Bangladesh can afford bold decisions to tackle Covid-19 crisis

In the midst of this Covid-19 crisis, protecting lives is the need of the hour. In countries with very large vulnerable populations, as in Bangladesh and others in South Asia, this also involves protecting the lives of the millions who live in poverty or dangerously close to poverty, and who are suffering a once-in-a-lifetime catastrophic shock to their livelihoods.

Thus, while the state is under lockdown, and the sick and infected are being taken care of by the health system, the state has to find ways to get money into the hands of its people, especially the poor and vulnerable.

Bangladesh has the fiscal headroom to take some bold steps to support its workers and people. And its focus is on workers, and not on the other critical part of the Covid-19 response, viz., tackling the health emergency.

About 55 per cent of Bangladesh's population is considered vulnerable (World Bank, modelled ILO estimate).This is actually better than India's 74 per cent, or Nepal's 78 per cent. Another way to look at vulnerability is to define poverty with a higher poverty line than the $1.9 per day (in terms of 2011 Purchasing Power Parity)-line which is used to define basic poverty. The relevant lower middle-income poverty line would be $3.20 per day. Defined this way, Bangladesh's poverty ratio is about 50 per cent, not dissimilar to its vulnerability rate (WB data, using PovCal).

Does Bangladesh have the resources to address the fallout of the Covid-19 crisis? Its public finances have been managed conservatively, resulting in a low public debt to GDP (gross domestic product) ratio of around 34 per cent. This is better than most countries in South Asia: compare, for example, India's public debt to GDP ratio of 72 per cent, and Pakistan's 87 per cent. Bangladesh's macroeconomic conservatism can pay off - it can now afford to responsibly borrow significant resources from external sources and domestic markets to address the crisis. This assessment is confirmed by the Joint World Bank-IMF Debt Sustainability Framework, where Bangladesh's risk of debt distress, as of late 2019, is rated as 'low'. Moreover, its debt-carrying capacity is rated as 'strong' and both external public debt and total public debt (as a ratio of GDP) are "…well below their indicative thresholds" (IMF, Article IV, September 2019). The indicative threshold for strong capacity countries like Bangladesh is a total public debt to GDP ratio of 70 per cent.

Thus, if Bangladesh takes on an unanticipated expenditure of, say, 10 per cent of GDP, its total debt to GDP ratio will stay very much within the threshold. To the extent that this additional debt is raised externally, on concessional terms, it will imply lower debt servicing. (Note that Bangladesh has requested funding from most multilateral financial institutions including the IMF, the WB, and the Asian Development Bank). While there are legitimate concerns such as low tax mobilisation and crowding out of the private sector, the current situation warrants a decisive increase in spending, and Bangladesh is better placed than most comparable countries to undertake such spending.

In the midst of a lockdown and precipitously falling global demand, workers are facing the prospect of widespread job losses. The World Bank in its biannual economic report for South Asia projects a decline of 20 per cent in Bangladesh's exports of goods and services in 2019-20. The garments sector, which makes up about 84 per cent of goods exports, is already being severely affected, with reports of factory closures, layoffs and furloughs. Remittances will also take a hit, as will service sectors such as transport, retail, entertainment, and so on. The WB report projects FY2020 growth at 3.0 per cent, but this is a base case scenario. Unless the government takes up the slack, growth could be significantly lower.

Job losses can be devastating for those directly affected, but they are not good for society, either. Jobs, either formal or informal, keep people out of poverty in most cases. Moreover, once labour force participation rates fall, they do not automatically recover even when demand does. On the flipside, production can be ramped much faster to respond to a demand surge once the crisis eases, if workers are already in place. In the US, for example, labour force participation rates, adjusted for aging, took about a decade to recover from the impact of the 2007-08 global financial crisis (Eppsteiner, Furman and Powell 2018). The current crisis is far more severe and widespread than the global financial crisis.

To minimise job losses, government support is unavoidable at this point in time. The government of Bangladesh has announced a package of support measures that are reported to amount to so far $8.5 billion, about 2.5 per cent of GDP. But those measures do not appear to have a sufficient focus on protecting jobs and the poor.

With over 80 per cent of the workforce in the informal sector, it will not be easy to reach the majority of workers. Let us start with the easier part - the formal sector.

To keep people employed in their formal sector jobs, the basic principle should be to provide zero interest loans to employers, routed via banks, with minimal conditions. This is different from the scheme that is proposed by the government, which levies a 4.0 per cent interest rate (the other 5.0 per cent being subsidised), and, most importantly, may not be easy to access. As long as the sector is severely affected by the crisis (and that is easy to see), and the money is used for paying wages, the banks could initially provide, say, three months of payroll support at zero interest (so the government subsidy element could be 9.0 per cent and not 5.0 per cent). For smaller firms, with less than a certain number of employees, the loan could later be converted into a grant. The important part is to get the loans out quickly, so that workers that have so far not been paid can receive their salaries and get about the business of surviving. The loans should also cover temporary or contractual labour in the supported firms.

At this stage, it is not important to focus on conservative banking rules, or filling out of long application forms, or asking for iron-clad proof. Time is of the essence. The United Kingdom's COVID19 Job Retention Scheme or the US Paycheck Protection Program may offer useful pointers in this regard.

It is much more difficult to reach workers in the informal sector. And there are no foolproof schemes to get to them, especially when informal workers, disproportionately employed in agriculture and services, are widely dispersed. In addition, the International Centre for Migration Policy Development reports that half a million migrant workers returned home to Bangladesh between January and mid-March 2020. Most of these migrants do not have any obvious jobs at home. To tackle the critical challenges of providing income support to informal sector workers, a variety of methods may need to be tried, such as reaching them through the cash transfer programme; using microfinance institutions (NGOs are another option) to channel wage support, like the banks' role for the formal sector; providing some version of Universal Basic Income to a defined part of the population (such as all informal sector workers including farm labour, as well as migrant workers that have returned from overseas). The basic principle would need to be the same as for the formal sector: implement the schemes quickly, start with at least three months of support, do not agonise over leakages, and try multiple methods, because we are in the phase of trial and error.

To summarise, this piece suggests that two of the most important priorities at this point in time should be to protect people's lives through health measures as well as job retention assistance, targeted to all affected workers, whether in the formal or informal sectors.

Paul Krugman, the Nobel prize-winning economist and New York Times columnist, has said that the US stimulus package for dealing with Covid-19, which is currently about 10 per cent of GDP, is not "remotely enough" for his country.(Subsequently, the Senate and the House have passed a new package worth over 2.0 per cent of GDP). The right way of thinking about the package is not as a stimulus, but as "disaster relief," said Krugmanin his Times column. With far greater challenges with respect to their health systems and informal sector workers, Bangladesh and many other South Asian countries clearly have to come up with bolder and bigger disaster relief packages. And while we should try to do implement schemes as well as possible, this is not the time to be purist.

Sanjay Kathuria is former Lead Economist and Coordinator for Regional Integration in South Asia at the World Bank. He was based in Bangladesh

during 2009-12.

Twitter: Sanjay_1818