World Bank sees U-shaped recovery for Bangladesh's economy

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Bangladesh's economy could make a U-shaped recovery if the federal government spends proactively and may utilize international resources despite the fact that output is defined to fall drastically within the next two fiscal years because of the prolonged coronavirus pandemic, World Bank said yesterday.

U-shaped recoveries happen when a recession occurs and the economy will not immediately bounce back but tumbles along underneath for a couple quarters.

In its twice-a-year regional update, the WB maintained its GDP forecast for Bangladesh at 1.6 % for the current fiscal year and 3.4 % for another fiscal year, let's assume that the impact of the Covid-19 crisis would extend.

"Bangladesh would experience a fall but would recover quickly (a 'U-shaped' recovery)," said the latest South Asia Economic Focus.

Speaking on the report, Mercy Tembon, World Bank's country director for Bangladesh, said the global monetary downturn will impact Bangladesh's economy like all of the economies in South Asia.

However, the policies that the federal government has undertaken to mitigate the impacts are in the proper course, she said.

"For resilient recovery, the federal government needs to continue to save lives, protect the indegent and vulnerable, save its debt and fiscal positions, build financial sector health insurance and create a conducive environment for private sector development and job creation."

The WB forecast came as South Asia is set to plunge into its worst-ever recession as the devastating impacts of the Covid-19 on the region's economies linger on, taking a disproportionate toll on informal employees and pushing an incredible number of South Asians into extreme poverty.

It forecasts a sharper than expected monetary slump over the region, with regional growth likely to contract by 7.7 % in 2020.

"The collapse of South Asian economies through the Covid-19 has been more brutal than anticipated, worst of all for smaller businesses and informal personnel who suffer sudden job losses and vanishing wages," said Hartwig Schafer, World Bank vice president for the South Asia Region, in a news release.

In Bangladesh, private consumption growth will probably remain subdued with depressed wage income and a decline in remittance inflows, while anemic private investment is projected because of heightened uncertainty.

Investment and exports will suffer amid major uncertainty about the resumption of demand for ready-made garments. Demand in Europe and america is stabilising however the recovery is fragile.

Moreover, while remittance inflows have surged in the last three months, this may be the result of repatriated savings by returning overseas workers. Remittances are forecast to decline in FY21 with weaker demand from migrant-receiving countries including the oil-producing Gulf states.

Weaker demand and financing constraints may further reduce professional production, while flooding in early FY21 may hamper agriculture production. However, GDP growth is projected to recover to 3.4 % in FY22, supported by a rebound in export demand, remittance inflows and public investment.

Inflation is projected to remain above target due to expansionary monetary and fiscal policies and higher food prices. The existing account deficit is expected to widen with a decline in exports, because of continued low external demand, and a decline in remittances, because of the return of staff from overseas.

The fiscal deficit will probably rise as recurrent expenditure on social protection measures remains elevated in the near term and capital expenditure increases in the post-Covid-19 recovery phase.

Poverty is expected to increase substantially for a while, with the highest impact on daily and self-employed staff in the non-agricultural sector and salaried workers in the manufacturing sector.

Urban areas will still be disproportionately affected, with around 68 % of directly affected personnel found in Dhaka and Chattogram.

Downside risks to the outlook are substantial, the WB said.

Domestic risks include additional waves of the Covid-19 that may necessitate renewed restrictions. In the government's Covid-19 response programme, risks include ineffective implementation of infection prevention measures and limited operationalisation of credit programmes.

In the context of Covid-19 disruptions, fiscal risks may arise, especially if tax reforms are delayed or infrastructure projects face cost overruns.

"Increased deficit financing from domestic banks may put upward pressure on interest rates and could further constrain credit to the private sector."

In the financial sector, challenges include deviations from international regulatory and supervisory standards, the lack of a bank resolution framework and weak governance in state-owned banks.

"Financial sector challenges are particularly extreme in Bangladesh due to deviations from international regulatory and supervisory standards, the lack of a bank resolution framework, the introduction of interest rate caps, and weak governance in state-owned banks."

The resolution of rising non-performing loans (NPLs) will require substantial policy dialogue to lessen credit risks, limit moral hazard and manage fiscal risks.

"While growth is expected to recover over the medium term, downside risks include a prolonged Covid-19 pandemic and financial sector fragility."

External risks also remain elevated, the WB said.

While external demand for garment products is stabilising, the recovery is fragile. Lower oil prices may limit demand for Bangladesh's overseas workforce in the Gulf region, impairing remittance inflows.

"Also, the continued appreciation of Bangladesh's real exchange rate would adversely impact export demand and remittances."

In the years ahead, the report said the government's Covid-19 response would remain a paramount priority, including testing, quarantining and treating patients and providing monetary relief to the indegent and vulnerable.

"Other ongoing priorities include strengthening fragile banks, diversifying exports, accelerating reforms running a business regulation, and deepening fiscal reforms."

The WB said for just about any country with projected new average daily coronavirus cases of 5 per 100,000 people or less on or prior to the last quarter of 2020 are assumed to see economic activities get back to normal levels by end-October because of lifting of restrictions, necessity or both.

"Within the spot, Afghanistan, Bhutan, Pakistan and Sri Lanka had already reached that milestone by September 2020, while Bangladesh is forecasted to attain it as well."

Early, proactive spending by governments combined with possibility of full access to international markets at reasonable rates could catalyse a faster recovery, the WB said.

This scenario assumes that governments undertake a faster expenditure switch from current transfers and supporting consumption to activities that can help revive the economy, such as temporary work programmes.

Moreover, it assumes that external financing will be forthcoming at historical rates and terms. Under these assumptions, the recession would be a lot more muted than in the baseline scenario for all countries.

The simulations suggest that prudent fiscal and financial policies are essential, but the availability of external financing makes a critical difference in the rate of economic recovery in your community and in minimising the income loss.

Even if a buildup in external debt does not materialise, many countries with low debt-to-GDP levels have domestic vulnerabilities that could transform right into a public debt problem in the kind of contingent liabilities.

"Bangladesh, Pakistan and Sri Lanka are anticipated to visit a rise in domestic debt in the baseline forecast. Moreover, rising non-performing loans in the domestic sector have been cited as a concern in Bangladesh, Bhutan, India and Pakistan."

The report said the Covid-19 impact is biased against informality. Informal sector staff have suffered the most significant declines in employment, and the majority of the households who've fallen into poverty during the pandemic are dependent on informal workers, largely daily casual wage workers from the center of the income distribution.

Almost all the personnel in underneath 50 % of the earnings distribution in Bangladesh are informal.

"Informal employees and women are losing livelihoods, and considerable uncertainty remains."

A big share of Bangladeshi personnel is engaged in sectors directly influenced by the Covid-19. Compounded with pre-existing vulnerabilities and the lack of formal safety nets, households tend to manage income shocks with their own resources.

Relief measures should, for instance, consider the high vulnerability of informal and short-term wage workers. Expanding income assistance in the sort of transfers linked to a poverty threshold may be sufficient to protect some of these workers, the WB said.

And other kinds of support, such as for example in-kind transfers or public works, may also be effective.

"However, since a large group of damaged informal workers may well not be eligible for poverty-tested transfers, there can be a have to loosen the conditions for eligibility."

"Immediate relief has dulled the impacts of the pandemic, but governments need to address the deep-seated vulnerabilities of their informal sectors through smart policies, and allocate their scarce resources wisely."  
Source: https://www.thedailystar.net

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