The World Bank's (WB) just released South Asia Economic Focus has projected a drastic decline in Bangladesh's growth this fiscal year and the next. Growth could be between 2 to 3 percent this year. The WB projection should help awaken those sedated to comfort by the Asian Development Bank's 7.8 percent growth projection for Bangladesh in FY20. This came just after a 3.5 percent projection by the Economist Intelligence Unit. In all fairness, ADB did footnote that their projection does not include the Covid-19 impact.
The surprise here will be if anyone is surprised to see the dire outlook portrayed by the WB.
Indeed, the whole world is in a health and economic crisis from which it is unlikely to emerge the same as before the crisis. Covid-19 has created health and economic havoc globally. Sadly, it is not over yet. No one knows when and how it will end if ever it ends. In an integrated world, the impacts of the disease beyond those who die and those who are incapacitated or caring for the incapacitated and unable to work for a period has become apparent since the outbreak. Initially, amidst the slowing down of the Chinese economy with interruptions to production, the functioning of global supply chains was disrupted. Companies dependent upon inputs from China started experiencing contractions in production. Panic among consumers and firms distorted usual consumption patterns and created market anomalies. Global financial markets plunged.
Since then Covid-19 has turned into a fluid combination of a global health pandemic and an economic catastrophe. There is no precedent of such a lethal combination. It is unfolding at a pace to reach extraordinary heights and depths. The bottom appears to be reaching a new bottom every day and its duration is anybody's guess. The WB report rightly notes: "As advanced economies enter one of the worst economic recessions in history, the short-term economic outlook for South Asia has rapidly worsened…It is not easy to determine the magnitude of that deterioration."
There is already growing evidence of devastating human and economic impacts. The epicentre of the health crisis has shifted from China to Europe and the US. The latter are Bangladesh's largest export markets where hundreds and thousands of Bangladeshi workers also reside and send remittances to their relatives at home. The virtual lockdown in Bangladesh has made consumption expenditures, other than for essentials, rather imprudent for households who can afford it and impossible for households who have lost bulk of their income. This has resulted in an adverse demand shock never seen in Bangladesh's history. The lockdown has also brought to a sudden stop the wheels of the economy in many parts of industry, agriculture and services.
For the first time, the WB has presented a range, rather than a point, estimate of growth depending on assumptions about the length of lockdown in advanced economies. They have considered two scenarios – one based on 2 months lockdown and the other based on 4 months lockdown. Growth this fiscal year is projected at 3 percent in case of the former and 2 percent in case of the latter. The adverse impacts are not going to wither away in just one fiscal year. Bangladesh's growth is projected to be between 1.2 to 2.9 percent in FY21 followed by a robust recovery ranging between 5.2 to 6.2 percent in FY22. The projections for Pakistan, Sri Lanka and Nepal are much more dire than this.
More important than numbers are the channels of transmission on both the demand and supply sides of the economy. Efforts to flatten the Covid-19 spread has the consequence of fattening the economic recession curve. These efforts affect both the supply and demand sides of the economy.
The supply side disruptions began even before Covid-19 came to Bangladesh. The raw materials for a large portion of the export-oriented production of Bangladesh is dependent on China, which accounted for 26 percent of the total imports in FY19. This includes raw materials, machinery and consumer products. These are critical commodities, particularly but not only for the readymade garments (RMG). More than 40 percent of the raw materials and machinery used for RMG are based out of China who have also not been spared by Covid-19. The slowdown in the delivery of raw materials, intermediate inputs and capital machinery from the external suppliers combined with domestic disruptions have inhibited the supply side of the economy. Although raw materials are procured 3-6 months in advance, depletion of stocks can create disruption in production in near future or can lead to a rise in prices thus putting pressure on the fulfilment of export orders as well as domestic demand.
The WB report presents estimates of the supply side multiplier effects. How much might the output in various sectors be affected if there is one dollar decrease in the supply of various goods and services from domestic and external sources that are used as inputs in production and services sectors? The highest multiplier of 3 is in textiles, meaning a dollar decrease in the supply of inputs decreases textiles output by 3 dollars. The multiplier is 0.7 in construction, 0.5 in transport and 0.2 in agriculture. These illustrate the magnitude of damage on the supply side due to disruption in supply chains.
Both domestic and external demand are adversely affected. Private consumption accounted for 69 percent of total demand in FY19. A large drop in consumer demand is inevitable, driven by a collapse in sales on the occasion of Pahela Baishakh, the forthcoming Ramadan followed by Eid-ul-Fitr. Domestic consumption of services such as transport, hotels and restaurants, personal services and so on have already plummeted. Unlike consumption of fast-moving consumer goods where postponed consumption can be regained when some kind of normalcy returns, lost demand in services cannot be made up.
On the external front, Bangladesh's major export markets – Europe and the United States – have taken turns in becoming Covid-19 epicentres. France and Germany are already in recession. Unemployment claims in the US have reached nearly 17 million in just one month. This has done huge damage to consumer confidence. Exporters in Bangladesh are deluged with order cancellations, let alone getting new orders for this year and the next.
Investment demand is in a precarious state. Business firms, irrespective of size and origin, are being hurt by the collapse in domestic and foreign demand. Coupled with impediments to transporting inputs and goods, production losses, large-scale bankruptcies are increasingly likely. Just like Covid-19 is more likely to infect individuals with pre-existing health conditions, its economic impacts are likely to be deeper in economies with pre-existing financial distress. With Covid-19, banks are likely to see huge pressures on their balance sheets as debtors' default and new borrowers and depositors disappear. Bangladeshi banks had high nonperforming loans and low capital buffers to begin with. Channelling Tk50,000 crore subsidised loan support package through the banking system will compound their default risk exposure even after the emergence of a new post-Covid-19 normal. A recovery in private investment, which is critical for boosting productivity and creating new capacity, is beyond eyes can see.
The combined threat on the demand and supply sides is made more ominous because the outcomes are mutually reinforcing. Economic recessions tend to cause lasting damage to the lives of people and corrode the balance sheets of banks and private enterprises, often for a long time.
The economic losses will exacerbate poverty and inequality. Human suffering, mostly in the form of loss of life, deterioration of health, but increasingly through loss of jobs and livelihoods, have increased and will continue to increase. A vast number of the country's citizens are under restrictions and advised not to leave their homes. Many workers have lost their jobs or are working on reduced work schedules. The poor in particular are getting the worse of all deals – they are subject to high virus risk because they cannot practise social distancing; many poor agricultural workers will be missing the relatively high wage opportunities in Boro harvesting because they are unable to migrate and they are also badly affected by hikes in food prices because they spend a large share of their budget on food.
If the economic downturn is prolonged and deeper, this will further hurt disproportionately the poor in other ways as well through impact on nutrition, education, and indebtedness. Findings from the Brac's perception survey confirm the WB report's apprehension that "people at the lower end of the income distribution will be hit harder".
The author is an economist.