The Financial Express

Coronavirus toll on economic vibrancy

| Updated: March 25, 2020 21:52:16

Coronavirus toll on economic vibrancy

The spread of coronavirus is going to take a serious toll on the global economy. Different international agencies have already projected that an economic recession is unavoidable. United Nations Conference on Trade and Development (UNCTAD) has made three projections on trade, foreign direct investment (FD) and overall economic growth. According to the UN body, the COVID-19 outbreak is hampering global trade and may result in a US$50 billion decrease in merchandise exports across global value chains. It also projected global FDI to shrink by minimum 5.0 per cent to as high as 15.0 per cent in the current year. Finally, it cautioned that the shock will cause a recession in some countries and depress global annual growth to below 2.50 per cent in 2020. 

In fact, recession is already there as different social and business activities have been shutdown in large part in Europe and the United States. The fallout of recession will be catastrophic in the long-run and Bangladesh is not immune from it. The country is now well integrated with the rest of the world.  Country's trade-GDP ratio is now around 40.0 per cent, remittance-GDP ratio is around 12.0 per cent and foreign debt-GDP ratio is 19.30 per cent. These indicate the degree of link of Bangladesh economy with the rest of the world. Thus, any turbulence in global economy will affect the country seriously. Though the shock to the economy will largely come from the external side, weakness in domestic front will make it difficult to absorb the shock.

DATA SHOWS SLOWDOWN: There is already a slowdown in the country's revenue earnings. The National Board of Revenue (NBR) data showed that tax revenue stood at Tk 1.26 trillion in the first seven months of the current fiscal year (FY20), against its target of Tk 1.64 trillion for the period. Negative growth in import reduced the collection from customs duty and thus adversely affected the overall revenue earnings.

During the July-January period of the current fiscal, merchandise import declined by around 4.40 per cent. In the same period of the past fiscal year (FY19), import registered 7.41 per cent growth. Decline in import in the seven months was not linked with coronavirus but slowdown in domestic demand as well as internal investment was notoiceable.

Low implementation of the annual development programme (ADP) may be ascribed for this. Official statistics showed that implementation rate of ADP in July-February period stood at 37.09 per cent which is the lowest in the last three years. During the same period of FY19 and FY18, the rates were 39.13 per cent and 38.01 per cent respectively. 

Sluggish private investment is also reflected in modest growth in private credit as well as industrial term loans. Central bank statistics showed that private credit registered only 4.18 per cent in the first seven months of the current fiscal year which was 6.20 per cent in the same period of FY19. Again, industrial term loans increased by around 6.50 per cent in the first-half of the current fiscal which was around 29 per cent in the same period of the past fiscal.

Export earrings also declined by around 4.50 per cent in the first eight months of the current fiscal. Earnings from merchandise export stood at $26.24 billion during the July-February period of FY20 which was $27.56 billion in the same period of FY19.

Medium and long-term (MLT) external loans are also in declining trend. The latest statistics of the country's Balance of Payments (BoP) showed that MLT declined by around 5.52 per cent in the first seven months of the current fiscal to $2.94 billion from $3.11 billion in the same period of FY19.

On the external front, remittance and FDI are still two bright spots. Inflow of remittance increased by 20 per cent in the first eight months of FY20 while gross inflow of FDI, as reported in the BoP, increased by 4.64 per cent in the first seven months of the current fiscal year.

RISK LOOMS LARGE: The major destinations of the country's export items are the US and the European Union (EU). As the situation in Europe has already turned for the worse, demand is shrinking fast. People are now highly concentrating on safety and cleanness. They are adopting social isolation. Lockdown in many European countries compel the citizens to stay home and work from home where possible.

Under this situation, it is unlikely that regular orders of clothing from these countries will continue. Already, buyers of Bangladeshi RMG products have started to cancel some of the already placed orders. It means, exports of RMG will decline in near future.

Besides export, remittance will also come under a big threat. A large number of non-resident Bangladeshis has already returned to the country from abroad. Many of them are regular remitters to the country. Moreover, travel from the country is restricted in many counties. Thus, it is likely that inflow of remittance will drop significantly in the last quarter of the current fiscal.

The decline in export and remittance will be a big blow to the economy no doubt. There is also no reason to think that FDI will increase. Only inflow of aid, mostly targeted to fight the coronavirus, will be there.

Sluggish import is also unlikely to reverse in the coming days.  Already dampened private demand is likely to be subdued further due to cut down in export orders. Thus demand for raw materials and intermediate goods to produce export-oriented goods will also decline.

Again, import for domestic consumptions may face disruption unless China recovered fully. More than one-fifth of Bangladesh's import is sourced from China. In FY19, total import from China stood at $13.63 billion while total import from the rest of the world was $46.27 billion.  Due to the spread of coronavirus, thousands of small and medium enterprises (SMEs) in China were forced to cut down or stop production. UNCTAD estimation showed that Bangladesh may lose $16 million in its global value chain due to disruption in Chinse manufacturing units.  Again, to ensure coronavirus related safety, shipment from China has also turned stringent. For Bangladesh, it is impossible to find an alternative to China as no country in the world has such  large-scale production and supply capacity.

Against the backdrop, Asian Development Bank (ADB) has projected that Bangladesh's GDP may contract by as high as 1.10 per cent in the 'hypothetical worst-case scenario' of a 'significant outbreak' of coronavirus in the country. It means, the virus could wipe some $3.02 billion off the $300 billion-plus economy. The country may also see around 0.89 million job loss due to the outbreak of the virus.

FISCAL STRAIN: Economists and business leaders have emphasised on compensation package for the affected sectors. Bangladesh Bank has already relaxed its policy asking the banks to suspend "adverse" classification of loans until June 30 from January 01, 2020. The central bank has also asked the commercial banks to allow traders to extend the tenure of realisation of both the export proceeds and bill of entries of imports up to six months instead of the existing four months. 

Nevertheless, compensation or support to keep the business activities vibrant is a tricky thing. Any support to the export-oriented sector will not be effective unless the economy in China, Europe and the US rebound. Moreover, any monetary compensation will strain the state coffer.

The focus is still on the formal sectors of the economy while it is the informal sector that provides most jobs in the country. Local micro and small businesses have already turned vulnerable due to reduction in domestic consumption. Any support ignoring the informal sector will be less effective to continue the wheel of the economy.  Finally, corruption and lack of good governance will be the major barriers to transfer the fiscal and monetary supports properly.




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