Published in The Business Standard on Friday 15 May 2020
The Business Standard talked to professor Rehman Sobhan about the current economic crisis arising out of the Covid-19 pandemic as part of a series of video conferences moderated by Dr Zahid Hussain. Prof Sobhan’s thoughts on the economic challenges are separately presented here for our readers.
Inam Ahmed: It seems the economy is heading for a deep depression. How do you see things will play out in the future? How will it even out? When will the recovery start? How do you look at the future?
Rehman Sobhan: The most obvious answer to that is that it depends on how we handle the Covid-19 crisis because the big problem is that we have got such an inadequate record of testing, in fact, which seems to have one of the world’s lowest rates than elsewhere. We have really no idea as to the width and depth of the covid crisis. So we have no idea when it is going to peak and how long it will go on.
So this has created a big unknown factor in making forecasts for the economy because in other parts of the world they are just much greater … the way in which the crisis is in fact evolving. And they are at least attempting to make a prediction about when it will flatten out and the curve will start to move downward.
In our case, until we really get to an adequate level of testing… 20,000 tests a day, you are not going to get a proper sense of the extent of the problem.
I don’t know what sort of target is being set to enable us to reach such a level. It looks that it may not be possible in May, so we may be talking about even June by which time we will reach our maximum potential of testing.
In case of that, some reasonable indication will come with the extent of the problem when our curve will flatten and start moving downward.
At the moment, unlike other countries, the trajectory of the curve seems to be clearly upward. Today we saw the number of infections reach four figures for the first time. So, this is going to be a very crucial variable which will determine both the nature and extent of the economic response and also the outcome on the economy.
Inam Ahmed: What is your reading of our current macro-economic crisis?
Rehman Sobhan: Well, obviously which is very reasonable to us, I think, it has impacted immediately on our export sector where we are seeing now that there has been a sharp fall in export. And of course it is also affecting our import regime.
Our export sector and also various sectors of the economy are tied into a value chain which depends on regular flow of import coming into the country. The growth is going to be rapidly decelerated. It is then going to impact on revenue generation.
And at the same time it is going to impact on our development expenditure, for the development expenditure has already slowed down because of the interruption in both work and movement of people. But this is going to go on further, which will then impact on big projects.
And moving on from here, of course, we are also seeing fallout in such areas as poverty and human development. And these I think are important because it shows that over the years we have made impressive progress with regard to reduction of poverty in terms of our numbers looking at the household expenditure survey.
Obviously, this reduction of poverty is itself a very fragile process. Because, it shows you there is a very important distinction between just statistically reducing the level of poverty and how it affects the quality of life which is really also contingent to our poverty of dignity – whether the vulnerability of people who are classified as poor has been significantly improved.
And actually what we are now seeing is that small shocks are rising to bigger shocks that have generated severe vulnerability.
Today, just over the few weeks, you will see the poverty level suddenly going up because it shows the basic dividing line between our current level of poverty and those above it by a small percentage. It’s not great. And many thought that these people will go below the poverty line.
This indicates now that the whole sectors of economy hold a range of households mostly related to informal service providing sectors and also related to various goods producing sectors whose income have been drastically affected because of the supply-demand crisis which is going on in the economy.
So we should wake up to the fact. Of course, we have very positive figures to show in the last ten years in terms of our development. Both our growth and our graduation to middle income state are very fragile and in fact the whole moving out of poverty is a very ephemeral process where it can very easily be downsized as we are actually seeing.
So what we will have to look for now is to introduce qualitative strengthening of the various structures of the economy so that we can deal with the crisis in a much more effective way.
Inam Ahmed: You said we need to strengthen our structures of the economy. What are the structures that we need to strengthen?
Rehman Sobhan: Well, I think, we need to demonstrate much richer strength and resilience into the revenue generating capacity of the economy to begin with. This is already very weak compared to the neighbours and the developing countries. Here we see a continuous downward pressure on our revenue.
Secondly, of course, we are structurally highly dependent on a very narrow range of export. And again, this is highly sensitive to the particular demand of the global market. This proportionate impact is coming on us because the garment sector is particularly vulnerable to the conditions on the countries both in North America and European Union which are severely affected by the crisis.
Thirdly, the other structural problems are in the whole area of neglect in the particular segment of economy of which we have finally dramatically been made conscious of – the real weakness of the health sector. Now because of the infrastructure that we are given, which are also popularized by my old friend Amartya Sen and others, that Bangladesh’s human development record has been good. But that was essentially being made in comparison to India. And he was trying to always tell us that India’s investment in health and education is poorer. That Bangladesh has been able to get a better result.
But what we are finding out here is that Bangladesh’s investment in the health sector is exceedingly low. And much lower in relation with GDP and also budget compared to many other countries. At the same time the management of the health system has been very weak.
So all these areas now, when you are facing a real crisis, are open to the mass in a very limited way. And another reason is our record of testing. I think we have a lot of problems in coordination. So we need major investment in the health sector. The management and governance of the health system are very crucial in the way we actually deal with this.
If you are really looking for comparison, you should look at Vietnam, which of course everyone has now noted, that is doing better than us in many areas. They have already made a much bigger investment in health and their management also helps them to react at the moment of crisis. And they have the result with zero death and they have drastically reduced the level of infection so that they can go back to business as usual and this has given them the advantage to go ahead of Bangladesh in the export market. After China, Vietnam is our main competitor in the RMG export market. They have now overtaken us in the US market. They are now in a more advanced position than us and we have to work hard to recover our position.
And what made it possible for Vietnam to reach such a position is the investment and management in the health sector. And it is here where we really need to apply our mind.
It is not just a matter of investment or resources which is also an issue of quality of management, of whether we are talking about healthcare or we are talking about educational system, which in fact enhance the system both qualitatively and then also structurally strengthen the system which will enable you to cope with Covid and any other crisis.
Inam Ahmed: Is our policy response going in the right direction to fight Covid-19? Whatever Bangladesh Bank is doing or the stimulus packages it is offering, do you think they are in the right direction or we need to do more?
Rehman Sobhan: Well, I think, in the circumstances they are reacting in the best possible way. And obviously about the stimulus package they are working on the assumptions.
With the economic recession which is to do with the supply side problem, the output needs to be stimulated, and with the demand side problems demand needs to be regenerated.
And they also have to address the humanitarian problems related with the workers and other sectors of the economy such as the informal sector. Now the stimulus packages have attempted to enhance the liquidity of the banking sector operating.
There are some problems here that we need to look out for very carefully. Stimulus package is being exclusively handled by the banks. That means through various interventions you have been enhancing the liquidity of the banks and you are also attempting to provide subsidy through interest rate and also taking measures to relax loan recovery.
Now considering the prevailing structural circumstance of our banks, I do not know how this is going to be handled. Because banks are already facing serious problems. They already have hundreds of thousands of crore taka in default loans and last year they had 50,000 crore taka of loan rescheduling.
Now the packages that have been provided to them have made them really assume the role of risk taking. Though they are being subsidised, they will lend the money and they have to recover it. Now giving the whole package to the right people, ensuring that it is properly utilised and recovering it are now really resting on the banks.
Now the banks who in the best of times when the economy was more or less moving were having difficulty in managing the credit flow. Under the prevailing circumstances when there is already a crisis in both demand and supply which is severely impacting on the business prospect for the people who will be borrowing money, this is going to be really difficult.
Here the problem will of course be severalfold. One is the stimulus package was partly designed to ensure that workers in particular would regain their job, or, would actually get their salary. And the first Tk5,000 crore was designed to pay the salary of March and April.
Now how effectively has that served its purpose? I have been told that it has been very helpful, but how far it has been effective and how long you can go on simply banking on such measures for the foreseeable future without businesses themselves reviving to a point where they will be in a position to give back their debt to the bank is of course something to be seen. I think this has to be very carefully thought out.
How far business will revive and what impact this will put on the financial viability of the banking system should be measured carefully. Then there will have to be serious consultation between banks, analysts and the government.
The second intervention, which is transfer payments including subsidizing food and free distribution of consumer goods. Here again I think the government is doing the best it can. But the problem now is to work out and do some sensible forecasting on how long this will be necessary because this is tied up with the third aspect of the revival of the informal sector.
Here I have not come across any clearly thought out and any longer term series of intervention to deal with the much severe problem of the people in the informal sector.
There are certain categories of SMEs which have been serviced by microcredit and also by the SME financing system. There are the whole range of people – rickshawpullers, and day labourers and everyone else – who are not really covered by the stimulus package. These people need to be supported and what sort of stimulus package will need to meet their particular need has to be thought out. I think this has been overlooked.
I think the budgeting for this year will have a much bigger package which you will really call welfare oriented social potential programmes.
The last point I want to make is that we should not disconnect all our intervention from the Covid outcome. Because the goal at the moment is to revive, to activate the economy which means that the workers are going back to work in the factories. They are coming from the villages and going back to their workplaces. Their workplaces are highly vulnerable and have very little scope for social protection.
There will be a large movement of people into the marketplace, supply side response will be there and goods and services will be coming in. We are going to see a great deal of movement and a great deal of activities as more money is flowing in.
Now, without getting a clear handle on the trajectory of the Covid process, a whole range of activities are going on when we are still at an upward trend of Covid. This would then have a quite severe consequence for the health situation. So I think here we need a very serious consultation of all concerned.
My advice is that given the complexity of the serious problem, the government would be well advised to widen its consultation process to include a broader section of professional people both from the healthcare system and also from the civil society who can contribute with their analyses of the economy and also people who will then be involved in broader issues of social management related to social distancing and educating. This is really a national crisis and it should be dealt with a point of national agenda. We should not simply depend on the government to deal with the problem in its own exclusive way and the government itself should in fact take advantage of being much more inclusive to deal with the process.