13.05.2020

Bangladesh: Navigating the globalized impact of the pandemic

As an economically developing country heavily dependent on export-oriented sectors and remittances, Bangladesh needs to pursue a multi-pronged strategy to regain its economic momentum. The South Asian nation has to deal with an unprecedented three-dimensional crisis.

Twenty Taka bill, Bangladesh
(c) shutterstock / Dmitry Chulov

The COVID-19 crisis has added new dimensions and challenges to the increasingly globally integrated economy of Bangladesh. In recent years, its economy’s growing connectedness with the global economy – through the export and import of goods and services, financial flows and foreign investment – has meant that the movement of Bangladesh’s macroeconomic parameters hinges critically on its external sector performance. Thus, the external sector of the economy has positive and important implications in terms of growth of the country’s GDP production, employment generation, foreign exchange reserves, import capacity and stability of the exchange rate. COVID-19 and the attendant transmission channels, both from global to national and vice versa, are already having significant adverse impacts on key external sector performance indicators of Bangladesh and therefore on the national economy at large.

 

Supply chain disruption hits Bangladesh hard

The tell-tale signs of pandemic-affected key partner economies of Bangladesh, such as the United States, China, Germany, the UK, Spain, Canada and Italy, started to be felt already even before the country went into lockdown on 25 March. Supply disruptions in China, accounting for about one fifth of Bangladesh’s global import and a large share of imports in the ready-made garments (RMG) sector, were having adverse implications for both the export-oriented apparels industry and import-dependent domestic market activities in Bangladesh. When subsequently economies in Europe and North America grounded to a halt, global brands and buyers catering to those markets first deferred, and then started to cancel export orders for apparels. Textile products account for 83 per cent of Bangladesh’s total export, employing about 3.5 million workers of which about two-thirds are women.

The implications of the COVID-19 crisis for Bangladesh’s flagship RMG industry cannot be overemphasised. Since the lockdown started, the predominantly demand-induced disruptions are being compounded by supply-side disruption, with consequent implications for employment and earning opportunities affecting both entrepreneurs and workers. The story is the same for other export items such as leather and footwear, frozen food and the jute goods sectors. External sector-related activities are set to continue facing further disruptions because of delays in accessing imported raw materials, extension of the lockdown (currently until 16 May) and due to health concerns at the enterprise level.

 

Facing a triple crisis

Indeed, Bangladesh now has to deal with a three-dimensional crisis: health, economic and humanitarian. The government has taken several initiatives in support of entrepreneurs and workers associated with export-oriented sectors.

These were primarily in the form of subsidised credit and refinancing facilities for working capital, by bringing workers under various safety net programmes and through targeted food supply and subsidised sale of rice. Apparels entrepreneurs are urging global brands and buyers to stand by Bangladesh, not to cancel orders or defer payments. According to the apparel exporters’ association, altogether 4.0 billion USD worth of orders have been cancelled already. Indeed, export of apparels declined by 18.2 per cent in March compared to the corresponding figure of the previous In April, when the lockdown was in force, export of apparels plummeted to USD 360.0 million compared to USD 2.42 billion for the corresponding month of last year, a whooping drop of 84 per cent.

The likely scenario for the next few months is also bleak. Experts have warned against premature opening of the economy as Bangladesh is yet to see the flattening of the curve in terms of infections and deaths. Although entrepreneurs have been asked to open factories after ensuring compliance with safety standards, health safety of workers remains a major concern in the backdrop of weak compliance capacities and lax enforcement.

The robust remittance flow of about 17.0 billion USD in the financial year 2019 has also seen a dip. In March, it came down by 12 per cent compared to the previous year. In April, total remittances declined by one third and those from the Middle East, accounting for more than 60 per cent of the flows, by about two thirds. Workers going abroad (more than 600.000 in 2019) has also come to a halt. With the oil price plummeting, both the number of workers and remittance earnings are expected to come down significantly in the coming months. Indeed, it is apprehended that there will be a large influx of returning migrant workers once travel resumes. All these dramatic numbers, translated into real daily life, will mean nothing good for the country’s balance of payments and expected developments at the macro and micro-household as well as enterprise levels.

 

Strategies to be pursued

Bangladesh will need to pursue a multi-pronged strategy to ensure that the damage to its external sector-related activities is mitigated and once the recovery phase starts, the country is able to regain its lost economic momentum. Such a strategy will need to address the health, economic and humanitarian aspects of COVID-19 through strategic expansionary fiscal, monetary and public expenditure policies, support of development partners and sector-specific, targeted measures.

The more than 12.0 billion USD worth of various support packages (equivalent to about 3.5 per cent of the GDP) announced by the government must be delivered in a way that these reach the targeted people, enterprises and businesses. The government has also gone for a significant expansion of safety net and food distribution programs. Cash transfer to about 5.0 million poor families is planned; experts, however, have estimated that the number of households in need is more than three times as high. Larger amounts of cash transfers to the most vulnerable people, as well as subsidised sale of rice for the workers, deferred payments of corporate taxes for entrepreneurs and larger investments in the health sector will be required. In view of the shrinking domestic fiscal space, there is a need – unavoidably so – to go for larger deficit financing and tap even more into external resources.

Bangladesh’s economic recovery will be an uphill battle of unknown proportions. It will take a genuine whole-of-society approach with the government, labour, businesses, international aid agencies, civil society and other non-state actors joining hands and forging partnerships.

 

 

Professor Mustafizur Rahman is a Distinguished Fellow at the Centre for Policy Dialogue (CPD) in Dhaka, Bangladesh.

The views expressed in this blog series are not necessarily those of FES.

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