The cost of fighting the coronavirus on society and the economy will be very high. Around 52.0 million or 85 per cent of the country's workers are depended on various informal economic activities, most of whom are currently unemployed due to shutdown. Though the government has taken some initiatives to extend social safety net programmes for the poor and vulnerable sections, these will not be enough to cater for the needs. The budgetary allocation for social safety net is Tk 143.73 billion in the current financial year (FY20) -- around 3.0 per cent of the national budget. Besides enhancing the allocation, a well-targeted, rapid and efficient delivery mechanism is necessary so that the needy people can get the aid on time.
In this regard, the main challenge is mobilising the resources rapidly. The Prime Minister has already announced a bailout package of Tk 727.50 billion to support the various industries and services. It entirely relies on market mechanism. Probably, the key presumption is that as the total amount is meant for different industrial sectors as subsidised bank loans, factories and business houses will quickly resume their operations by availing the loans, and in the process, benefits of the stimulus package will trickle down to low-income people. The announced package does not specifically mention anything about the informal sector although a number of SMEs are in informal sector and the package allocated Tk 200 billion fund as working capital loan for SMEs. The modality of the fund is yet to be finalised.
As economic activities have almost come to a halt, revenue earnings from the different sources have also started to suffer. Slowdown in import is going to reduce the collection of customs revenue. Due to very thin domestic trading and services activities, collection from the value added tax (VAT) has also slumped heavily.
As the inflow of foreign aid is already low for the last couple of years, the government has now turned to the global lenders. The government is expecting that the multilateral donors will give $2.60 billion (or around Tk 220 billion). While waiting for expeditious release of some of the aid money already in the pipeline, the government expects that the World Bank will provide $850 million followed by $750 million from the International Monetary Fund (IMF). The IMF already said it is going to mobilise $1.0 trillion global fund.
The government is also negotiating with Asian Development Bank (ADB) to get $600 million. Asian Infrastructure Investment Bank (AIIB) has already approved $250 million and Islamic Development Bank (IsDB) $150 million to fight COVID-19.
Sufficient resource mobilisation within a short period of time from external sources is a difficult task for the government. Moreover, the expected amount of aid will not be adequate to finance the announced stimulus package. So, the government has to primarily depend on domestic resource mobilisation.
Besides tax revenue, the largest source of the government's domestic resource is borrowing from the market. Bangladesh Bank has already stepped-up move to facilitate borrowing from the banking system. Given the sluggish economic activities in this period, it is likely that commercial banks may find it worth investing in government bonds. In that case, due to the necessity of the government, yield of treasury bills and bonds may increase further. Average yield of treasury bills increased in the third week of March from the last week of February, while the yield of treasury bonds dropped during the period. For instance, yield of 10-year treasury bond dropped to 8.05 per cent from 8.22 per cent.
Another quick option for the government is to borrow directly from the central bank by minting money. There is a risk of inflation no doubt due to increased money supply. Nevertheless, during the lockdown, people's spending on 'transport and communication' reduced significantly, estimated to be around 4.20 per cent of the consumer price index (CPI). Spending on 'clothing and footwear' and 'furniture, furnishing and other' has also declined. These two components weigh around 9.0 per cent of the CPI basket. Thus, overall inflation is likely to be downward for now. So, increase in money supply will not fuel inflation. The PM has also pointed out this while announcing the stimulus package. Thus, by manoeuvring the monetary policy, the government will be able to mobilise some of the required resources. The move, however, needs to be supported by demand management.
Demand management usually indicates fiscal or monetary steps or both to contain consumption spree when augmenting supply is difficult. There is, however, no set formula for demand management and policymakers need to adopt the tool according to the needs of the time.
The government may also think of stopping Boishakhi festival bonus for the government officials up to grade-9 (where basic pay is Tk 22,000) or any other reasonable threshold. This will definitely help contain some demand as well as consumption. The money could be transferred to social safety net programmes. In a similar vein, if the prevailing situation doesn't improve, Eid bonus may also be suspended or curtailed. A few government officials, in different media, have already argued in favour of transferring bonus money to state coffer to support the poor and vulnerable people.
The government may also consider suspending some development projects of lesser priority. Every year, annual development programme (ADP) includes a number of projects on highly political considerations. Suspending such projects will help the government transfer some funds to social safety net programmes.
As global oil price has come down below $30 per barrel, the government is in a position to save a significant amount from oil import. The savings can also be used to support people in distress.
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