Why the perils of a closed economy impact the country
Because of its socio-economic structure, the capacity and willingness of emerging markets to contain the outbreak by implementing social distance initiatives is an open question: high urban density, a broad informal economic sector, and demographic dividend.
Less strict lock-down regimes, combined with poorer health care networks, that result in a relatively high number of Covid-19 cases and associated deaths. Risks of social conflict in areas with large informal economies are high.
At the same time, the EMs are less able to respond to the pandemic by fiscal and monetary intervention than the developing world. Although it varies by region, there is limited capacity to introduce fiscal stimulus without increasing debt sustainability issues and major currency devaluations.
According to the World Bank, only 15% of Bangladesh’s population receives more than $6 a day, and over 90% of the workforce is in the informal sector. Since the national shutdown began on March 26, millions of rickshaw-pullers, day laborers, and factory employees fled to their homes, leaving the streets of Dhaka bare.
Yet how do the threats of a closed economy impact the country going forward? The Bangladeshi economy is likely to take some sort of contraction in the absence of effective and timely policy decisions. Even with the small amount of data available, it is clear that the Bangladesh economy is in the midst of an unforeseen setback.
With a very small tax-to-GDP ratio of 9.3%, the government of Bangladesh does not have adequate fiscal room to render big stimulus packages. In these conditions, monetary growth, as most developed economies have already implemented, is the only viable alternative.
The Government of Bangladesh is seeking to formulate a parallel fiscal expansion to avert the catastrophe, but the success of the stimulus plan remains to be seen. According to Bangladesh Bank, exports decreased by 4.8 percent year-on-year (YoY) from July 2019 to February 2020 due to export output in most eurozone countries.
Just before Covid 19 struck, Bangladeshi garment makers had lost bargaining power due to a downturn in overall demand and an overvalued domestic currency. The top ten export destinations in Bangladesh account for approximately 72% of overall exports, of which approximately 90% are ready-made garments and apparel exports.
Of these major export destinations, the United States, Germany, the United Kingdom, Spain, France, and Italy — the hardest-hit economies contribute about 58.0 percent of overall exports. Such nations are either canceling their orders or holding off their prior orders.
So far, $1.8 billion worth of orders have been placed on hold and another $1.4 billion worth of orders to be delivered from April 2020 and December 2020 has been postponed. This constitutes 10.9% of the overall nine-month export basket.
The remittance, which has proved to be life support to the Bangladesh economy over the last decade, dropped by 11.6 percent in March 2020. The top five remittance destinations are Saudi Arabia, the UAE, the United States, Kuwait, and the United Kingdom, which contribute roughly 63.0 percent to the overall remittance inflow. Each of these destinations is either affected by a lockout or by a fall in oil prices.
In addition, possible work losses and pay reductions pose a challenge to remittance inflows. From January 2020 to March 2020, nearly 1 million out of a total of 10 million overseas employees have returned to Bangladesh. With an expected 50.0 percent yoy increase in remittances between March 2020 and June 2020, Bangladesh may lose $1.9 billion in remittances in four months, which is equal to 0.6 percent of GDP.
The only significant consequence was the fall in oil prices. On the day of Tues, April 22, oil hit an all-time low of ($37.63) a barrel. A negative price clearly means that, despite the high cost of storage, the oil-exporting countries are far better off disposing of their inventories.
If Bangladesh is willing to reach a deal with its import partners, it will save a large amount, as Bangladesh’s oil and gas imports accounted for 12.0% ($55.6 billion) of its overall import basket for 2019. While local sources report that the nation has a potential over-storage capacity of 50 days, this will ease the burden on the Balance of Payment.
Despite the foreign direct investment, tax revenue, and government mega-project spending set to decrease, the current account deficit is forecast to rise by 1.2 percent. Corporations that rising wages, default on debt payments, and lay off a portion of the workers would place more pressure on banks and other NBFIs to implement the stimulus package.
The financial sector will face liquidity pressure as deposit and loan recovery still declines. Private sector credit growth is expected to slip to 5-6 percent of YoY between March 2020 and June 2020. Cutting the Cash Reserve Ratio (CRR) by 1% will contribute some Tk130 billion to the liquidity of the banking sector.
Bangladesh Bank will also relax the Advance Deposit Ratio (ADR). As most companies are unwilling to support, engaging donor organizations such as the IMF, the World Bank, and ADB could prove to be successful as the IMF and the World Bank have a funding potential of $1 trillion for emerging markets from which Bangladesh could gain from $700 million and $100 million, respectively.
If the situation persists, the central bank may consider quantitative easing (QE) to boost the money supply, and the government may find the Universal Basic Income (UBI) system to be part of a supporting fiscal strategy. The job of delivering UBI to 160 million people may be questionable, even with the introduction of mobile financial services, but higher inflation and exchange rate depreciation
Provided that the total budget deficit is projected to hit up to 7% of GDP in 2020, the question arises as to whether such steps will yield anything economically beneficial. However, if the present pandemic is dealt with successfully, the long-term gains will put the world back on course as we all continue to follow the “new standard” path.