needs to be implemented by drawing needed lessons from the experience of the first package. In this context, procedural complexities associated with selection of enterprises, collaterals, repayment schedule and risk mitigation etc. should be addressed in a way that caters to the needs of the CMSMEs and also safeguards the interest of disbursing entities. Recovery of the economy will hinge, to a large extent, on such second generation of support measures.
Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Mr Towfiqul Islam Khan is Senior Research Fellow, CPD. [email protected]
[Research support was received from: Muntaseer Kamal, Syed Yusuf Saadat, Md. Al-Hasan and Kamruzzaman (Senior Research Associates, CPD); Mr Abu Saleh Md. Shamim Alam Shibly, Mr Tamim Ahmed, Ms Nawshin Nawar and Mr Adib Yaser Ahmed (Research Associates, CPD); and Helen Mashiyat Preoty and S. M. Muhit Chowdhury (Research Interns, CPD)]