Bangladesh’s economic recovery or collapse depends on vaccination pace: WB

Illustration: Vecteezy

The recovery or collapse of Bangladesh's economy depends on three major factors – the pace of the ongoing Covid-19 vaccination campaign, the extent and duration of mobility restrictions, and how quickly the world economy recovers, says a report of the World Bank.

The report titled "Bangladesh Development Update – Moving Forward: Connectivity and Logistics to strengthen Competitiveness" also identified some major challenges for Bangladesh's economy in the field of uncertainty stemming from Covid-19, elevated financial sector risks from high levels of non-performing loans, and weak government revenues.

It set the highest priority to protecting households affected by the negative impacts of Covid-19 and building a data infrastructure to track the impacts of future shocks, which can help inform policy response to future crises.

The Dhaka office of the World Bank published the report at a virtual press briefing on Monday. Two senior economists, Bernard Haven and Matias Herrera Dappe, presented the keynote.

Haven said Bangladesh's economy would achieve 5.6% growth in the current fiscal year if all the challenges were managed efficiently.

He said the slower pace of vaccination, restrictions on mobility, and a volatile global economy would hinder the domestic economy with 2.6% growth.

Haven also said the economy would achieve 3.6% growth in the current fiscal year and recover with 5.1% growth in the next financial year, and 6.2% in the fiscal 2022-23.

In June last year, the World Bank projected 1% growth for Bangladesh for the fiscal year 2020-21, which was upgraded to 1.6% in October that year.

But considering the uncertainty in several sectors of the economy due to both domestic and global factors, the global lender projected a wide range of growth from 2.6% to 5.6% for the current fiscal year.

The report projected 8.4% growth in export earnings in the current fiscal year.

It also projected lower investment in the current fiscal year with 3.4% gross fixed capital investment, which was 4.3% in the last fiscal year.

The report projected 7.4% gross fixed capital investment in the next fiscal year and 8.6% in the financial year 2022-23, slightly above 8.4% in FY2018-19.

Despite a lower development expenditure and a lower budgetary expenditure, the World Bank forecast a 6% budget deficit in the current fiscal year due to lower revenue collection.

The report also forecast that the budget deficit would be 6% of GDP in the next fiscal year and would recover slightly in the fiscal year 2022-23, reaching 5.9%. Bangladesh maintained its budget deficit below 5.5% of GDP over the last decade.

"Despite the uncertainty created by Covid-19, the outlook for Bangladesh's economy is positive. Much of the pace of recovery will depend on how fast mass vaccination can be achieved," said Mercy Miyang Tembon, World Bank country director for Bangladesh.

She said at the event there are huge uncertainties regarding the pandemic.

"The global economy also has some uncertainties despite positive demand at present. We have projected economic growth with a wide range instead of a point."

She also said the World Bank approved $500 million in loans as support. "Considering the health and economic situations, the agency will make a decision on further allocations of budget support. The World Bank is working on this."

The World Bank report revealed that food inflation is rising due to volatility driven by supply chain disruptions in the lockdown, temporary surges in consumer demand, and flooding in early FY21. But the non-food inflation slowed with dampened consumption growth.

The report projected a moderate inflation rate of 5.5% in the current fiscal year.

It suggested increasing government revenues, diversifying exports, resolving vulnerabilities in the financial sector, rebalancing urbanisation, and improving the business climate.

Restrictions could disrupt economy

The World Bank anticipated that rising Covid-19 infections would require more restrictions on movement, which could disrupt economic activities.

It could delay the implementation of major infrastructure projects and create cost overruns.

Challenges in the implementation of credit and social protection programmes under the stimulus schemes could also undermine recovery.

In turn, higher borrowing from domestic banks could constrain the availability of credit to the private sector.

Pandemic exacerbates risk in financial sector

Financial stability risks predate Covid-19, including high levels of non-performing loans, weak capital buffers, poor bank governance, and risk management, read the report.

The World Bank said reduced profitability and weaker asset quality in the banking sector are likely to have second-round repercussions for the real economy by limiting the availability of credit.

"Although Bangladesh was already not fully aligned to international standards prior to Covid-19, the Bangladesh Bank has further relaxed loan classification requirements and allowed banks to freeze loan classifications as per their pre-Covid-19 status.

"Such extraordinary measures can have positive effects on the short term but harmful consequences over the medium and long term, unless they are carefully implemented and closely monitored," it said.

Moreover, the expected positive developmental impacts of accommodative monetary policy and the Covid-19 stimulus packages could be undermined by interest rate caps and delayed recognition of non-performing loans, as these measures will ultimately hamper credit growth, it read.

Bangladesh to receive 68 million vaccine doses from Covax initiative

Bangladesh will receive 68 million doses of vaccine to protect its people against Covid-19, said the World Bank report.

It said the national Covid-19 vaccination campaign began in February 2021 in Bangladesh, and the country received shipments of seven million doses from India.

Another 25 million doses have been procured from India while 68 million more doses will be received under the Covax initiative beginning in May 2021, read the report.

"However, achieving mass vaccination and herd immunity will take a significant time," the report explained.

The World Bank announced a $500 million loan programme for Bangladesh to make vaccines available for 75% of the population, said the country director of the World Bank at the event.

Improved logistics to increase export earnings

High logistics costs are eating up even half of the revenue in some sectors in Bangladesh, revealed the report.

It said improving infrastructure would help reduce logistics cost by 25%, which would help increase export earnings by 20%.

Dappe said Bangladesh had succeeded in reducing poverty by half between 2000 and 2019.

He said the country had also achieved over 6% economic growth for a decade but was facing a competitiveness crisis due to lower productivity and wage, concentrated export basket and higher logistics costs.

Bangladesh ranked 105th among 141 countries in the global competitiveness report of the World Economic Forum in 2019 and 100th among 160 countries on the World Bank Logistics Performance Index 2018.

Dappe also said logistics costs in Bangladesh are high in most sectors.

"Costs range from 4.5% of sales for leather footwear to 47.9% for horticulture. Per tonne and per kilometre inventory carrying costs are higher than that in most countries."