Economic crises are nothing new for the world economy. Several have passed by in the last few decades, wreaking havoc on poverty and prosperity.
The ongoing coronavirus pandemic has led to the latest one – an intertwined health and economic challenge – something rarely experienced before. With more than one third of world population under some sort of restriction movement, being termed the Great Lockdown, the wheels of economic activities around the world have to come to a grinding halt.
Severe slowdown is being projected in global and Asian economies due to massive slump in production, consumption, and investments. IMF projects global growth to fall to minus three percent in 2020 while Asia's growth is likely to be zero, a first-time in the last 60 years.
Closer to home, growth in South Asia will have no respite and will dwindle to a range of 1.8 to 2.8 percent in 2020. Bangladesh, having displayed a robust average growth of more than six percent over the last decade, will also fall victim to the severe slowdown with growth rate falling between two to three percent in 2020.
Consequences will be devastating with loss of jobs, income, trade and investment. The World Bank estimates that for each $1 million in foregone domestic demand service sector, Bangladesh will lose 125 jobs.
Ready-made garment (RMG) producers hint that the sector could lose up to $6 billion worth of export orders due to production and supply disruptions. Prolonged suspension of production and operations due to movement restrictions will render many firms bleeding financially.
The hardest of the impact would involve marginalised low-income people many of whom are daily wage-earners and self-employed.
Governments around the world are scrambling to put together assistance programmes to help address the unfolding economic shock, and help private sector and low-income group sustain through the rough waters.
The nature and extent of support vary from country to country but most share some common categories of support aimed at saving jobs, emergency assistance to socially vulnerable and low-income groups, and stimulus to help private sector firms absorb the negative shocks and jump start operations following ease of restrictions.
The government of Bangladesh also announced a seemingly generous Tk73,000 crore economic stimulus package with several components targeting different parts of the private sector.
The package generated much excitement as well as scrutiny regarding whether the package is sufficient and/or agile enough to address the key challenges and if it prioritises the groups which need it most.
The assistance programme was quick to be put in place, bold in size, and inclusive in objective as it provides specific window for small and medium enterprises, the likely hardest-hit segment of the private sector. That said, there seems to be a number of improvement opportunities to make the package deliver higher impact than what it may do in its current form.
Firstly, the design of the package does not seem to take into consideration banking sector challenges. Success of the stimulus package will require pragmatic design, effective implementation, and robust monitoring and feedback mechanism.
The details provided by the central bank or the government on the first component of the package, the Tk30,000 crore working capital facility, raises many eyebrows regarding the design and operating principles. The guidelines put the onus of mobilising funds on commercial banks by stipulating that the banks will have to use their own funds to finance this component of the stimulus. Such arrangement is fraught with multiple problems.
This is likely to be marred by uncertainly about the liquidity required. In the run-up to the Covid-19 crisis, the banking sector in Bangladesh has already been grappling with several challenges, including many banks having inadequate liquidity and capital. Hence, putting the responsibility of managing the fund/finance with individual banks is likely to lead to less than optimal disbursement of assistance under this package.
The guidelines also create greater risk aversion by banks which is somewhat inevitable economic crisis/slowdown, thereby creating risk of cherry picking in selecting loan candidates. Given business/market/credit risks amplify significantly during any economic slowdown, banks take more stringent measures to analyse credit applications than they do during normal economic settings.
With significant slowdown in economy already confirmed/anticipated by the government and international agencies such as the IMF and the World Bank, it is almost certain that banks in Bangladesh will take a greater risk averse position which will deny access to credit to many firms, who on one hand will require boost in finance to recover from slump but on the other hand will likely be struggling to recover from the "great lockdown".
Given the aforementioned risks, and to better reflect fundamental features of government stimulus package announced around the globe, and government financing of the stimulus, the government could consider providing at least 50 percent of the Tk30,000 crore window is provided to the banks by the government of Bangladesh through a refinancing window at the central bank.
Secondly, the current package lacks incentives for employers to sustain employment. One of the devastating effects of the Covid-19 lockdown/slowdown is loss of enormous number of jobs, the most critical driver of development, growth and poverty reduction in Bangladesh.
Most economic stimulus packages announced in countries in Asia and beyond include incentives that will help/incentivise employers not to retrench employees. For instance, in India, the government will pay both employers' and employees' contribution to the Employee Provident Fund (EPF) for the next three months, covering 48 million employees. Singapore will pay up to 75 percent of local employees' salaries, and USA will provide tax credit for up to $5000/employee for employers who retain their employees.
In light of criticality of employment in Bangladesh's context, and its likely impact on social stability, it will be prudent for the government to consider inclusion of cash and non-cash fiscal incentives/support to help employers retain employments.
The stimulus needs to think of bolder steps to ensure access to credit for small and medium enterprises (SME). Such firms, in general, are characterised as riskier than large firms across the globe. This often leads to both a higher cost of credit and/or a lack of motivation on the part of financial institutions to prioritise credit to SMEs.
Risk/Credit guarantee schemes, where governments share potential losses in case of default, are proven tools globally to address this challenge. The current package does not include any such support. The government could add a part to the stimulus to create a credit guarantee/risk sharing programme for financial institutions to provide adequate access to finance for SMEs.
There is a genuine need for greater forbearance with regard to regulatory compliance in the short run. Countries around the world have offered temporary time-bound relief to companies with regard to regulatory compliance such as tax filing, tax and utility payments, and loan servicing.
Singapore, for instance, has waived the levy for approval/renewal of foreign workers while Pakistan has allowed payment of utilities in three installments over a several months period, with India extending tax return till June 30, 2020.
While Bangladesh has announced a few such support, there is room for and need to expand such relief measures e.g. extending time period for VAT filing, property tax by businesses, utilities payment, and longer time horizon to furnish corporate taxes etc. There are also opportunities to look into further relaxation of interest and loan obligations, and also waiver/reduction of different government fees with regard to issuance and renewal of various permits/licences/registrations.
A significant number of Bangladeshi working age population are engaged in self-employment activities. While many of them are micro and informal, and hard to target through business support stimulus, there are many who operate self-employment activities through formal channels.
Currently, the package does not include any support for such group. Several economic stimulus packages around the globe are offering such support e.g. USA providing deferral of social security tax, Singapore providing up to S$9,000 over nine months to each such self-employed individuals. Cash and non-cash fiscal support for self-employed merits strong attention in order for the package to support this important group in the workforce.
Finally, the policy makers should consider developing appropriate monitoring mechanism to constantly assess, and if necessary, adjust the design and implementation mechanics of the stimulus package. This is important as the pandemic scenario is still evolving (e.g. length of potential lockdown), and so will the economic impact.
Many adjustments will have to be made as and when we get a clearer sense of the economic shocks. Inclusion of private sector and other relevant stakeholders from outside the government in such institutional mechanism will help policy makers receive timely feedback and pragmatic advice to strengthen effectiveness of the much-coveted stimulus package.
The author is former senior economist of World Bank Group