Is Bangladesh ready to face the imminent global recession?
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January 31, 2023

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TUESDAY, JANUARY 31, 2023
Is Bangladesh ready to face the imminent global recession?

Thoughts

Md Mizanur Rahman
10 April, 2020, 03:05 pm
Last modified: 10 April, 2020, 03:12 pm

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Is Bangladesh ready to face the imminent global recession?

According to the ADB, Bangladesh will lose 0.2-0.4 percent of its targeted GDP to the pandemic. The country will face negative economic growth as the US, UK and China are its main importers

Md Mizanur Rahman
10 April, 2020, 03:05 pm
Last modified: 10 April, 2020, 03:12 pm
The value of Asian stocks have decreased dramatically as a consequence of the coronavrius virus outbreak. Photo: Reuters
The value of Asian stocks have decreased dramatically as a consequence of the coronavrius virus outbreak. Photo: Reuters

Over the centuries, the world has faced several pandemics. However, the exponential growth of the novel coronavirus makes it quite different from other diseases in the past. As this virus spreads across the world, its deadly effect and potential to wreck the global economy is becoming ever clearer.

Initially, economists assumed this recession would be "V" shaped – the burden of the epidemic would lie on China's shoulders as that is where it began.

However, as time went by, the virus began wreaking havoc on the economies of all countries it spread to. The United Nations estimates that the coronavirus could slow the global economy down by at least two percent compared to last year.

According to the World Bank, the growth of East Asia will slow to 2.1 percent in 2020 and the pandemic might push 11 million Asians into poverty. The International Monetary Fund (IMF) warned that Covid-19 will cause a global recession in 2020 that will surpass that of 2008-09.

The Asian Development Bank (ADB) estimates global economic losses due to the pandemic to be at $4.1 trillion. But, will the pandemic affect Bangladesh's economy?

The answer is simple: if economic powerhouses like the US, UK and China can be affected, then so can we. According to the ADB, Bangladesh will lose 0.2-0.4 percent of its targeted GDP to the pandemic. The country will face negative economic growth as the US, UK and China are its main importers.

Over 84 percent of Bangladesh's total annual exports come from the ready-made garment sector. The outbreak of Covid-19 has caused the sector its fair share of losses because its main market is Europe. Buyers are now cancelling purchase orders every day. According to the Bangladesh Garments Manufacturers and Exporters Association, up to March, orders worth $2.87 billion were cancelled and $7.38 million's-worth of work orders suspended.

As a result, a large number of factories have stopped operations. Those still running do not have enough raw material, a large portion of which is imported from China. According to the Bangladesh Bank, in FY2018-19, the total merchandise import payments stood at $456 billion –28 percent of which was from China. This data also shows that 70 percent of imports from China were textile raw material, machinery, plus electrical and mechanical appliances.

The leather industry has also been playing a significant role in our economy. Bangladesh meets about 10 percent of the demand of the global leather market. However, Covid-19 has severely impacted the leather industry as well. Most of the processed leather and leather goods of Bangladesh used to be exported to the US, UK, Italy, Germany and China. According to Bangladesh Leather, Leather Goods and Footwear Exporters Association, 65 percent of the leather and leather goods went to China. However, as imports have stopped, it is not possible to bring in chemicals for raw leather processing. As a result, the raw leather is going to waste.

Export of crab and shrimp, cultivated in the coastal areas of Satkhira, also play a significant role in our economy. China imports 80 percent of all the crab and fish produced by Bangladesh. Needless to say, the export of these products to China has also stopped. The situation has been worsened by low sales of crab and shrimp on the domestic market. Earlier, these would be sold for Tk600-1,000 on the domestic market; now they are sold for Tk300-400.

According to the Export Promotion Bureau, Tk700 crore was earned from the export of crab and shrimp in 2019. This year, the target was to earn Tk1,100 crore, but Covid-19 has thwarted that plan.

Both the tourism and aviation sectors have also been hit badly by the virus, with flights being suspended all over the world. Hotels are incurring major financial losses as well.

The around 10 million Bangladeshis who go overseas to work – the majority in the Middle East, US, UK, and Malaysia – used to send foreign currency, before the coronavirus disrupted the global labour market. According to Bangladesh Bank, the amount of foreign remittance inflow this year is relatively low compared to any other time as a large number of expatriates have returned home.

The International Chamber of Commerce assumes that as a negative trend prevails in every sector, it will also affect the country's banking sector. Deposits, opening of letters of credit and loan disbursements have already decreased. Bankers suspect that if this negative trend continues, then banks will not be able to make their expected profits next year. Many of the new banks will not be able to properly manage their operating expenses.  

Customers of the banks have also been terrified by this virus and begun withdrawing their deposits. As a result, for the last few days, the interbank currency market – Call Money – of the country has been facing a severe liquidity crisis. Many banks are becoming unable to provide money to their customers. The liquidity crisis is acute among state-owned banks. They have been borrowing money from the Call Money market and also from the central bank since the very beginning of this year.

According to Bangladesh Bank's data, at the very beginning of February, banks invested Tk5,000 crore in Call Money every day. But by the end of February, investments fell to Tk2,000 crore – further falling to Tk1,000 crore recently. In order to keep the situation stable, Bangladesh Bank is lending more than Tk12,000 crore every day to the banks. Most of the banks are borrowing money from the central bank against Repo and Assured Liquidity Support (ALS).
Banking sector experts assume that because of the novel coronavirus outbreak, many loan recipients will be affected and they will not be able to repay the loans on time. Considering the matter, the Bangladesh Bank has issued a circular relaxing the loan repayment system. In this regard, no classified loans will be charged from January 1 to June 30 this year even if a customer is unable to pay back the loans on time. The central bank has also extended , by three months, two types of classified loans – "doubtful" and "bad" – on the same grounds. As a result, loans overdue for three months, nine months and 12 months will be considered sub-standard, doubtful and bad loans, respectively.

Bangladesh Bank has also allowed banks to extend the usance period in raw material import, and it has been extended to one year from the existing six months. In another circular, it permitted banks to provide advance payments of maximum $500,000 – or the equivalent in other foreign currencies – without repayment guarantees for the import of coronavirus-related life-saving drugs, medical equipment or other related medical items.

The Centre for Policy Dialogue has warned that the current economic situation may seriously undermine the livelihoods of the underprivileged cohort of the population. Realising the economic disorder, Prime Minister Sheikh Hasina has announced a Tk5,000 crore stimulus package for export-oriented industries, which will be used only to pay wages and allowances of workers and other employees. The money will be given at a two percent interest rate for a period of two years, including a six-month grace period. Moreover, the business-friendly initiatives taken by Bangladesh Bank are appreciable.

Economists assume that the losses caused by Covid-19 can be recovered with the concerted efforts of the government and the business community. However, the government needs to take effective measures such as providing small and medium enterprises with: working capital, tax waivers, incentives, and low-cost long-term loan facilities.

The author is a banker and an associate member of the Institute of Chartered Secretaries of Bangladesh.

Top News

global recession / Bangladesh / COVID-19 / Coronavirus

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