Originally posted in The Financial Express on 1 March 2021
From the perspectives of turnaround, rebound and recovery, the Bangladesh external sector performance evinces a mixed picture as one traces the developments from the vantage point of February 2021. One recalls that both exports and imports were under pressure even before the Covid-induced public holidays were announced by the government towards the end of March 2020. A key reason driving the state of the external sector at that point was that economies of Bangladesh’s major trade partners in the developed world — European Union (EU) and North America — as also other key trading partners such as China, had already by this time been afflicted by the adverse impacts of the pandemic. This resulted in demand depression for Bangladesh’s exports and supply-chain disruptions for the country’s imports. The global market-driven scenario was further impacted by the supply-side disruptions in the fourth quarter of FY20 consequent upon the dual pressure of health-related uncertainties arising from the Covid pandemic and the shutdown of economic activities following the public holidays.
The reflection of the above was felt on the trade balance which was further weakened as the state of external balance of payment at the end of FY20 indicates. Further deterioration of the trade balance was, however, arrested in the backdrop of sluggish import sector performance. The robust performance of remittance, on the other hand, kept the current account balance comfortable. The twin forces of the turnaround in the global demand and supply-side response supported by the government stimulus packages resulted in the arrest of the fast-falling export, which, however, is yet to enter positive terrain at the end of the first seven months of FY21. Imports registered a higher pace of decline with the result that there was some improvement in the trade balance at the end of December 2020. Thanks to robust flow of remittances, balance of payment position at the end of first six months of FY21 (December 2020) as against the corresponding period of the previous FY2020 shows a significant improvement. However, the overall picture conceals a diverse range of undercurrents and multiple narratives, with the level of export earnings flattening, continued sluggish performance in case of imports payments and in the backdrop of continued performance of remittances.
Table-1 testifies that overall balance position has continued to improve significantly in the recent past, from US$ 179.0 at the end of FY 2019, to US$ 3,655.0 million at the end of FY2020. The BoP position further strengthened at the end of December 2020 (Q2 of FY2021) when the balance stood at US$ 6,155.0 million. This has led to increasingly robust replenishment of the forex reserves which stood at US$ 43.2 billion as of 10 February, 2021.
PROSPECTS OF RECOVERY IN THE BACKDROP OF THE EMERGING GLOBAL SCENARIO
Understandably, Bangladesh’s external sector performance and outlook critically hinges on the state of the emerging global economic scenario, underpinned by growth projections, trade forecasts and consumer confidence.
As was pointed out earlier, performance of the external sector, particularly of export sector, was significantly impacted when economic growth in Bangladesh’s major export destination countries first slowed down, and then contracted in 2019 and over the early months of 2020. Some major economic partners of Bangladesh such as the UK, USA and Germany experienced economic recession. In 2020 world economy shrank by 3.5 per cent, about two times more than during the global financial crisis of 2009. The modest growth recovery of 4.3 per cent in the 2021 would barely offset the losses of 2020. The projected cumulative output losses during 2020 and 2021, estimated to be of about US$ 8.5 trillion, would wipe out nearly all output gains of previous four years. All these had adverse impact on Bangladesh’s export sector in FY2020 when export earnings dropped by about 17.0 per cent. There was some optimism that developed economies would be able to get into recovery phase and post high GDP growth in 2021 and 2022. However, in view of the second wave of the pandemic and the consequent impact on economic recovery, earlier growth projections were revised downward by both the International Monetary Fund (IMF) and the World Bank.
For OECD countries as a group, including key export destinations of Bangladesh such as the USA and Germany, the growth projections for the next two years, while positive, have been revised downward compared to the earlier projections. For 2022, the anticipated growth rates are lower than those of 2021. In all likelihood, it will be a ‘difficult ascent’ particularly for the developed countries which are Bangladesh’s major markets. Also, as per World Trade Organisation (WTO) projections, protectionist policies pursued by many developed countries could linger in the coming months in view of the less than robust recovery.
The tepid recovery will also have negative impact on consumer confidence and consumer demand. All these do not augur well for sustainable recovery of Bangladesh’s export sector in foreseeable future, to the pre-Covid level.
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EXPORT PERFORMANCE AND PROSPECTS OF RECOVERY
FY20, exports were hit by three-pronged pressure of demand-side shrinkages, global supply chain disruptions associated with COVID-impacted global market and low supply-side capacity utilisation in view of the impact of the Covid on the domestic economy of Bangladesh.
As can be seen from the Table-2, export earnings were 16.9 per cent lower in FY20 compared to that of FY19. While the sharp fall has now been arrested, rebound and recovery are still not there. Export value over the first seven months of FY21 (July-January) was lower than that of the corresponding period of FY2020, by about 1.1. per cent. It is already evident that the target growth rate of 21 per cent set for FY21, which would have taken the export earnings (projected to be US$ 41.0 billion) to the pre-Covid level (40.5 billion), is not going to be achieved. Indeed, at this pace of growth, export earnings in FY21will likely be about 6.0-7.0 billion lower than the pre-Covid figure.
As was anticipated, the low performance of export sector during the July-January period of FY2021 was primarily underpinned by negative growth of the RMG sector (-3.4 per cent), although knitwear exports (+3.7 per cent) had performed better than the woven wear exports (-10.9 per cent). Interestingly, jute and jute goods (+27.1 per cent) and home textiles (+44.3 per cent) have continued their impressive performance contrary to the overall export trends.
An analysis of export performance reveals a number of underlying factors which had impacted on the trends. First, the high domestic-content-driven knitwear sector has performed better than the import-intensive woven wear sector. Second, export structure points to home textile and jute products as items with high export potentials. Third, export performance was impacted by both value and volume. For example, prices of Bangladesh’s exports of key apparels items have seen decline in average prices, for most items, at a higher pace compared to that of Vietnam, both in the EU and US markets.. Fourth, in view of the shifts in the demand structure in the global market, more emphasis will need to be put on, for example, man-made fibre items in export of woven wear and synthetic items in export of leather goods. Fifth, in view of the anticipated slow uptake of developed country economies in 2021 and 2022, and in the context of the anticipated high growth of Asian economies (China, India and the ASEAN), a renewed effort will be needed towards market diversification as a strategy to mitigate market risks and exploit potential export market opportunities that the resurgent Asian markets could offer. Sixth, and this had been underscored in successive earlier IRBDs, a strategic exchange rate management will be crucial to maintaining export competitiveness of Bangladesh. CPD analysis had shown, in recent years Bangladesh’s competitors have been pursuing aggressive exchange rate (depreciation) policy with a view to enhancing export competitiveness. This has resulted in relative appreciation of Bangladesh Taka (BDT) against currencies of key competitors resulting in Bangladesh’s weak competitive strength vis-a-vis major market rivals such as Vietnam, Cambodia, and India. Seventh, and not the least, the support to the export sector through targeted policies and incentives, will need to be sustained to help export-oriented industries navigate the current difficult times. However, the incentives will need to be recalibrated to incentivise access to regional markets, export of non-traditional items that are demonstrating robust growth (such as home textiles and jute goods) and to promote the cause of intra-RMG diversification.
In view of the need to prepare Bangladesh for its post-LDC future, the urgency of capacity-building to undertake complex negotiations cannot be overemphasised. Here comprehensive economic partnership agreement (CEPA) type of deals will need to be given highest priority. Bangladesh’s trade and industrial policies will have to be designed keeping this in view. These negotiations are expected to entail a distinct departure from the past, based on varying degrees of reciprocity. This will require in-depth analysis of the requests and offers to be made in view of complex negotiations. The idea of setting up a well-endowed Negotiation Cell, preferably in the Ministry of Commerce, ought to be given the highest consideration in this connection.
ROBUST REMITTANCE EARNINGS
Contrary to projections by global institutions such as the World Bank and the IMF, remittance flows to Bangladesh have been quite robust over the past months. The earlier projections made by the Bank for 2020 anticipated that remittance flows to South Asia would post a negative growth of (-) 22.1 per cent. However, actual remittance flows to Bangladesh had turned out to be about US$ 18.36 billion in 2020, which was 18.4 per cent higher than that of 2019. In 2020 remittance flows to India came down by 32.3 per cent compared to 2019. Indeed, during July-December period of FY21, remittances were 38 per cent higher than the corresponding period of FY20, demonstrating an acceleration in the flows towards the end of 2020. However, no discernible shift in the sources of the flows is visible with Saudi Arabia, USA and UAE holding the top three positions. Briefing Note published by the Citizen’s Platform for SDGs identifies seven reasons driving the high flows: (a) additional demand for support on the part of cash-strapped remittance-receiving households; (b) greater use of formal channels in view of disruption of informal (hundi/hawla) channels; (c) 2 per cent cash incentives put in place by the GoB in July 2019 on the remitted amount; (d) additional 1 per cent incentive by mobile platforms such as bKash; (e) relaxation of ceilings for remitted money sent without documentation (raised to US$ 5000 from the earlier US$ 1500); (f) transfer of money saved on account of Hajj not being performed in 2020; (g) sending of savings back home in view of job uncertainties in host countries and apprehensions about forced-return of Bangladeshi migrant workers.
The robust remittance flows have led to an improvement in the current account balance and significantly strengthened Bangladesh’s overall balance of payment position. These have also contributed to a significant rise in forex reserves which at US$ 43.2 billion was equivalent to about 10 months of import at the prevailing level.
While high remittance flows have been a welcome development, a cautionary statement is perhaps called for at this stage. The first concerns the issue of sustainability of high flows. Some of the underlying reasons driving this are Covid-related (high demand of households, disruption of informal transfer channels, dis-savings, job uncertainties in host countries). These may have induced a one-time rise in remittance flows which may not be sustained over time. Second, the number of migrant workers leaving for overseas jobs have come down sharply in FY2021 (if during the 7FYP about 7.4 lac workers had left the country every year, on average, number of those in FY2021 (July-November, 2020 was only 7670). While this is expected to go up as countries relax travel restrictions and host country economies open up, the figures are unlikely to reach the high mark of pre-Covid level. This is likely to have adverse impact on future remittance flows, from medium-term perspective. Thirdly, recent BBS figures testify to the high cost of migration in Bangladesh (about US$ 5.0 thousand per migrant worker which was higher than any comparator country and was equivalent to about 17 months of average earnings of a migrant worker). Estimates show that about US$3.7 billion was spent, on average, for this purpose annually during the 7FYP period. This amount was equivalent to about 24 per cent of remitted amount to Bangladesh in an average year. Renewed effort must be put to bring down cost of migration, promote host market diversification and to send more migrant workers through G to G channels.
IMPORT SECTOR PERFORMANCE REFLECTS SLUGGISH INVESTMENT SCENARIO
In the backdrop of the Covid-induced slowdown of the economy, global supply-chain disruptions, lower demands by both export-oriented and domestic-market focused enterprises and imports posted a negative growth of 8.6 per cent in FY20 over FY19. The sluggish trends have continued in FY2021: over the first six months (July-December, 2020) imports came down by 6.8 per cent compared to the corresponding period of FY20. A decomposition of the structure of import indicates that a larger part of the fall is accounted for by fall in imports of intermediate goods (-8.8 per cent), and more so, of capital goods (-16.7 per cent). Decline in import payments for raw cotton (-19.9 per cent), textile articles (-15.7 per cent) and only an insignificant rise in import of yarn (+2.1 per cent) indicate depressed demand by the export-oriented RMG sector. Similarly, the significant fall in import payments for capital machineries (-29.2 per cent) indicate lack of investment demand in the domestic market.
The above import scenario is indeed corroborated by the sluggish domestic demand for investment (as borne out by slow growth of private sector investment demand and low growth of private sector credit uptake) and also by significant fall in the Foreign Direct Investment (FDI) flows. Indeed there has been significant fall in FDI flows in recent months. FDI flows in FY 2020 was 39.0 per cent lower than that of FY2019.
It is important to note in this connection that foreign equity component in the FDI amount has come down sharply, by about 39.1 per cent. This is in line with the trend of stagnating domestic demand for investment.
CONCLUDING REMARKS
Bangladesh’s external sector performance in the backdrop of the Covid pandemic transmits a diverse range of signals as regards turnaround, rebound and recovery of the economy. Strengthened balance of payments position augurs well for the economy, from the point of view of maintaining healthy reserves, ensuring exchange rate stability, robust import payment ability and comfortable debt servicing capacity. On the other hand, these also underpin some disquieting developments in the economy. Export growth has remained negative over the first seven months of FY2021, so earnings in FY2021 will remain far off the target. Indeed, it may take some years for the exports to get back to the pre-COVID level. Balance of trade shows robust improvement only because the pace of fall in import payments have exceeded that of export earnings. True, current account balance position has improved significantly because of the robust growth of remittances. However, the high remittance flows seen in the recent past are unlikely to continue over the coming months. Imports, both of intermediate goods, including those by export-oriented enterprises and capital goods, including capital machineries, have experienced a significant dip, indicating sluggish domestic demand for production and new investment. There is, thus, a need for sustained efforts at maintaining robust flows of remittance, raising export competitiveness and export earnings and stimulating domestic demand and investment for the external sector performance to contribute towards sustainable recovery of the Bangladesh economy.
Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman is Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem is Research Director, CPD; and Mr Towfiqul Islam Khan is Senior Research Fellow, CPD.
[Research support was received from: Muntaseer Kamal, Syed Yusuf Saadat, Md. Al-Hasan and Kamruzzaman (Senior Research Associates, CPD); Mr Abu Saleh Md. Shamim Alam Shibly, Mr Tamim Ahmed, Ms Nawshin Nawar and Mr Adib Yaser Ahmed (Research Associates, CPD); and Helen Mashiyat Preoty and SM Muhit Chowdhury (Research Interns, CPD)]