Since December 8, 2019, when a first known case of pneumonia with unknown aetiology was found in Wuhan City, China, the world has been badly tangled up in the novel coronavirus or Covid-19. From a public health emergency termed by the World Health Organization (WHO) on January 30, it has been termed as a pandemic by the WHO on March 12. Defying all efforts by the world to tame the virus, its spread remains uncontrolled.
The effects of Covid-19 are of course not confined to just public health only. The global economy is now integrated through trade, remittances, investment and foreign aid. So the pandemic has given rise to economic challenges coupled with uncertainties and unpredictability both at global and national levels. Countries have already started to brace for the aftershocks and will continue to feel the heat of economic slowdown in different ways. Disruption in the supply chain, lower production of agriculture and industrial goods, and closure of aviation, tourism, restaurant and hotel businesses are having a knock-on effect on the job market. Countries continue to lay off workers, and companies are slashing down salaries and payments, and freezing recruitments. This is almost clear now that the consequences of the coronavirus outbreak will be felt well beyond the middle of 2020 and lead to the hardest and longest global recession so far.
There are a few conventional measures which are taken during an economic downturn. The objective of governments is to boost demand and increase spending to create vibrancy in the economy. At present, there is depressed demand because people are staying at home and limiting their expenditures. They are losing jobs and other sources of income. However, we are also observing supply shocks. Both global and domestic supply chains have been disrupted due to the closure of factories, reduced production and lack of supply of goods and services in the market. So through fiscal and monetary responses governments aim to restore and stimulate economic activities, overcome supply shocks and increase aggregate demand.
To tackle the devastating impact of Covid-19 on the economy, a number of affected countries including Bangladesh have initiated policy responses. Most policy responses by the countries have been in two areas: fiscal and monetary. Fiscal measures included stimulus packages, such as direct financial support for the affected sectors, expansion of social safety nets and cash transfer to the low income groups, exemption of various taxes and fees, allocation for immediate health preparedness and food distribution at a lower price for the poor. Monetary policy responses include mainly quantitative easing to increase liquidity in the financial system. This means that central banks will buy treasury bonds and bills from commercial banks so that banks in turn can provide loans to customers. The other method of monetary policy response is to reduce policy rates such as repo and cash reserve ratio (CRR). The repo rate is the rate at which central banks lend money to commercial banks in case there is any shortfall of funds. CRR is the share of a bank's total deposit which is to be maintained with the central bank in the form of liquid cash. Many countries have already reduced these rates drastically.
Till now, Bangladesh has far less cases of Covid-19 compared to many countries. But the coronavirus is still distressful even though Bangladesh has been doing relatively well in terms of economic growth. In FY2019, the growth of Gross Domestic Product (GDP) in Bangladesh was 8.15 percent. As a result of high growth, the country has been successful in reducing its poverty level during the past one decade or so. But the short-term economic scenario has not been all that impressive in recent years. In FY2020, except for remittances, all other major economic indicators have shown negative growth. For example, both export and import growth were negative during the first eight months of the current fiscal year. Revenue collection has remained low during the first six months of FY2020. Indeed, revenue-GDP ratio was only 9.9 percent in FY2019 while the tax-GDP ratio was 8.9 percent. On the other hand, implementation of the annual development plan (ADP) of the government also remains unfulfilled when compared with its original allocation in the national budget. This allows the economy to maintain a budget deficit within the 5 percent limit as projected by the ministry of finance.
The economy also suffers from some other weaknesses. High growth has been unable to create adequate jobs in the economy. University graduates find it difficult to get jobs. Youth unemployment rate is 10.6 percent as opposed to the national unemployment rate of 4.2 percent, according to the Bangladesh Bureau of Statistics (BBS). The unemployment rate among the youth having a tertiary-level education is 13.4 percent. It seems the unemployment rate increases with higher education.
The other feature of the current growth pattern is that it has not reduced disparity in the society. Inequality of both income and asset distribution is very high in Bangladesh. Higher growth has benefitted a small group of rich people much more than the poor people. BBS data indicate that the income share held by the richest 5 percent of the households in Bangladesh increased from 18.85 percent in FY1992 to 27.89 percent in FY2016. On the other hand, the income share held by the poorest 5 percent of households fell from 1.03 percent in FY1992 to 0.23 percent in FY2016.
In the wake of Covid-19, the achievement of various short-term and medium-term economic objectives may become difficult for the government of Bangladesh. Therefore, there may be a need for review and changes in the fiscal projections made in the national budget for FY2020. The stimulus package of Tk 5,000 crore offered to the affected sectors for navigating through the troubled period may increase budget deficit slightly. However, given the urgent need for economic revival, an increase of budget deficit up to one percent may be acceptable. In fact, depending on the duration of the coronavirus crisis and its effects on health and the economy, larger stimulus packages may be needed to soften the blow of Covid-19. Not only do the export-oriented sectors need support, the small and medium enterprises (SMEs) also require support to stay afloat. The affected SMEs should be offered loan at 5 percent with a longer repayment period.
The hardest hit by the coronavirus outbreak—that is, the lower income group, the informal-sector workers, and the women—will need direct cash support till the economy bounces back. The government's plan to expand the existing transfer programmes that benefit more vulnerable households is a welcome step. Besides, ensuring adequate food supply for lower-income households, particularly those dependent on daily wages, through increased allocation for the Open Market Sale programme is also a praiseworthy measure.
In case of the monetary policy responses, the lowering of the repo rate from 6 percent to 5.75 percent, and the reduction of CRR from 5 percent to 4.5 percent, are expected to generate liquidity space. However, only the genuine victims of Covid-19 should enjoy the opportunity to delay their non-performing loan classification, and the truly affected businesses and individuals should get the loan facility.
For Bangladesh, the Covid-19 pandemic should be an opportunity for prudent macroeconomic management which is gradually decaying given the inefficiency in both expenditure and revenue mobilisation. This is the time when the government has to prioritise its spending. It has to identify activities and spending which are immediate, and which can wait for a few months. This will have to be done pragmatically so that expenditure reduction does not affect employment and the income of people. Similarly, the perennial policy neglect as regards health should be reversed by much more allocation in the health sector. Covid-19 is a testimony to our unpreparedness in the health sector with a meagre allocation despite our proclaimed economic growth.
As the ministry of finance is set to work towards the formulation of the upcoming budget for FY2021, these are some of the issues which need to be at the centre stage.
Dr Fahmida Khatun is Executive Director at the Centre for Policy Dialogue (CPD).