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Coronavirus: The trajectory of recovery

| Updated: September 19, 2020 21:30:03

Coronavirus: The trajectory of recovery

When countries overwhelmed with the pandemic outbreak declared lockdown (holiday in Bangladesh) their economies did not come to a standstill. Some sectors like agriculture, food processing, pharmaceuticals and services of  sundry nature continued, albeit at a reduced level. So, by recovery it is not meant that shutdown economies have started working again, starting from zero or negative output. What recovery means in the context of lockdown is growth momentum of the economy that will regain the lost ground and take production back to pre-lockdown level.

The speed at which recovery will take place and the time frame of achieving full recovery i.e., nearly the pre-covid level will depend on how much growth has been eroded, how much resources are available in the form of both domestic and foreign, what are the prospects of exports, how buoyant is the private sector on which the onus of renewed investment will be, how effectively is the government mobilising resources and spending the same for productive purposes, how quickly can wage earners start remitting their earnings at previous level, what is the state of global recovery that will both restore supply chain and consumption and how much able are multilateral and bilateral donors to help affected countries with loans and grants. This is a long list of factors and depending on their number making positive contributions will determine the course and degree of recovery. Recovery of an economy devastated by lockdown following covid pandemic depends both an endogenous and exogenous factors. Like corona pandemic, recovery is also universal, with country-specific variation in degrees.

Keeping the above parameters in view an attempt can be made to delineate trajectory of recovery in Bangladesh, albeit tentatively because all data are not available now. Nor are the strategies of recovery fully unveiled. Unlike stoppage of economic activities that stopped overnight following lockdown, recovery will not proceed at breakneck speed from day one after the lifting of lockdown.

The GDP growth rate encapsulated the momentum of the economy before covid pandemic. At the end of FY 20, covid had started wrecking damage and it was estimated by the government that the growth rate would be around 5.5 per cent, down from 8.2 per cent as originally estimated. The World Bank has been most conservative and estimated the growth rate of GDP for FY 20 to be between 1.2 to 2 per cent. The IMF estimated the figure little higher, placing it at  2 to 3 per cent, while ADB's estimate has been the highest at 4 per cent. Accepting the figure of 4 per cent GDP growth, it means recovery to the level of 8.2 per cent-- the pre-covid level, will take about a year, because the growth momentum has been lost in the meanwhile due to lockdown for over two months when most of the economic activities were in a limbo.

The projected time period of one year for recovery at pre-covid level is, however, contingent on the robust growth of all sectors  and macro-economic parameters of growth. Exports, the main driver of the economy, fell by 8 per cent even before covid-19 struck. The main components of exports-- garments started showing a downward tendency towards the end of last fiscal due to recession in many of the countries that bought garments from Bangladesh. Corona pandemic accentuated the crisis of demand in the importing countries. According to BGMEA at least 1089 factories employing 1.2 million workers received cancellation of order from their buyers in April, 2020. The buyers had either cancelled or suspended orders worth more than $ 1.49 billion. Even if the orders were in place Bangladesh would not be able to export as more than 60 per cent of raw materials came from China and covid had disrupted the supply chain all on a sudden. Faced with cancellation of orders and stoppage of production, garment owners reportedly retrenched 85 thousand workers in 65 factories located in six industrial areas. Though Bangladesh has now lost the number 2 position in export of garments to Vietnam, many Bangladeshi garments are hopeful that they will rebound by December, ahead of Christmas. However, hope of recovery of  export market remains uncertain as of now. Accounting for 85 per cent of total exports, if there is a major shortfall in the garments sector, overall recovery of the economy will be delayed by more than a year, it is apprehended. Unlike garments, leather and leather products, two more promising export items, were already facing weak demand from buyers abroad because of change of taste among buyers and use of substitute materials. In the wake of covid-19, the demand for leather and leather goods have gone further down. With the fall in oil prices and the incidence of corona in the middle-eastern countries, the prospect of healthy remittance by wage earners has also become dicey. With most of the star performers in exports finding themselves at bay by corona virus, the power house represented by them may not be strong enough to pull through the crisis.

Domestic consumption of goods may compensate for loss in exports to some extent. According to Bangladesh Bureau of Statistics (BBS), manufacturing activities producing goods for local market like fertilisers, cement, iron, steel plates, petroleum products etc., have resumed production after lockdown has been lifted. The pharmaceutical industry's performance has been the best of all, because of demand from abroad. It posted an increase of 1.8 per cent of income  during April, soon after lockdown on month on month basis and 17.8 per cent on year on year basis. Lifting of lockdown in the EU countries has seen an uptick of demand for Bangladesh goods, including garments, leather goods and pharmaceuticals.

Following lockdown on  March 26, a large number of daily wage workers, low income earners and petty traders became unemployed. To help them and their employers, the government announced a stimulus package for all sectors affected by covid that translated the monetary terms to more than Tk. 100 (one hundred) crores. The poor who lost their income were given Tk. 2500 per family for two months and open market sale of food items arranged in urban areas.

Much more could have been done by the government by way of cushioning the negative impact of the pandemic. But it has been handicapped by a growing burden of public debt. So, it has relied more on monetary policy to address the damages caused by the pandemic.

The Budget for the current fiscal is visibly skewed towards relief and recovery  following the pandemic. Additional allocations have been given to all the priority sectors that require specific attention for recovery. It remains to be seen if the resources promised are actually released. Most of these will be from either through banks or public debts. With GDP-tax ratio stuck at 12 per cent over the past several years, it is unlikely to have a surge in collection of government revenue.

Resource mobilisation  is at the heart of stabilisation and recovery programme of the economy. Investments have to be made on a wide front to recover the lost ground and this will require massive resources-- domestic and foreign. The budget for FY 21 has projected a total expenditure of Tk. 5,68,000 crore out of which Tk. 33000 crore will be from tax etc. and Tk. 84960 crore from bank borrowing. Borrowing from external sources has been projected at Tk. 80017 crore. Non-bank borrowing is estimated at Tk. 25003 crore. The collection of revenue by NBR and others remains an open question. But given past experience it can be said that there will a huge shortfall of revenue. As regards borrowing from foreign sources, some indications have already been given about the size of the assistance that may be forthcoming. IMF has pledged $735 million as budgetary support while World Bank and ADB have both committed $500 million each to help Bangladesh government to tide over the crisis. Commitments for help have come from the government of Japan ($40 million), France ($30 million) and South Korea ($50 million). More funds may come from external sources if our government makes out a strong case for aid and loan money to accelerate recovery. In fact we should give more emphasis on borrowing from external sources than relying on commercial bank borrowing.

Enhanced resource mobilisation is only one side of the recovery strategy. More important is investment programme undertaken. The investment rate in Bangladesh is stagnating at 28 per cent of GDP for long. It has to jump now to at least 32 per cent to give a jumpstart to the economy. Alongside the volume, composition of investment has also to be such that more productive ones are selected to have accelerated growth.

One good sign about the prospect of quick recovery is the optimistic view among multilateral institutions. The local IMF Chief recently said in an interview that Bangladesh economy will rebound from October this year, that is four months after the lifting of lockdown. This appears to be a too optimistic prognosis, if by rebound is meant regaining the pre-covid level of growth. The IMF has, however, made its forecast dependent on a number of factors as conditions.

The projection by the credit rating agency Moody's appears to be more realistic. It has stipulated a period between one to one and a half years for full recovery. It's analysis is detailed and reasonable. It has, however, added a few caveats like no recurrence of covid-19, prudent fiscal policy and a favourable global economic environment. Moody's projection seems to fall in the class of moderate case scenario, eschewing the best and the worse case ones. Very prudent indeed.



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