Policy makers all over the world are struggling to cope with the dual challenges posed by the coronavirus pandemic. On the one hand, the lives of people have to be safeguarded from this new health disaster as experts are still learning about how to suppress this virus. On the other hand, livelihoods also require safeguarding due to the pandemic induced economic slowdown.
Hence the need for a medico-economic response framework to this pandemic. Many countries have opted for short-term sacrifices on economic gains to attain long-term sustainable development in the form of prolonged "lockdowns." The objective is to first stay alive and then gradually reopen the economy in a planned manner to reduce the cost of this initial stoppage.
The question of recovery becomes important only if we preserve the economy. It is in this context, the major emphasis on robust public healthcare related expenditures – both now and tomorrow – becomes so crucial. Simultaneously, the state must come forward to ensure food security for the conventional poor and the neo-poor, mostly originating from the stoppage of the informal and service sectors, by providing both food and cash support. Bangladesh is no different, and is searching a strategic way out of this unprecedented disaster by killing both birds at the same time.
Despite commendable progress in terms of socio-economic development indicators over the last decade or so, it can be safely argued that the country – especially it's health sector – was not well prepared to deal with a global health crisis such as the coronavirus pandemic. Moreover, despite being on track for fast economic progress, it must also be accepted that overwhelming majority of the work force in Bangladesh were still engaged in the informal sector before the advent of this health tsunami. This informality of the economy makes it even more difficult to deal with economic effects of the pandemic. It is, therefore, more important to go for more contextualised "out of the box" solutions to the emerging problems.
Indeed, keeping the economy still moving – at least to a certain extent – amid the global economic slowdown is a real challenge and there is no alternative to continuously adapt to the new emerging challenges. While the demand originating from the external economy has been plummeting due to virtual stoppage of globalisation, as reflected in substantial losses in earnings from exports and remittances in the very recent days, only the preservation, and if possible, bolstering of domestic consumption can compensate those losses to some extent.
Here comes the importance of pursuing the Keynesian solutions of preserving the economy by increasing targeted public expenditure to address the twin challenges noted earlier. Health expenditure must get the top priority related to pandemic response, including huge expansion of testing, contact tracing, quarantine infrastructures and ensuring social distancing, along with necessary hygiene interventions, and at the same time keeping other non-coronavirus health facilities functioning.
And this should be followed by investment in agriculture, not only for producing more food, but also for processing, storage of and restoring the supply-chains for vibrant marketing. Agriculture must perform even better during the pandemic to support food security for the low-income segments of the population who may not endure a spike in food prices.
Fortunately, Bangladesh as a country has a very good track record of meeting the challenges of all kinds of disasters, and as well as facing exceedingly well the global financial crises in the past. I believe the country can do it again given the right set of policies are implemented with utmost care, particularly in preserving and ensuring faster recovery of the economy.
During the last global financial crisis in 2008-09, Bangladesh's economy was not only safeguarded from global economic shocks, but in fact it continued to grow consistently, defying the crisis. Thanks to a broad-based financial inclusion campaign spearheaded by the central bank, finance was channelled to the bottom of the economy – especially to agriculture – and domestic demand was bolstered.
These broad measures ensured resilience in the face of global financial crisis a decade ago. In addition, the Bangladesh government has also been following inclusive development policies with medium and long-term visions. And the results have been stunning. The same strategy can be followed yet again. Experts suggest that the macroeconomic strength of Bangladesh is going to be the key to the country's success in managing the current crisis. With prudent fiscal and monetary policies, the country can still have growth that is well above the regional and global averages.
With this backdrop, the budget for the coming 2020-21 fiscal year is going to be proposed in the Budget Session of the National Parliament next month.
It is expected that upcoming national budget will provide a strategic guideline of how Bangladesh is going to manage both the health and economic crises in the short, medium and long terms.
The core expectations include continuation of the stimulus packages already declared to save the economic units – regardless of their size.
Moreover, it is expected that there will be radical change in the trend of public resource allocation for the health sector. There will be similar changes in terms of budget implementation practices for this sector.
Not just in the coming fiscal year, rather the medium-term budget framework, i.e., the budgets for the coming two to three fiscal years, should have tackling the Covid-19 pandemic-related challenges as the central concern.
Given these core expectations, it is obvious that the government will have to mobilise a lot of resources to continue the desired developmental journey. And this brings forward the concerns about revenue income of the government in the coming fiscal year and its strategy for deficit financing. Needless to say, there is little hope of the government increasing its income from revenue collection dramatically in the next fiscal year because all taxpayers have suffered, more or less, from income loss due to the economic slowdown.
Besides, it is also most unlikely that the National Board of Revenue (NBR) will be able to significantly increase its capacities to collect taxes. More public borrowing, both from within and outside, is the only way out for the government. The World Economic Forum also suggests that Bangladesh can safely increase its budget deficit by 1 percent. My own hunch is that it can do more if the expenditures are prioritised well in the context of not much threat of inflation.
The government should not rely too much on borrowing from domestic commercial banks since the domestic banks naturally will be more interested to invest in government bonds than providing credit to the private sector. Hence, if the government relies too much on borrowing from the domestic banking system, that will curtail the supply of credit for the private sector (crowding out effect).
In this context, credit lines of the multilateral financing bodies such as the World Bank, ADB and IMF are going to be most reliable and safe sources of credit for Bangladesh.
Firstly, these multilateral financiers will prioritise giving credit to Bangladesh due to its macroeconomic strength, as well as its proven track record of credit compliance. Secondly, although Bangladesh on certain cases might have to agree on higher interest rates against these credits – as the country no longer belongs to the LDC category – those rates will still be lower than that of loans from commercial banks.
Finally, Bangladesh may also have to eventually move away from its current strategy of dictating exchange rates and interest rates at some point in time to avail loans from the said multilateral agencies. This too, in the longer run, will be beneficial to the economy as a whole. Desired reforms may be beneficial in attracting more domestic and foreign direct investment and ensuring maturity of the financial sector.
While Bangladesh is most likely to receive priority treatment in accessing special credit from the multilateral agencies, it will still take some time for necessary formalisation. Until then, the central bank ought to continue expanding its "balance sheet" to increase the supply of money.
Many experts are giving the "printing money" prescription to make sure that money is channelled to the lower income group households, but that solution is more applicable for advanced economies.
I believe emerging economies like Bangladesh ought to choose a middle ground.
Our central bank should pursue easing of regulatory requirements and run more refinance schemes. The Bangladesh Bank has already taken up initiatives to supply additional Tk70,794 crore to the market via refinance schemes and easing of regulatory requirements. There should be adequate allocations in the budget proposal for FY2020-21 so that refinance schemes could be further expanded and easing of regulatory requirements can be continued.
For additional inflow of foreign exchange, the central bank can sell bonds online to affluent non-resident Bangladeshis. In the coming fiscal year, the Motijheel office of the Bangladesh Bank can expand the existing programmes (selling treasury and other bonds to NRBs online). This should be an attractive investment opportunity for affluent NRBs, especially in the context of a global economic slowdown and government bonds having high interest rates.
A key point to be noted here is that be it refinance schemes or some other kind of financial stimulus package, our banking system will play the most pivotal role in materialising those initiatives. But commercial banks are most unlikely to reach out to new customers with new and/or innovative credit programs since they are naturally risk aversive. This is especially true for SME credit schemes because of higher risk involvements and lack of experience in SME financing.
A two-pronged strategy is required here.
Firstly, partnerships need to be promoted for innovative financing. The central bank is already promoting banks and microfinance institutions (MFIs) working together to finance the bottom of the pyramid. Other unorthodox credit transfer channels, such as agent banking, are also not new in Bangladesh. We have adequate experience in innovative financing. This is high time to put that experience to use in coping with this unprecedented crisis.
Secondly, the central bank/government needs to share the risk of innovative financing with the commercial financial service providers. For example, 50 percent of the stimulus declared for micro, small and medium enterprises (MSME) sector will be covered by refinance schemes. The budget proposal should create provisions so that 100 percent of the stimulus packages for SMEs are covered by refinance schemes. Besides, the Bangladesh Bank is already piloting a credit guarantee scheme. In the coming fiscal year, it needs to be further scaled up. The budget should have a robust allocation for developing a state-of-the-art Credit Guarantee Scheme like that of Malaysia.
It is evident that Bangladesh will be able to secure additional funds from domestic, as well as foreign, sources provided prudent economic diplomacy continues. But securing funds alone is not enough. Careful prioritisation of the limited resources is equally, if not more, important.
Following are some of the sector-wise recommendations for public spending in FY2020-21:
- The health sector must aim to achieve up to 20 percent share of the total budget in the next three years (currently it has less than 5 percent). This additional allocation will be required to prepare the health infrastructure required to cope with the pandemic, as well as to continue other critical health services.
- More households will fall back to poverty and/or will be at risk of falling back to poverty due to the coronavirus-induced economic slowdown – global poverty is projected to increase by 8 to 10 percent. Share of the social safety net allocations in the total annual budget needs to be doubled, from 10 percent of the total budget to 20 percent, in order to safeguard the poor from socio-economic shocks induced by the pandemic.
- Food and cash support programs, must be continued in parallel in the coming fiscal years, preferably through digital payment systems, to help the marginal people cope with the socio-economic shocks. Choosing one over another will not be prudent. Channelling only cash to the needy may result in increased price of food, and providing only food support will not be adequate as quick implementation of massive food support programme is not viable.
- Between 2013 and 2019, share of agriculture in the total national budget has decreased from 11.3 percent to 5.7 percent. In the upcoming fiscal year, this share must get a significant upshot – by 10 to 15 percent of the total national budget. Indeed, agriculture can save the economy to a significant extent through providing adequate cushion for inclusive growth. This will ensure economic vibrancy in the rural areas and as well as ensuring supply of food for the urban industrial sector. Increased allocations should go to establishing crop storage facilities, modern processing of fruits and vegetable plants, enhancing access to market – including digital ones – and mechanisation of agriculture.
- It is needless to say, all sub-sectors of our education (primary to tertiary) have suffered and are still suffering due to the pandemic. In the coming fiscal year, there should be increased allocations for digitisation of the education infrastructure so that distant learning can be facilitated. The government needs to pay attention to the private educational institutions. The long-standing demand of allocating at least 4 percent of GDP for education has gotten more rational due to this existing scenario.
- Implementation of megaprojects, particularly at least a few Special Economic Zones which are nearing completion, must get enhanced budget if we really want to attract some companies who may be opting out of China. In any case, the budget must give more emphasis on improving investment environment as a whole to attract more FDI as has been done by Vietnam.
The macroeconomic strength of Bangladesh is giving us some hope even during the ongoing crisis. The Economist magazine has put Bangladesh ahead of India, China and even the UAE in terms of ability to cope with economic shocks of the Covid-19 pandemic. Experts see no risk in declaring economic stimulus for Bangladesh businesses worth up to 5 percent of the country's GDP (current share is more than 3 percent).
However, without efficient implementation of the budget, i.e., without effectively managing the "leakages and spillages" will all be in vain. And to ensure that, the government must continue dialogues and cooperation with the private sector, the non-government organisations and the international development partners.
This pandemic is an unprecedented one, to cope with which we will need an unprecedented level of collaboration and discourse among stakeholders.
The writer is the Bangabandhu Chair Professor of Dhaka University and former governor of the Bangladesh Bank. He can be reached at email@example.com