Employment generation and improving the healthcare system are fundamental for reviving the economy, said Naser Ezaz Bijoy, CEO of Standard Chartered Bangladesh (SCB) and he believes Bangladesh stands best chance with following approach in the order of priority:
a) Contain spread of virus as the current healthcare system will not be able respond to accelerated spread of COVID-19. To note, if the outbreak is not contained, there will be loss of valuable life, and additionally, it will deal a blow to the domestic economy through prolonged movement restriction which is currently costing the nation a loss of GDP to the tune of $300-400 million per day. In nine weeks, the total loss has been around $18-$20 billion, which is almost seven to eight percent of the economy. If this loss is deducted from the targeted 8.2 percent growth, the real growth will be zero. In this situation, if we at least do not achieve negative growth, that will be a remarkable achievement.
b) Focus on stimulating the domestic economy, as more than 75% of manufacturing activities and 90% of 70 million workforce are catering to the domestic economy. Hence it is imperative that financial support reaches directly the hands of daily wage earners and marginalized population, to keep economic activities running.
c) Support export sector and returnee diaspora Bangladeshis, to remain afloat by supporting them to protect jobs of the workforce and to provide them with respite from financial as well as fiscal obligation during a time when the buyers are unable to fulfil their obligations, until global demand for goods and services recover. To note, unlike the first two areas, which are purely related to in-country issues - on this point, Bangladesh has minimal control over global market, hence the impact of allocated state resources to support export sector and returnee diasporas, albeit essential, have higher level of uncertainty, in terms of the immediate impact.
According to him, the government should have a priority focus on employment and healthcare for faster recovery of the economy. "If employment is generated, consumption will rise. If consumption increases, manufacturing and the service sector will get back life and banking sector activities will resume in full swing."
He also said "Our healthcare capacity is inadequate. If we cannot contain the spread of virus before the western markets resumes near normalcy, the exporters will run risk of losing future orders to countries who have successfully contained the outbreak. The government cannot do this alone. It requires participation of everyone."
TBS: What is your view on the life versus livelihood debate?
This is a huge debate. I think it is not that simple, otherwise, "Life" would always prevail over livelihood. Actually, it is also about the probability of losing life versus the probability of losing livelihood. In a country where a third of the population are daily-wage earners, a country which has weakness in the healthcare and education system - the probability of losing livelihoods is higher than the probability of losing lives. It is very difficult to strike a balance between the two things in a country like ours. Even with all good intentions, it will not be possible for government to be successful if we, the citizens, do not impose self-discipline on us.
TBS: Which industry will be more affected?
Almost all industries, more or less, will be impacted due to lack of buyers. Only technology-driven business platforms like e-commerce will have lesser impact compared to others. Given the purchasing power is getting impaired, even the demand for essential commodities will be depressed albeit to a lesser extent.
TBS: Is the stimulus package good enough to stimulate demand?
The size of the current stimulus package is around 3.5 percent of GDP and 70 percent of it is bank-driven. While the stimulus packages are significant, they will not be enough, considering the quantum of the impact on the economy. Honorable Prime Minister Sheikh Hasina announced the stimulus packages in phases, I believe that she will consider more stimulus packages as she deems appropriate. A total incentive package amounting to Tk 111,000 crore. Of the amount, Tk75,000 crore will be sourced from the banking sector. Under the Tk 50,000 crore package for interest subsidy, some Tk30,000 crore has been allocated for industries and the service sector, and Tk20,000 crore for Small and Medium Enterprises (SMEs). The government will bear half of the nine percent interest for the package of Tk 50,000 crore.
The Bangladesh Bank has already supported 50 percent of the total amount that will be taken from the banking system to help the banks implement the package.
TBS: What are the barriers to execution of the stimulus package?
The stimulus package is mostly bank-driven and the government has done a lot in terms of providing liquidity. But the complexity of the guideline in terms of execution can be an impediment to a smooth execution of the stimulus package.
For instance, the Honorable Prime Minister made a simple announcement on providing interest subsidy with BDT 50,000 of the stimulus package. However, the guideline was not as simple as that. The first thing is a bank can lend only 30 percent of working capital of clients' existing loans. Moreover, stimulus on SME sector has multiple sub limits, which is likely to make it difficult for the SMEs to get the benefit of the package.
Banks are responsible to select qualified clients in line with the conditions, and if they cannot, the government will take back its subsidy. So, banks will remain conservative in lending under the stimulus package. This is why simplification of the guideline is needed. The Bangladesh Bank has already revised some rules of the guideline to simplify the process.
TBS: How is the stimulus package of Tk50,000 crore enough for subsidizing interest of the clients of the banking sector?
The total loan asset of the banking sector is $125 billion, of which 10-11 percent is in default and around 80% of these loans are working capital. As per the guideline, interest subsidy is applicable for only 30% of the working Capital facility. Hence the interest subsidy amount (@4.5%-5%) will be around $1.2 bn which is equivalent to BDT10,000 cr. Therefore, BDT 50,000 cr is enough to provide the interest subsidy for the clients as outlined by H'ble Prime Minister.
In fact it is also enough to accommodate any additional interest subsidy for 2 months. Bangladesh Bank has recently issued a circular for not to recognise any kind of interest for two months – April and May which is around BDT 15,000 cr. Bangladesh Bank is expected to provide further guidance on treatment of suspended interest. If BB wishes, a part of this stimulus package can used to subsidize the interest. If done so, this will be a win-win situation because borrowers will get relief from interest burden, banks will not suffer for loss of income, NBR will get higher tax and the government will not need any new stimulus package.
TBS: What will be the challenges for the banking sector in the post-coronavirus period?
Let me start with a positive news on the financial strength of Bangladesh as a sovereign entity before talking about banking sector. Bangladesh entered, in this global economic headwind, as a much stronger country compared to many other comparable nations due to low external debt, low overall public debt and comfortable debt service capability due to healthy foreign exchange reserve. In such a crisis period, the countries which have large foreign currency obligation/debt suffer the most. When a country remains already leveraged, multilateral lenders do not want to give money. Multilateral lenders are fairly comfortable with Bangladesh Debt Servicing capability for now.
In this case, Bangladesh is in a stronger position due to low obligation to external payment. Bangladesh has only 15% External debt to GDP, 35% Public Debt to GDP and annual debt servicing is less than 10% Foreign Exchange Reserve. So, all these positive indicators will help the Bangladesh government has meaningful capacity to raise debt from foreign sources to support the economy.
On the other hand, while many banks are stronger compared to other, the overall banking sector was already facing two major challenges before the outbreak of the virus – liquidity and high default loan. However, I must acknowledge that Bangladesh Bank took various measures by easing regulatory requirements, such as curtailing the repo rate, cash reserve requirement and advance deposit ratio. At the same time, many refinancing schemes were formed to support banks. As a result, liquidity is no longer a major challenge for banks.
Foreign currency liquidity is also a factor, and decline in export and remittance will have pressure on it. The fall in oil price in the global market will offset this shortfall, giving the government a relief. Moreover, as foreign currency borrowing is low, this is the time for the government to borrow from foreign sources. If the government can increase external borrowing, liquidity problem of both taka and dollar will be solved. Otherwise, exchange rate may come under pressure, which may lead to import-led inflation resulting in higher risk of stagflation.
The one of the major challenges for the banking sector will remain with credit risk. The Bangladesh Bank did a lot in supporting liquidity, but there has to be support to cover credit risk. Bangladesh Bank has already started working on it. The central bank has already collected opinions from bankers on this issue. We are in process of sharing the best practices in different countries over the credit guarantee scheme.
In the pre-Covid-19 period, banks were already stressed with credit risk management and after the virus outbreak, credit risk became higher. The Bangladesh Bank instructed bankers not to classify customers between January and June, but it will only defer the recognition of the problem. Because in July, overdue of six months with new maturing loans from the running month will become due hence increase default loan, in the coming months. Only delay in classification is not the solution to the problem. Many of the regulators required the banks to bodily shift all outstanding maturing obligations of the clients in the impacted industries, by 3 months, to avoid such problems. In such a scenario, interest will continue to accrue, hence if any client have cash flow and wants to reduce the interest cost, the clients have the option to opt out of the program and continue to pay as per the schedule.
A bank's biggest interest is to protect depositors who account for 97 percent of funds being used for lending by the bank. It is a bank's responsibility to absorb risks that are emerging for various reasons. Banks manage risks by pricing the risk assets. If a bank loses the ability of pricing risk assets, it will first hurt depositors, putting it into uncertainty or lower return.
The problem of a bank starts from risk assets and the final impact turns on the bank's liquidity. If banks cannot price their risk asset, they will be shy in lending. Rather, banks will prefer investing in government treasury bills and bonds, which is less risky than lending to the private sector with looming economic uncertainties. It has a chain impact in the overall economy. Borrowers will not get loan under the stimulus package. The stock market will also be impacted negatively due to banks' low dividend and loss. The low dividend of the banking sector will ultimately hit the government's exchequer and all these may have a potential impact on sovereign rating and risk appetite of investors and lenders in counterparties and banks in the country.
TBS: Is it time to open the market for commodity price hedging?
The Bangladesh Bank may consider providing flexibility for the clients to hedge the open price risk to take the opportunity of buying commodity at a low price. Price hedging needs to be practiced by the business people. So, partially it can be opened. Awareness and technical workshops can be arranged for all stake holders to help understanding the risk management of open interest, FX and Commodity risk that the clients are carrying on their balance sheet.
Hedging against investment risk means strategically using financial instruments or market strategies to offset the risk of any adverse price movements. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce uncertainties around volatility.
TBS: What changes will come in banking approach in the post-coronavirus period?
In the post-pandemic era, cost will be a major factor for banks. They will have to rethink whether they need such a huge number of branches. They will have to change their traditional banking model and focus on technology-driven banking activities.
Automation is very necessary for the banking sector now. The work-from-home culture that banks started during the coronavirus crisis can be continued to some extent after the pandemic. We already have experienced that home office saves time and energy. It will also reduce the use of expensive premises, which is already happening in America. There is a huge potential of home office culture in Bangladesh.
Both digitization and work from home can positively contribute to sustainability as well as in diversity and inclusion. Some changes of regulation will help achieving the true potential of the benefits and can be a game changer. This will also mean that many Bangladeshi individuals with right skill-set, can now work for any bank or company in any part of the world. Hence, it is high time to explore opportunities for re-skilling of workforce and accelerated investments in digital infrastructure.
Merger and acquisition will be an opportunity now. There are also investment opportunities as many investments are shifting from China.