Published in The Financial Express on Monday 8 June 2020
The Bangladesh economy from the very beginning of the ongoing fiscal year (FY20) has been grappling with formidable challenges in the areas of revenue mobilisation, banking, capital market and export. The outbreak of Covid-19 has exacerbated these challenges by having impacts on the economy through the various transmission channels, both domestic and global. This has now been further aggravated by the super-cyclone Amphan which had hit the coastal areas of the country, causing significant losses to crops, assets and also costing human lives.
The spread of the pandemic in Bangladesh and the subsequent ‘general holidays’ have affected almost all macroeconomic correlates adversely. The analyses in our earlier write up (published in the FE on June 8, 2020) have provided evidence that the Covid-19 pandemic has led to a slowdown in economic growth, given rise to poverty and inequality, triggered a record shortfall in revenue mobilisation, disrupted the implementation of public investment projects, escalated budget deficit and bank borrowing, decelerated export growth and induced a fall in remittance inflow. CPD estimates have shown that economic growth is likely to be at best 2.5 per cent in FY2020. The (upper) poverty rate is likely to rise around 35 per cent in FY2020 while both consumption and income inequalities have increased. Its analysis also apprehended that revenue shortfall may turn out to be as high as Tk 1.25 trillion in FY20.
Alongside these, there are also signs of some resilience, as evinced by official data. Inflationary trend is by and large stable and the balance of payments position and exchange rate are steady. The foreign exchange reserves have seen some rise in recent years.
The government has come up with a number of policy interventions over the past few months in the form of several stimulus packages and monetary easing, and by providing reliefs. Regrettably, the policy response has not been adequate. The government has relied primarily on monetary policy tools as manifested by the design of the stimulus packages.
Generally, as an economy faces such a crisis, fiscal stimulus gets priority in the design of the policy packages,. One could argue that lack of adequate financial resources may have influenced such a design. Also, the stimulus package remains largely focused on large enterprises.
The scope of direct assistance to the marginalised groups has been found to be limited. CPD in April 2020, has argued for providing Tk. 16,000 assistance to each of 19 million households over a period of two months to ensure meaningful implementation of ‘general holidays’ which should have been a ‘lockdown’.
The government in the end went for a down-sized cash transfer to a lower number of people. Weakness of administrative capacity and lack of good governance have further limited the effectiveness of the government efforts.
The aforesaid cash transfer programme could not be fully implemented in time as evidence of large-scale mis-targeting (inclusion and exclusion) and corruption came into light.
The other constraint felt during the overall policy response is lack of required coordination among the various agencies and actors involved. Even during the ‘general holiday’ period, flip-flops in decision-making were in evidence concerning the opening of RMG factories and allowing people’s movements during Eid holidays (after initially prohibiting any such movement). The onus of health safety has largely been shifted from state to individuals and enterprises.
The economic policies in response to the Covid -19 pandemic over the last couple of months were influenced by the false dichotomy between life and livelihood. While it is true that CPD has also earlier urged to focus on life and livelihood, putting the so-called ‘life versus livelihood’ debate on the table has misguided the policy discourse. The decision to open up economic activities without taking proper precaution, plan and preparation is having a significant cost in terms of lives and sufferings of the citizens, and sustainable recovery of the economy.
It is critically important to review the current state of the pandemic spread (as is known, the ‘curve’ is yet to flatten) and take a planned phased approach to allow movements and economic activities. To this end, it is of utmost urgency that the government takes immediate steps to increase the number of Covid-19 tests and prepare a detailed plan involving health experts and economists, not a select group of business leaders only. Relevant guidelines released by the World Health Organisation (WHO) should be followed in this connection. These need to be complemented by adequate budgetary allocations for Covid-19 test capacity and support for lower income groups so that they are able to cope with the ‘lock-down’ period.
There is a broad consensus among the relevant professionals as regards the needed macroeconomic policy stance. CPD in March 2020 has urged in favour of an expansionary macroeconomic policy stance, from both fiscal policy and monetary policy perspectives. The government has taken a number of steps as part of the monetary policy it intends to pursue.
In the run-up to the budget for FY21, it is crucial that the fiscal policy response should also be used to its fullest potential. Bangladesh is in a comfortable zone with a better debt-GDP ratio and this will allow the country to go for a higher budget deficit. However, to pursue this policy, the major challenge lies in creating the required fiscal space.
In order to create the fiscal space, the government will face the challenge of augmenting a substantial amount of revenue in a year when the economy is likely to struggle while raising tax rates will be difficult. To this end, success will depend on the government’s ability to plugging tax evasion and curbing illicit financial flows.
The government must continue to harness all potential sources for foreign finance (grant and loan). One may predict that the onus will largely be on bank borrowing. The governance of banking sector and undertaking the long-awaited reforms assume heightened importance in view of this.
While financing remains the top challenge, allocation priorities of the budget for FY21 need to be right. CPD has argued to put utmost priority for four sectors – health, social protection, agriculture and employment. If the government does not come out of the usual budget framework driven by inertia of business as usual, the needed resources may not be allocated to these areas.
The demand estimations in these areas also need to be realistic and evidence-based. For example, while providing resources to the health sector for testing and treatment to address Covid-19 pandemic, there has to be a clear projection as regards the likely number of infections over the next fiscal year in the country. These assumptions and information should be clearly mentioned in the budget speech so that these numbers and the concerned budgetary allocations can be examined thoroughly. Same is true for social protection and agriculture sectors.
Not to forget, the resources have to be utilised in a timely manner, and corruption against these allocations should be severely dealt with. The recent information published in media as regards the Covid-19 related health project reemphasises this need.
CPD has also called for other supportive measures such as gradual depreciation of Bangladeshi taka and implementation of the stimulus packages in a timely manner by prioritising the deserving and marginalised entrepreneurs. In view of the uncertain global environment, the government needs to focus adequately to stimulate domestic demand by incentivising domestic consumption. Also, aggressive diplomatic efforts will be required for market diversification and to address the challenges in the areas of overseas employment and remittance inflow.
It has been the tradition in Bangladesh policy circles to prepare the national budget with a view to sustaining high economic growth. Indeed, the target and attainment of robust economic growth appear to find the centre-stage in the government’s economic policy discourse. It may be easy to conceptualise and monitor the path of economic recovery, be it ‘V-shaped’, ‘W-shaped’ or ‘U-shaped’; hopefully not ‘L-shaped’, with economic growth numbers.
However, it is important to understand that this year and the present crises are not of the types that are generally associated with the usual business cycle or recession. The elephant in the room for economic policymaking including the upcoming national budget is the Covid-19 pandemic. Saving people from loss of lives and sufferings ought to be the highest priority. The economic recovery should be measured and monitored in terms of poverty, inequality and employment. It is hoped that the next budget will be able to rise up to this emergent challenge.
Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD);
Professor Mustafizur Rahman, Distinguished Fellow, CPD;
Dr Khondaker Golam Moazzem, Research Director, CPD; and
Towfiqul Islam Khan, Senior Research Fellow, CPD.
avra@cpd.org.bd; www.cpd.org.bd
[The article is based on CPD IRBD 2020 (fifth periodic review of FY20). Research support was received from CPD IRBD team members including Md Zafar Sadique, Mostafa Amir Sabbih, Muntaseer Kamal, Md. Al-Hasan, Syed Yusuf Saadat, Abu Saleh Md. Shamim Alam Shibly, Nawshin Nawar, Tamim Ahmed, Md Jahurul Islam, Iqra Labiba Qamari, Fariha Islam Munia and Taslima Taznur]