The toll of coronavirus on our exports

During the lockdown, it has become a habit to check Bangladesh Garments Manufacturers and Exporters Association or BGMEA's website daily. BGMEA has been reporting some vital statistics about the impact of coronavirus on Bangladesh's readymade garments (RMG) industry. As of this writing, $3.17 billion worth of RMG orders are canceled or suspended, affecting 2.27 million workers. There is a little over eight months left in 2020, and nobody knows with any certainty just how our exports, particularly RMG exports will be impacted.

In 2019, Bangladesh exported $40 billion worth of goods to the rest of the world, of which RMG's contribution was $33 billion (or 82.50 per cent). Two factors-trading partners' income and domestic real exchange rate-explain the changes in Bangladesh's export to a very large extent. In recent research, we have quantified the potential financial impact of these factors separately for total exports and for RMG exports of Bangladesh.

According to our results, using the latest IMF projection that the combined gross domestic product (GDP) of major advanced economies (our trading partners) decline by 3.0 per cent, Bangladesh's total export is estimated to drop by 15.0 per cent (equivalent to $6 billion). The RMG export is slightly less sensitive to changes in trading partners' GDP. A 3.0 per cent drop in trading partners' GDP is associated with a 12.0 per cent drop in RMG exports (equivalent to $4 billion). In contrast, deprecation of the taka real effective exchange rate has a positive but comparatively lower impact on exports. For example, a 10.0 per cent depreciation of real effective exchange rate is associated with a 3.75 per cent increase in total exports. For the RMG exports, the impact is even lower (around 1.0 per cent), implying that our RMG exports are considered 'necessary' items, commodities whose demand is not very responsive to price. 

A direct policy implication of these results is that while the depreciation of taka would likely to give a boost to the quantity of total exports, it would not raise foreign exchange earnings. The same conclusion holds for RMG exports also. Whether this result is due to genuine demand inelasticity, or to the nature of forward contacting in RMG's, or to impacts upon the supply chain, or constitutes a purely statistical artifact (our view), further research is needed to uncover the underlying relationship between RMG exports and exchange rate movements.

Another interesting result is the comparatively short time it takes for RMG exports to adjust following an exogenous shock to the industry. According to our result, the half-life (i.e., the time it takes for 50.0 per cent of the shocks to dissipate) of a shock, is less than two years for RMG's, but over three years for the overall export sector. What all these estimates suggest is that the RMG sector is agile and resilient, and recovers more quickly after a shock than other exports do. Whether this agility and resilience is due to superior entrepreneurship, or better institutional support, or both, is a question for further research.

In its fight against coronavirus, the government of Bangladesh has announced a stimulus package worth Taka 50.0 billion for all export-oriented industries. Needless to say, the stimulus is geared towards the RMG sector. Sadly, the size of the fiscal stimulus package falls short of what is required to keep the RMG industry in business since the sector pays Taka 40.0 billion in salaries alone every month. Protests by garment workers demanding payment of wages and restoration of work is a case in point.

The problem with RMG, especially at this grave crisis, is that it is not an essential item in the short run. Except for growing children, the adults can continue to live with the existing stock of clothes they have for many months, perhaps a year. We do not know what internal calculations have led top retailers such as H&M, Zara, Primark, and Uniqlo to close their stores around the world. Perhaps operating costs make a large part of their total costs. Rubana Huq, president of BGMEA made an emotional call to retailers to pay for the goods they have ordered. Without the support of such clothing brands, a wider chaos is likely to follow. A study by a professor at the University of Delaware finds that a 10.0 per cent decline in RMG exports could lead to a 4.0 per cent to 9.0 per cent drop in employment in Bangladesh. The crux of the problem may be that, like Bangladesh, many of the big brands are too focused on surviving and hence require other forms of mitigation.

There are some rays of light for the RMG sector. First, globally the price of raw cotton has softened considerably. From a peak of $2.2/kg in mid-June 2018, the cotton price has dropped to $1.52/kg in the first week of March 2020 (The Economist Intelligent Unit). Owing to the coronavirus related demand destruction, cotton price is expected to decline further. Second, Bangladesh imports about one-quarter of cotton from India. The weak Indian rupee vis-à-vis dollar will support Bangladesh's strong cotton consumption growth. Third, Bangladesh is currently working towards a free-trade agreement (FTA) with Argentina, Brazil, and Uruguay. Brazil is the fifth largest cotton producer in the world. Cheaper raw cotton under an FTA will boost Bangladesh's RMG export competitiveness in the medium term. Fourth, besides its cheap labors, favourable tax incentives are encouraging many foreign firms to relocate to Bangladesh. The corporate tax rate for RMG exporters is 12.0 per cent, which is low by international standards.

On the global front, experts are divided over the duration and depth of an impending recession. Central banks and fiscal authorities around the world are ramping up stimulus primarily to minimise the duration rather than the depth of the recession. Although the present situation makes it difficult to analyse the direction of the global economy with precision, the current rally in equity markets reveals investors' collective perception that there will be a swift economic recovery in the second half of this year.

Yet if the global economy does recover in the second half of this year, it will likely be driven by the United States (US), Bangladesh's second biggest trading partner after the European Union (EU). This is because the US entered the coronavirus crisis in a strong momentum with the tightest labour market since the 1970. Second, the US enjoys a significant demographic tailwind compared to Europe, China, and Japan. Third, with the public debt at 106 per cent of GDP, the US has both the willingness and ability to provide more monetary firepower. Finally, in an election year, the US private sector and the US dollar will outstrip much of the rest of the world.   

Our best hope for export recovery thus lies in a quick rebound of the US economy. But in the meantime, we need to cushion our workers from the loss of income and prepare the export industry to face the new challenges ahead.

Syed Basher is Professor and Pooja Agnes Gomes Lecturer of Economics at East West University. This research is part of a wider research project under Sustainable Finance Department, Bangladesh Bank. The views expressed here are the authors' own.

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