Countries in the Middle East are facing a dual shock in 2020- the Covid-19 pandemic and the collapse in oil prices. The disruption of global value chains reduced demand for the region's goods and services, most notably oil and tourism.
Bangladesh relies heavily on the Middle East countries for inward remittances and receives almost 59 percent of the total inflow from the region. The uncertainty of the spread of Covid-19 and a fall in the aggregate demand for goods and services could hurt the region over the medium term and its spillover on Bangladesh's remittance could be severe in coming months.
The region employs around 81 percent of 10 million Bangladeshi migrant workers. The emergence of the novel coronavirus put Bangladesh's remittances inflow on considerable risk and a sizeable number of Bangladeshi expat workers have returned home following recent layoffs. However, riding on quick and effective policy response, Bangladesh could secure $18.2bn or 10.9 percent higher remittance in the outgoing fiscal, much higher than the World Bank's interim forecast of $14bn.
Though a large number of Bangladeshi workers were stranded globally, they managed to send their savings to their families at home. As Covid-19 pandemic spews venom and continues to disrupt normal life, the outlook for the next fiscal remains very bleak. There is a possibility that the number of jobless Bangladeshis stuck in foreign countries could go up substantially.
For instance, in the Gulf, depressed petroleum prices and severe hit in the tourism industry may disrupt many jobs. According to the IMF, oil exports are expected to decline by more than $250bn across the region. The commodity itself has fallen by 50 percent this year, and the IMF expects the UAE's economy to be declined by 3.5 percent, and Saudi Arabia's by 2.3 percent.
The non-oil sector in Saudi Arabia to be contracted by four percent this year and that will put significant strain on the country. A loss of revenue from Hajj and Umrah, estimated at $12bn annually, will put further strain on the Kingdom. The Kingdom saw more than 19 million pilgrims for Umrah and 2.5 million pilgrims for Hajj in 2019. Combined, they contributed approximately seven percent of the total GDP and 20 percent of its non-oil GDP.
The cowing effect that Covid-19 has had on travel, trade and business activities, in general, is expected to severely impact the UAE's non-oil economy, which accounts for around 80 percent of the country's overall GDP. Kuwait, on the other hand, is facing the big and unprecedented challenge from the external shocks caused by this virus, specifically the decline in oil prices and the value of investments and assets, which will put a negative impact on the financial solvency of the state.
The last five years' weaker growth in the Middle East countries following the 2014 collapse in oil prices has already jeopardised the magnificent development schemes in the region like 'Saudi Vision 2030' or 'Dubai 2020 Expo' or UAE's plans of big investment in non-oil sectors to attract large scale foreign investment.
As a result, huge construction and infrastructure plans and hospitality industries and related services suffered. The scaling down of 'non-essential' construction led to rampant joblessness, affecting Bangladeshis, among others.
As such, many of our migrant workers will become undocumented for various reasons and some 20 lakh Bangladeshi migrants may face possible deportation after the Covid-19 pandemic. Most of them would return from the Middle Eastern countries. The government is negotiating with host countries and using different measures of diplomatic activities to stop the deportation process.
According to Brac, around 200,000 Bangladeshi migrant workers returned home between mid-February to mid-March, including 41,000 from Saudi Arabia, 38,000 from the UAE, and 20,000 from other Gulf countries. Every month, around 50,000 job seekers would move to the global labour market, which has come to a halt due to the pandemic over the last three to four months, and some 200,000 workers could not go to their work destinations despite having legal work permits and papers.
While the recent modest recovery in prices for oil suggest that the second half of 2020 is ending on a more optimistic note, however, the oil market remains fragile at least in the medium term. Global oil supply plunged by 11.8 mb/d (million barrels per day) in May, driven by a record OPEC+ cut and economic shut-ins in the US, Canada and elsewhere.
After tumbling by 7.2 mb/d in 2020, global oil output is set for a modest 1.7 mb/d recovery in 2021, assuming OPEC+ cuts ease. The futures curve suggests that the market expects oil prices to recover slowly, but not reaching $40 per barrel until the end of 2022. So, GCC countries will remain in pressure in the next few years or so.
Looking forward, aside from the shabby domestic economy, Bangladesh has to deal with severe blow in the external sector. The Covid-19 pandemic has accelerated the changes in the world that would have been due in a few years for the fourth industrial revolution. Nature of many jobs would be changing rapidly and we need to make adjustments with the changing paradigm.
While most of our remittance sources are being badly affected, given the skill set of our migrant workers, Bangladesh is entering into a global 'new normal' that has been begotten brutally. Only with appropriate policies and strategies, Bangladesh can deal with sheared hopes and truncated livelihood that Covid-19 has presented before us.
M A Faisal Mahmud is Chief Investment Officer at LankaBangla Asset Management. He can be reached at [email protected].