Navigating Covid-19 impacts on Bangladesh’s external sector

The transmission channels by which the emergent global scenario in the wake of the Covid-19 pandemic are impacting the increasingly globalising economy of Bangladesh are diverse: export outflows are receiving disrupted; import inflows are facing delays; outmigration has ground to a halt; tourist arrivals are practically non-existent; business contacts are receiving delinked; investment flows are facing growing uncertainties. The first signs of the adverse effects of the Covid-19-induced external developments already are being observed in the Bangladesh economy, at the degrees of financial transactions and the real economy, and on business, commerce and consumers at the degrees of enterprises, entrepreneurs and workers.

What's deeply worrying is that the virus-inflicted injuries are hurting the economy at a time when the external sector of Bangladesh is under stress on several fronts. Growth of export earnings over the first eight months of FY 2020 has been negative (-4.8 percent growth over the corresponding period of FY 2019). Bangladesh's flagship export sector, the RMG, posted negative growth over the first eight months of FY 2020 (-5.5 percent) when compared to corresponding period of the prior year. Indeed, barring jute and jute goods, all key items of export have experienced negative growth in the first eight months of FY 2020. It is already evident that the ambitious export growth target of 12 percent for FY 2020 will not be achieved, and the actual export earnings this fiscal year will possibly be significantly less than that of FY 2019 (USD 40.5 billion). Growth in import payments has also experienced the negative terrain (-2.2 percent growth in the first seven months of FY 2020). Indeed, the performance of the import sector is indicative of an economy experiencing demand depression, with likely adverse impacts on growth performance in FY 2020. Important import sub-components such as for example intermediate inputs (-2.1 percent) and capital goods (-8.3 percent) including capital machineries (-22.0 percent) have posted negative growth regarding import payments in the first half of FY 2020, compared to the corresponding amount of FY 2019. A welcome relief is that the remittance sector has registered robust growth (+21.5 percent) in the first eight months of FY 2020. However, growth in the number of staff going abroad has slowed down perceptibly (+4.2 percent growth in the first eight months).

The higher remittance flow has helped to lessen the deficit in today's balance: the figure towards the end of December 2019 was (-) USD 1.4 billion, a noticable difference over the matched figure of a year back that was (-) USD 3.4 billion. Over the first half a year of FY 2020, no discernible change, however, was obvious with respect to the flow of foreign direct investment (FDI) to Bangladesh: the web FDI figure was (+) USD 1.36 billion in FY 2020 compared to (+) USD 1.32 billion in FY 2019, a rise of a mere 2.6 percent. The cumulative effect of the movement of varied components of the balance of payments (BoP) was that the overall BoP position remained rather weak on the eve of Covid-19: (+) USD 27.0 million in December 2019 as against (-) USD 513.0 million a year earlier.

If the identified transmission channels are examined together with Bangladesh's overseas partner countries, it'll become quite evident that Covid-19 will have important implications for Bangladesh's external sector performance over the coming months of FY 2020, & most likely beyond even. Indeed, some of the repercussions are already becoming more and more visible. On the export side, Bangladesh's major export destinations are some of the countries hardest hit by Covid-19: USA (accounting for 16.9 percent of Bangladesh's total exports), Germany (15.2 percent), UK (10.2 percent), Spain (6.3 percent). This observation is true for other export items aswell: for raw leather, Hong King and China together account for over fifty percent of the export; for leather goods, USA (25.8 percent) and Japan (24.4 percent) are major markets; for jute and jute goods, Turkey is an integral market (22.7 percent of export of the item); for exports of fish, China (16.3 percent) and UK (15.3 percent) are the main destinations.

Already exporters are experiencing delays in the shipment of goods. RMG entrepreneurs are experiencing deferment of orders and delays in delivery in addition to disruption in imports of machineries and equipment, primary and secondary inputs and accessories. Major brands are sending cautionary signals regarding possible cancellation of orders because of the protracted shutdown of borders in the EU and THE UNITED STATES and the likely slowdown of the economies of importing countries. BGMEA has produce proof this happening already.

While shipment from China is expected to grab in the coming weeks, exporters and producers whose inventory drawdowns have already reached the limits are facing difficulties in keeping their production process going. Diversifying import sources, from China, can only be considered a medium-term solution which, however, has tangible cost implications. China's increasing dominance as an import way to obtain Bangladesh started in the first place from the competitive price with the ability to offer to Bangladeshi importers and enterprises.

Also, it really is noted that a number of the countries most damaged by the coronavirus are those where many Bangladeshi citizens live and work. The pandemic will probably have a dampening impact on the robust remittance flows of days gone by several months. The already lower number of workers going abroad in recent times could fall further. THE CENTER East, which makes up about about two-thirds of the remittance flows, is having to deal with the dual challenges of the pandemic and the falling oil prices. Projections are that oil-dependent developing countries could expect their coal and oil revenues to be slashed by up to 85 percent.

There is widespread apprehension that the havoc due to Covid-19 on the global economy could result in a global recession of the type observed in 2007-2008 in the aftermath of the monetary and financial crises. The stock markets and futures markets, which have seen a substantial erosion of market values recently, transmit an ominous sign in regards to such a chance. The coronavirus has destroyed USD 23 trillion in global market value since mid-February, in line with the Economist. As a matter of known fact, the IMF, UNCTAD and the OECD are projecting significant monetary losses in 2020, the decline being to the tune around 1.6 percent, 1.7 percent and 2.4 percent of global GDP, respectively. The ILO has warned that the pandemic may trigger a global economic crisis that could destroy up to 25 million jobs worldwide if governments fail to take coordinated efforts. As a result, there are likely to be demand-side repercussions for Bangladesh's key export markets.

In view of the emergent and anticipated near-term scenario, Bangladesh's external sector should be supported through appropriate policies, targeted measures and incentives and, if the problem demands, by putting in place a thorough stimulus package.

While fiscal deficit could exceed 5.5 percent of the GDP in the current FY 2020, this should not deter the policymakers from pursuing an expansionary macroeconomic stance, underpinned by higher public expenditure, quantitative easing, fiscal incentives and sector-specific targeted support measures. The Bangladesh Bank has recently asked the commercial banks never to change the classification of loans between January and June 30, 2020 whether or not a business fails to repay its loan. In another positive move, the central bank has started to buy treasury bills and bonds to add to the liquidity in the bank operating system. Furthermore, the central bank can ask the dealing banks to lessen L/C margins and extend settlement of L/Cs from three months to six months. The federal government may possibly also take an initiative to produce a fund for on-lending to exporters by the commercial banks at a reduced interest rate, preferably at 5 percent. Export-oriented micro and SME enterprises damaged by Covid-19 should get priority in accessing this fund. The interest on lendings from the USD-3.5-billion Export Development Fund could be revisited and lowered. Some quantitative easing may be pursued to inject more money into the system to enable banks to meet the demand for credit at the same time of liquidity crunch in the bank operating system. The policy rates set up and statutory reserves ought to be reviewed on a regular basis over the coming months.

Duties at the import stage should be monitored on an ongoing basis so that availability of import items in the domestic market could be ensured at affordable prices, particularly in the event of essential items. The NBR, for the time being, has already taken the proper decision to waive import duty, regulatory duty, supplementary duty, VAT, advanced VAT and advanced tax on 12 medical items under 17 HS codes; this is to remain in effect till June 30, 2020. If the problem demands, other essential items and medical equipment and ingredients ought to be put into this list.

A targeted rationing system could be introduced in the cities, particularly for personnel and low-income people. The significant food stock at the disposal of the federal government (of about 1.7 million tons at present), as also the stock maintained by the private traders, should provide comfort to the policymakers in this regard. The federal government could also think about introducing the open market sale (OMS) programme, perhaps at an additional reduced price, to focus on the needs of the low-income people.

A database of visiting migrant workers, who aren't having the capacity to join their workplaces, ought to be created. These people will require support from the federal government to tide of these uncertain times.

The upshot of the above discussion is that navigating the Covid-19-impacted evolving scenario will require a dynamic and prudent macroeconomic management for Bangladesh's policymakers. And the federal government should be ahead of the curve in working with medical issues, meaning it has to be proactive rather than reactive. While Bangladesh can rightly claim success because of the sustained economic growth of days gone by decade, the coming days will test whether the economy has also the capability to soak up shocks without undermining macroeconomic stability and by sustaining the growth momentum.