Covid-19 and the road to recovery in Bangladesh

Covid-19 and the road to recovery in Bangladesh



Covid-19 has generated hugely distressing effects on the economy of Bangladesh. While there have been some signs of economic recovery, the process of recovering is not uniform across sectors. Also, there are marked differences between economic and social recoveries. When it comes to the question of recovering from the crisis, the dominant discussion in Bangladesh is still on the economic recovery. However, the economic recovery process is not set apart from the social recovery process. There are valid concerns that the recovery processes in the areas of poverty, employment, health and education have become unsettled.

In the case of economic recovery, in recent months there are some positive signs concerning two dominant drivers of growth in Bangladesh—exports and remittances. In the absence of any comprehensive government support during the crisis time, remittances are working as informal social protection for families under distress. This situation is a reflection of the heightened urge to support families at home.

There are some reasons for the remittance surge in recent months. Lockdowns and the downturn of economic activities in the leading remittance-source countries compelled the shifting of the channel of remittances from the informal to formal. Incentives provided by the government helped as well. There are also cases of people losing jobs in the Middle Eastern countries and therefore, sending all their savings back home. However, looking at the current economic situation and the projections of economic growth in countries in the Gulf, Europe and North America, there are concerns about the sustainability of the positive trend in remittances flows in the days to come. In the case of exports, the current positive growth may not sustain as there is a second wave of virus infections in major export destination markets. This situation may affect these already weakened economies further and reduce the demand for our exported items.

Both remittances and exports generate direct and induced effects on the economy. In the case of exports, the direct effects include foreign exchange earnings, employment generation and profits for the exporting firms. Similarly, the direct effects of remittances are the inflow of foreign exchange and the rise in incomes of remittance recipient households. The induced effects of exports and remittances rely on the strengths of the multiplier effects they have in the economy. Empirical studies have shown that the growth impacts of exports and remittances in Bangladesh come predominantly from these multiplier effects. In this context, one critical concern is that while the direct effects of the positive growth in exports and remittances on the economic recovery in recent months might be strong, the induced effects may remain weak for long due to the broken or suppressed supply chains in the economy.

The crisis is still on. The second wave in Europe and North America is on its way. Also, there is a high risk of a second wave in Bangladesh. However, the experiences and learnings gathered so far might help in combatting this. Also, countries may not go for a full scale lockdown this time as they did during the first wave.

If we look at the two crucial components of aggregate demand—consumption and investment—both are still depressed in Bangladesh. As the recovery process is on, consumers are spending mainly on essential items, while the expanded spending on inessential items may remain weak for long. In the case of investments, private investment is showing a slow recovery. The negative growth in imports and low credit growth for the private sector are reflections of depressed private investment.

When we talk about the recovery, we should keep in mind that the recovery is happening at the cost of an intergenerational trade-off. Recovery can be fast, but the adjustment cost of recovery can be high. The adjustment is taking place both at the household and firm levels. Poor people undertake intergenerational adjustments to deal with the crisis when it comes to choosing between current consumption and saving for future consumption or investment. With insufficient government support, poor people are trying to cope with the situation using their own savings, rearranging priorities (i.e. spending less on education, health, entertainment), downward adjustments of daily intake of food, and support from families and friends.

Most of these coping mechanisms, however, require high trade-offs and high opportunity costs. The crisis forces poor households to assign very high weights on their current survival instead of on the human capital development of their families in the future. As a result, these households have to sacrifice prospects for better health, better education and a better life. There will also be a long-term intergenerational effect on the nutritional deficiency of food intake during the crisis period. On top of that, when schools and educational facilities have remained closed for months, it is possible that students from distressed backgrounds will face a higher burden, and many of them will be out of the education system permanently. All these are restricting strong induced effects of positive growth in exports and remittances from taking place.

At the firm level, the adjustment cost can be high in many manufacturing and services sectors, and in particular for the small and medium-sized enterprises (SMEs). Many SMEs have lost their businesses during the crisis. Given the complexity of receiving loans and other supports through the conventional process, the recovery path for many sectors and SMEs is likely to remain uncertain. The resonant performance of these sectors is critically important for ensuring strong induced effects in the economy out of the positive growth in exports and remittances. However, in the absence of such performance, the recovery of the overall economy will be slow.

The upshots of the above mentioned discussion emphasise on three critical issues for the path to recovery in Bangladesh.

First, the availability of an effective vaccine and mass vaccination is critical for sustained recovery. While we wait for the availability of an effective vaccine, there is a need for developing proper infrastructure and ensuring the required human resources for the mass vaccination of people. At the same time, the enforcement of the rules and regulations related to hygiene practices is vital.

Second, the current discussion on recovery needs to change its focus from the narrow GDP growth rate to broader development issues—poverty, employment and inequality. The economic and social recovery of the country will be weak and fragile if the recovery process doesn’t effectively address these three critical development challenges.

Third, an assessment is needed to understand the challenges and constraints in implementing the stimulus packages. As many affected sectors/firms are yet to receive the benefits of the stimulus packages, such an assessment can help in re-designing and re-targeting the stimulus packages.

 

Dr Selim Raihan is Professor, Department of Economics, University of Dhaka, Bangladesh, and Executive Director, South Asian Network on Economic Modeling (SANEM). Email: selim.raihan@gmail.com