Supporting informal sector key to reviving post-Covid economy

Whether Bangladesh will be able to bring momentum in the post Covid-19 overall economy depends largely on its policies towards the informal economy, which absorbs about 86.2% of the total employed population (aged 15 or older) in the country (according to the Labour Force Survey 2015-16). In rural and urban areas, the rates are 89.3% and 78.1%, respectively.

According to a study by the Asian Development Bank (ADB), the predominant informal sectors include (i) agriculture, hunting and forestry, fishing; (ii) mining and quarrying; (iii) construction; (iv) wholesale and retail trade; (v) hotels and restaurants; (vi) transport, storage and communications; and (vii) private households.

Specifically, more than 90% of employment in these seven sectors are informal.

A recent rapid study jointly conducted by the Power and Participation Research Centre (PPRC) and Brac Institute of Governance and Development (BIGD) revealed that around 53% of main earners from rural areas were unemployed in early April 2020, though most of them were employed in February 2020.

The study also shows that after the lockdown, the per capita household income dropped by 79% in rural areas.

These statistics indicate that the informal economy, which is predominant in rural areas, has been shaken by the lockdown, and hence, requires adequate support from the government.

Agriculture is a major informal sector in Bangladesh. The sector has been affected by the lockdown due to a fall in wholesale price, transport problems, labour shortage, and a likely disruption in the supply of fertilisers and diesel.

Furthermore, international remittance inflow in the country fell drastically because of Covid-19, Consequently, the farmers of migrants' households may face capital constraints in the upcoming crop seasons.

We have to research these issues to formulate appropriate policies.

However, as we do not know how long the pandemic and lockdown will continue, we must ensure food availability through domestic production because food imports may not be possible during this time. So, the government should support the agriculture sector so that farmers are encouraged to produce more aman and aus rice in the next seasons.

The government has declared a stimulus package of BDT 5,000 crore from which farmers can take loans with 5% interest rates.

Some of these funds may be spent in providing more subsidy for fertiliser, which may decrease the costs, thereby increasing production. The government also needs to ensure that the farmers get reasonable prices for their boro paddy. This is important in agriculture because production decisions for the next season are significantly influenced by profitability in the current one.

The government should make sure that other informal sectors like wholesale and retail traders, hotels and restaurants, and transport are also covered by its stimulus support package. It has recently announced that small businesses in rural areas will get loans amounting BDT 3,000 crore under the BDT 20,000 crore stimulus package allocated for supporting the small and medium enterprise.

The borrowers will reportedly have to pay 5% interest on this loan. It is, however, not clear whether the sectors like wholesale and retail traders, hotels and restaurants, transport, etc., which are mostly informal in nature, will be eligible for these loans. If not, the government should allocate a similar stimulus package for these sectors.

We also need to address the demand side constraints of the informal economy. Government transfers in the form of cash to vulnerable people may address the demand side constraints to a certain extent.

The government is currently providing in-kind support to the poor, but without adequate cash support along with the in-kind one, it will be difficult to increase the purchasing power of the vulnerable people.

In the survey conducted by PPRC and BIGD, rural poor households requested the support of BDT 1,368 per capita per month (for urban slums, the amount is BDT 1,702) from the government to cope with the Covid-19 crisis.

Based on this, PPRC and BIGD have estimated that the government needs to transfer about BDT 5,600 crore to poor households per month. This support, if provided, is expected to increase the demand for goods and services delivered/produced by the informal sectors.

Recently, the government has announced to pay BDT 2,500 per household to 500,000 poor households.

This is, of course, a good initiative but the coverage should be increased because as of 2018/19, 20.5% of country's population live below the poverty line, as per the Bangladesh Bureau of Statistics (BBS) estimate. Furthermore, due to the coronavirus crisis many vulnerable non-poor households are likely to become poor, at least temporarily.

The author is a Senior Research Fellow, Brac Institute of Governance and Development (BIGD), Brac University.