Relatively lower numbers of confirmed cases or fatalities from Covid-19 offer no reason for celebration for the least developed countries, especially the ones which rely heavily on apparel exports.
Given the magnitude of the crisis, clothing exports from Bangladesh, Cambodia, Lesotho and Haiti could fall by at least 20 percent, warns a policy brief prepared by the United Nations Department of Economic and Social Affairs (DESA) this month.
Meanwhile, Global Data on Wednesday made a forecast that Covid-19 will wipe off $297 billion from the global apparel market in 2020 – a 15.2 percent decline as compared to 2019.
The 10 worst impacted markets, in terms of value, will represent 85 percent of this total loss, with mature markets suffering the most – the US will account for 42 percent of all lost spend, followed by Italy, UK, Germany, Japan, France, China, Spain, Russia and Canada.
It forecasts a bounce-back in apparel spending by 17.1 percent in 2021, but that will not compensate for the loss of sales in 2020.
In 2019, the global apparel market was worth $1,955 billion. None of the estimations says that the market will return to this level or exceed this until 2022.
The forecasts are close to the estimates made by businesses and economists who are also assessing economic losses that the pandemic is going to cause.
Global retailers have faced about two months' of closure.
"Given that the apparel industry's global market size is of about $2 trillion, a loss of about $300 billion is therefore very logical," says Dr Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI).
The apparel industry in Bangladesh would face a drying up of orders in the next three months except for June, he says, adding that exporters may have some orders for June, but there will be a gap for two months --July and August.
Apparel exports may reach 60 percent of last year's export earnings, the economist predicts.
Due to the effect of Covid-19, some small and medium factories will be out of business while many other factories will have to change their business model for their survival, he further says.
The global apparel market is projected to decline by 15 percent because of many retailers' filing for bankruptcy particularly in the USA, said Asif Ibrahim, vice chairman of Newage Group, a leading RMG exporter.
In Europe, some UK retailers are also in trouble, he pointed out.
"For us in Bangladesh we may see our 2020 exports experience a significant decline in the US market. However, the decline will be less in the EU market," says Asif Ibrahim, also a director of Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
He holds high hopes on two major retailers H&M and Inditex, who pledged to stand by Bangladesh during the crisis.
Asif Ibrahim also suggests looking for a better opportunity by diversifying products such as producing personal protective equipment (PPE).
Meanwhile, Md Fazlul Hoque, managing director of Plummy Fashions Ltd which is rated to be the greenest knitwear factory of the world, says Bangladesh may lose about 16 percent of apparel exports due to the coronavirus.
"We lost about $2.5 billion exports in April. Apparel exports may witness a decline by about $1 billion every month on average in the next few months," he warns.
Bangladesh will receive 6 to 7 percent fewer orders in the coming months and by the end of the year the apparel industry may witness $6 billion to $7 billion lower shipments compared to the last fiscal year, he added.
If the pandemic situation does not improve, the volume of losses will be much larger, says Fazlul Hoque, former president of Bangladesh Knitwear Manufacturers & Exporters Association (BKMEA).
GDP growth to fall 4% in LDCs
The UN DESA policy brief, titled "Covid-19 Response", forecasts that the direct and spillover effects of the sharp fall in exports could translate to at least 2-3 percent decline in GDP growth in 2020.
Their vulnerability is further compounded by the fact that these economies are also highly dependent on remittances, which are likely to experience a similar level of contraction this year.
According to UN DESA forecasts, GDP growth of these LDCs will decline, on average, by 4 percentage points relative to their growth rates in 2019. During the global financial crisis, GDP growth of these economies fell by only 2 per cent.
While most LDCs depend on commodity exports, only six LDCs—Bangladesh, Cambodia, Haiti, the Gambia, Nepal and Lesotho—receive more than 50 per cent of their export revenue from exporting manufactured goods.
Manufacturing accounts for more than 95 percent of Bangladesh's exports.
Referring to the risk of a narrow export basket, the policy brief says, a single type of product—clothing and apparel—makes them very susceptible to external demand shocks.
For Bangladesh, Cambodia, Haiti and Lesotho, the share is over 85 percent.
More than 80 percent of apparel exports from these LDCs go to Europe and North America. As the current crisis will sharply contract employment and income in Europe and the United States, demand for apparel and clothing will also experience a sharp decline.
Furthermore, demand for non-essentials like clothing does not necessarily pick up immediately after the crisis. Thus, a postponed consumption is usually a foregone consumption.
Unlike in relatively more advanced manufacturing economies, these LDCs lack sufficiently large domestic demand to absorb excess supply as external demand falls.
This means production of a sizable share of exportable products comes to a standstill when external demand contracts sharply, leading to mass layoffs of workers employed in the sector.
Poverty will increase sharply
Manufacturing led export growth allowed rapid expansion of formal employment in these economies. The number of people—mostly women—working in the clothing sector in Bangladesh increased from 2 lakh in 1990s to over 40 lakh by 2018, contributing to a significant decline in poverty.
"A sharp fall in global demand for clothing, and the consequent hit on manufacturing sectors, will lead to a large increase in unemployment in the formal sector of these economies," it says.
Any decline in external demand will disproportionately hurt poor households employed in labour intensive manufacturing and undermine their efforts to eradicate extreme poverty and achieve SDG-1, adds the brief.
Balance of payment crisis
As these LDCs are also net food and oil importers, their import bills will remain high relative to export earnings, digging a larger hole in their current account deficits.
Lower oil prices will give them some relief but it will not be sufficient to offset the decline in export revenue, the UN policy brief points out.
These economies also rely heavily on remittances, which is a critical complementary source of external flows. Remittances cover between 40–80 per cent of their trade deficits.
Given that these economies have relatively low levels of external and public debt, they are unlikely to face debt distress in the near term, it however adds.
Multilateral support critical
These manufacturing-dependent LDCs—Bangladesh, Cambodia, Haiti, the Gambia, Nepal and Lesotho—are aggressively easing monetary conditions to ensure adequate liquidity in the financial sector through multiple mechanisms.
These LDCs, however, have a significantly higher level of fiscal deficit today than they had in 2008, which makes it harder for them to implement large fiscal stimulus packages, says the UN brief.
It is unlikely that these LDCs can significantly expand their fiscal packages with domestic resources alone. It will be very difficult for governments to borrow from the domestic banking sectors or the capital market without crowding out private borrowing, potentially constraining private investment, it warns.
Given their relatively low level of external debt, averaging about 35 percent of GDP, most of these economies should be able to borrow from multilateral creditors, it points out, stressing the need for a large-scale, coordinated and comprehensive multilateral response to help these LDCs confront this unprecedented health and economic crisis.
These economies may immediately access financing from the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI) of the International Monetary Fund (IMF). Low income countries facing exogenous shocks, natural disasters, and emergencies resulting from fragility can borrow from RCF, which has made about $10 billion of emergency funds available for low income countries, and about $40 billion for emerging economies, the UN brief adds.