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The Financial Express

Pandemic related economic challenges in Bangladesh


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Pandemic related economic challenges in Bangladesh

For the past decade, the silver lining for Bangladesh has been its Gross Domestic Product (GDP) growth. While Bangladesh boasts development in infrastructure, exports and GDP per capita, the country still needs to address the lack of job opportunities for the youth, the low labour productivity and the growing inequality between the rich and the poor.

Despite a decline in poverty, the pre-existing inequality trend in Bangladesh has been further exacerbated by the pandemic.

PRE-EXISTING PROBLEMS FOR BANGLADESH: The total change in poverty was only 7.0 per cent lower from 2010 to 2016. Despite lower growth of 7.8 per cent in 2010-2016, compared to the 9.6 per cent growth in 2000-2005, the economy had expanded due to export oriented industrialisation.

According to the Solow Model, capital accumulation is higher for lower income countries such as Bangladesh. Therefore, growth was higher initially in 2000-2005 and the rate at which capital accumulated, decreased in 2010-2016. Consequently, the growth Bangladesh had been experiencing cannot be conflated with an increase in living standards for the entire populace as the bottom quartile is still vulnerable to poverty.

 The weak health infrastructure coupled with the growing vulnerability to poverty caused a demand shock during the pandemic. This plunged the economy into a recession affecting the poorest the most.

THE PANDEMIC: Given that 40 per cent of Bangladesh's GDP is derived from the informal sector, poverty rate increased to 29.5 per cent in June last year. In 2016, 40 per cent of the population remained vulnerable to poverty despite the consistent decrease in poverty rate.

The pandemic has reduced the vulnerable demographics' income, thus exposing the lack of high productive work available in Bangladesh. In fact, according to the Bangladesh Economic Association (BEA) estimates, 25.5 million people had shifted from vulnerable to poverty, to below the poverty line in July. The government had initially rationed food in response to the 25 per cent spike in price of potatoes and 13 per cent increase in rice prices3. Already reeling from India's' ban on onion exports, onion prices skyrocketed in the midst of the pandemic too.

Unable to access rations, persistent decrease in aggregate demand and high prices pushed informal workers' income below the poverty threshold.

The informal labour market comprises rickshawpullers and street vendors. Masud, A 26-year-old rickshawpuller, earned Tk.150 at the beginning of the pandemic. The rent for his rickshaw is Tk, 100, so he is left with very little for other expenditures.

Rickshawpullers with dependent families are in a more precarious situation as they are unable to return to their villages. Additionally, only 70554 are registered out of 2,200,000 rickshapullers in Dhaka city which renders relief programme difficult for the government to implement.

Other victims of the pandemic are local street vendors. Total income per day decreased by 60 to 65 per cent for local Fuchka vendors. To address hygiene concerns, free sanitisers and one-time plates are being used but to reach breakeven level, the vendors have increased prices. These Fuchka vendors have been substituted for deliveries as eating out is risky. Much like the rikshawpullers, street vendors had to leave Dhaka during the lockdown.

With 4-12 million jobs lost permanently and another 12-17 temporarily furloughed, spending in the economy has adversely impacted small scale businesses in the informal sector. Furthermore, major contributors to Bangladesh's' economy are the migrant workers.

With 10 million international migrant workers, government policies such as tax exemptions and the Expatriates Welfare Bank had effectively leveraged remittance to advance welfare for the bottom percentile.

 However, due to the pandemic cash flows into the economy sourced from remittance had been disrupted. Thus, high poverty rates concentrated not only in the urban slums but also in districts other than Dhaka. For every 0.1 per cent of the district's population that is working as migrant workers, poverty would decline by 1.7 per cent. A total of 400,000 migrants have already returned.  However, reintegration opportunities are dependent on the 2.0 billion fund the government has allocated for group loans directed at facilitating rehabilitation for unemployed returnees. In addition, cash incentives worth 200 million have been allocated for stranded migrant workers by the Expatriate Welfare Ministry.

However, it was the loss suffered by the garments sector that really propelled the economy into a liquidity crisis garnering international attention to the plight of the labourers whose livelihood were threatened by the pandemic.

The government, during the onset of the pandemic announced they were going to cut 10 per cent of the salary received by the high income banking sector employees to offset the fiscal budget constraints that would arise from government spending on emergency funds.

The industry sector had to undergo furloughs during the shutdown. Therefore, the prime ministers issued Tk. 300 billion stimulus packages comprising Tk 50 billion emergency incentive packages dedicated specifically for garments sector.

Government spending in this case aimed to stabilise the liquidity shock that halted cash flows through the financial sector into the garments sector. However, the only subsidy offered by the government was a 4.5 per cent interest for loans taken out by struggling factories. More stimulus packages should be directed towards the garments industry since Bangladesh is an export-oriented economy with the garments sector accounting for 80 per cent of the country's exports.

Moving forward the government should include unemployment benefits and pursue diversification goals for the economy. With around 19 stimulus packages worth a total of Tk 1031.17 billion, the government is already increasing government spending as a means to implement expansionary fiscal policies. In order to curtail hyperinflation, the Bangladesh Bank has also implemented low interest rates to control inflation.

 The demand shock that catapulted the entire economy into a recession needs to be controlled by addressing the supply of cash. Since the garments industry had particularly experienced disruption with cash flows, loans should be directed towards this sector in particular.

On the other hand, welfare programmes and job diversification should be provided for migrant workers and business in the informal sector. The informal sector and migrant workers are unlikely to be able to pay back loans with such high interest. Furthermore, tax relief policies in the form of tax credits for enterprises that are debt-stricken should be co-opted with the existing subsidies provided by the government to reduce the domestic debt ratio-e specially since a fragile banking system could further jeopardise the existing financial structure and hence can exacerbate debt.

Therefore, Bangladesh Bank should continue to implement monetary policies such as low interest rates and control damaging speculations using forward guidance.

 

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