Since the confirmation of the first case of coronavirus on March 8, the pandemic has slowly gripped our nation. To combat the spread of the virus, the government announced general holidays since March 26. The aim was to integrate proven health measures such as social distancing to quell the spread of the contagion.
Countries around the globe also took such steps, including lockdown, to disrupt the impact of the virus. However, doing so has disrupted not only the flow of goods and people but also the global supply chain. The effect we see in front of us is stalled economies, acting as an omen to an impending global recession. The impact of COVID-19 is that we are looking at a significant shock to the demand side, compounding the mirage of supply-side disruptions of the economy.
Trying to ride this tide, as we look around the world, we observe nations are announcing their plans to come out of the lockdown caused by COVID-19. With the International Monetary Fund (IMF) expecting the Real GDP growth in Asia to lag at zero percent in 2020, Bangladesh is not immune. However, the government of Bangladesh, within its limitations, under the apt leadership of honorable prime minister Sheikh Hasina, has so far taken commendable measures to combat what is now turning into an economic contagion.
With a likely real recession- caused by exogenous demand and supply shocks, which is inherently better than either the policy recession and the financial crisis, a look at the demand and supply-side dynamics is worthwhile. In simple terms, we encounter a supply shock when phenomena such as bad harvest or global oil production disruption occur.
With oil prices at a new low, the focus must shift to staples. In this regard, the prime minister's initiative of "leaving no land uncultivated" to increase food production is well -timed, appropriate, and definitely, praiseworthy. In this regard, the government has already started distributing free fertilizer, seeds, pesticides, and other agricultural materials.
Thus, the government is addressing the underlying problem that can cause a pure supply shock. It is worth understanding that with an absolute supply shock, it would be unlikely that any measure could stimulate the economy.
Typically, with adverse spending shocks, we expect demand for purchase of goods and services to go down, leading to reduced production, reduced output, and mass-firings. The good news is that the government stepped in to prevent this lay-off by rolling out fiscal stimulus packages designed to fill the spending vacuum to keep demand stable.
Initially, the prime minister announced stimulus packages of Tk 5,000 crore for the export-oriented sectors, which were followed by other packages taking the overall size of the incentives to Tk. 100,000 crore, which is equivalent to nearly 3.5 percent of the country's gross domestic product.
These packages aimed to ensure that salaries of the workers in the export-oriented industries were paid, subsidised interest rates of loans for affected enterprises and CMSMEs as well as the agricultural sector and enhancing Bangladesh Bank's Export Development Fund (EDF). Furthermore, there is a stimulus package for low-income groups to support low-income professionals, farmers, and ultra-small businesses.
On the note of the non-interest bearing Tk 5,000 crore loan package for paying salaries to staff members in the export-oriented industries, Professor Mohammad A. Momen, panel director at BGMEA stated, "around 1600 to 1700 of the 2200 listed garments manufacturers with BGMEA have availed this loan, and salaries are being disbursed across these factories."
The government has taken effective policy measures, as stated above, to assist low-income groups and undertaken initiatives to reach informal workers and marginalized families. According to the IMF, around 80% of the working force in the non-agricultural sector in Bangladesh is involved in non-agricultural informal employment. A significant portion of them belongs to needy households- wage workers without social protection.
To protect these marginalized and low-income groups, the government has also undertaken initiatives to disburse Tk. 1250 crore among 50 lakh listed marginalised families. As expected, today, May 14, the Prime Minister inaugurated the disbursement of these cash incentives. Through expanding the social assistance programs by increasing benefit amounts to reach poor households, the government is ensuring that the most vulnerable can sustain themselves.
Furthermore, the Bangladesh Bank is providing ample liquidity by engaging in quantitative easing. To increase the money supply, the Cash Reserve Ratio (CRR) has been reduced by 0.5 percentage points. However, the Central Bank should look into the economic context before it decides to reduce the policy rates such CRR and the Statutory Liquidity Ratio (SLR) any further.
Although the Sheikh Hasina led government acted aptly with these measures to cushion the blow from COVID-19, we are still deep in the woods. With tourism and aviation sectors, the export of crab and shrimp exports, the leather industry, which fulfills 10 percent of the global demand, and most significantly the garment industry all being badly hit, the government needs to take some other bold steps. In line with that, the government has allowed garment factories to reopen with safety measures such as workers requiring to maintain physical distancing.
It is worth remembering that the garment industry is the nation's largest revenue generator, worth approximately $34 billion, has already been hurt with losses of around $3.5 billion in canceled or suspended orders. However, this brings another question to the fore, our inability to diversify our export basket, thus creating a huge risk in our export portfolio, with the RMG sector accounting for 85 percent of the country's export earnings.
Although we are well aware that for sustainable economic growth and stability, we must diversify our export basket; at this moment, we have not been able to achieve that. Thus, a heavy reliance on the RMG sector is a worrying sign for us as we look to combat this economic contagion.
Our prime minister has aimed to provide adequate support for the marginalised at a reasonable cost. The initiatives mentioned above link to social protection programs designed at expansive and inclusive safety nets. However, much like a CEO, but to a much greater magnitude, the premier of a nation can only do so much.
She has provided the direction, outlined the initiatives, however, transparency, and accountability at all steps among those involved in the process are of significant importance. We have already observed how vested groups acted during the distribution of relief packages to the most vulnerable and needed intervention from the premier, herself.
We hope there is no vested interest attached to the delivery of the incentive packages. Our prime minister has already warned against embezzlement and mismanagement of the stimulus packages. We hope that everyone understands that this is not only humanitarian support but a tenet to sustain the economy.
At the same time, we must remember, whatever the measures, we are not immune to the economic downturn. With the IMF, World Bank, and Asian Development Bank expecting reduced GDP growth ranging from 2% to 7%, how we fare would depend a great deal on the proper implementation of the stimulus package as well as the ripple effect of the global economy.
However, if these timely measures bear fruit, we can hopefully expect the "classic" real economy V-shock, where we should expect a displacement in output, but then the growth would bound back to pre-COVID-19 levels. It is worth not being a pessimist and expect this plausible outcome.
Fairuz Chowdhury is a Faculty Member, IBA, University of Dhaka