Targeted public expenditure to ride out coronavirus crisis: CPD

The government should pursue targeted expansionary measures in areas of healthcare, trade, supply chain management, public expenditure and monetary policy to tackle the fast-spreading coronavirus, said the Centre for Policy Dialogue (CPD) yesterday.

"Bangladesh is already exposed to this health-threat and the country is at risks of several economic impacts," it said, adding that the government should take initiatives to ease disruptions in the supply chain and ensure their smooth operation both within and outside of Bangladesh in the coming days to combat the impact of the virus.

The observations were shared at a virtual media briefing on "Health and Economic Risks of Corona Pandemic and Recommendations" at the CPD office in Dhaka.

The briefing came as Bangladesh confirmed the second death linked to the coronavirus outbreak. On March 18, the government confirmed the first death from the novel coronavirus.

Four more people have tested positive for the virus, taking the total number of confirmed cases to 24.

"In  view  of  the  COVID-19  emergency,  it  is  important  for  Bangladesh  to  be appropriately   ready   and   to   take   necessary   preparations  to   deal   with both the immediate and medium-term ramifications of this outbreak at the earliest," said Fahmida Khatun, executive director of the CPD, while making a keynote presentation.

The coronavirus is going to have serious implications for health sector preparedness and macroeconomic management of Bangladesh. This has important implications for reprioritisation, resource reallocation and fiscal-monetary policies and measures to be pursued by Bangladesh to near and medium terms.

As Bangladesh prepares for the upcoming budget for fiscal 2020-21, it is important to understand the extent of resource requirement for healthcare and economic management.

Increased budgetary allocation will be required for COVID-19-related areas in a focused and targeted manner in view of production and distribution of medicine, improvement of health services and availability of medical instruments and support to health professionals.

Higher demand for cash incentives in the wake of the virus outbreak may put additional pressure on the budget.

"Flexibility in the next budget needs to be considered to cope with the potential impact of the COVID-19."

The lower-income class, particularly who are dependent on daily wages, will be the most affected group from this pandemic. So, the government may consider taking specific incentive measures for them, the CPD said.

In her presentation, Khatun pointed out that poor budgetary allocation for healthcare sector, now at 0.9 per cent of the gross domestic product (GDP), has been a longstanding problem for Bangladesh.

The is considerably lower than the targets stipulated in the Seventh Five-Year Plan and the World Health Organisation benchmark, respectively 1.12 per cent and 5 per cent of GDP.

The COVID-19's adverse implications are being felt at a time when Bangladesh's external sector is under considerable pressure on several fronts.

Export target for fiscal 2019-20, which aims 12 per cent growth, is highly unlikely to be attained. Major export items such as garment, home textile, frozen fish and leather and leather products posted negative growth.

Import growth over the first seven months of the fiscal year was negative, hurt by the negative import growth of intermediate goods and capital goods.

The supply chain of key sectors such as garment has got disrupted particularly in the initial period because of snags in the import of raw materials from China.

"Business and employment would confront adverse impact if economic activities need to shut down in case of coronavirus outbreak in the country," the think-tank said.

Service sector-related enterprises, which include hotel and restaurants, wholesale and retail, trade and banks, insurance and financial services, would be affected more.

Impact would be higher in small-scale enterprises and those operate informally for not having any contingency plan. The manufacturing sector, particularly export-oriented garment and textiles industries would be the most affected.

"Workers who work in labour-intensive formal and export-oriented industries would be adversely affected," the CPD said. 

While the fall in oil and consequently commodity prices could help Bangladesh, on account of lower import payments and lower domestic demand, this could lead to a low-level equilibrium with consequent negative implications for investment, trade-related activities and slowing of GDP growth.

According to the think-tank, uncertainty in the global economy and consequent repercussions for the Bangladesh economy may create added pressure on revenue mobilisation during the remainder of the fiscal year and beyond.

Downturn in trade may result in considerably lower collection of revenue from customs duty, value-added tax and supplementary duty at the import stage.

In view of added uncertainty and increased medical expenditure in case of a massive outbreak and job loss and lower income, particularly in the informal sector, household may also spend less.

A prolonged epidemic may result in a slump in business activities, which, in turn, could trigger lower collection of VAT, supplementary duties and income tax at the local stage.

The surge of COVID-19 has already slowed down the implementation of some key projects. This coupled with slow pace in other foreign-aided projects may affect the implementation of the overall annual development programme in the current fiscal year.

As per the current trends in revenue collection and public expenditure, deficit may increase to 5.5 per cent of GDP this fiscal year. Depending on the extent of the coronavirus and the associated costs and policy measures, this may rise further, the CPD said.

If banks face a liquidity crunch, the general public will lose confidence and in the period of uncertainty, excessive fund withdrawal can create a snowball effect and increase the risk of bank runs. An expansionary but targeted public expenditure and monetary policy should be pursued amid shrinking fiscal space and weakened financial sector.

While the fiscal deficit is likely to reach 5.5 per cent of GDP in fiscal 2019-20, the likely rise in the budget deficit will need to be managed through prudent reallocation and prioritisation of public expenditure, and renewed efforts at domestic resource mobilization by curbing tax evasion and illicit financial flow.

The CPD called for tax exemption on all medical supply.

Mustafizur Rahman, a distinguished fellow of the CPD; Khondaker Golam Moazzem, research director; and Towfiqul Islam Khan, senior research fellow, were also present at the media briefing.