Tackling the economic fallout of COVID-19

Amidst the rapid spread of the coronavirus (COVID-19) across the globe, Bangladesh seems to be one of the least affected countries with only five identified cases as of March 15, 2020. While doctors and scientists are spending sleepless nights to fight this pandemic, the world is already grappling with its economic fallout. Since the situation is evolving every day, economic estimates can only provide a magnitude of the impact. The actual ramification will depend on the extent of the spread and length of the duration of the outbreak and how quickly policymakers can take action to mitigate the health and economic damage.

The United Nations Conference on Trade and Development (UNCTAD), in a preliminary estimate, indicates a shortfall of USD 2 trillion in global income. This will also bring down global annual growth to below 2.5 percent. The Asian Development Bank (ADB) has projected that the world could lose from 0.089 percent to 0.404 percent of its GDP due to COVID-19. In monetary terms, it ranges between USD 77 billion and USD 347 billion. Two-thirds of the impact will be faced by China itself.

The above consequences will be felt in a number of ways. China accounts for over 19 percent of global gross domestic product (GDP) at purchasing power parity. Hence any impact on the Chinese economy is going to have repercussions on the global economy. China is the world's largest exporter accounting for 13 percent of the world's trade. The country is also the second largest importing nation, accounting for 11 percent of total global imports. There will also be disruption in the supply chain. As China is the world's largest manufacturer and exporter, global production will be hampered if Chinese industries are shut down for some time. China is, in fact, the highest supplier of goods to more than 100 countries in the world. China produces about 20 percent of global manufacturing intermediate products which are traded. The global shock will also be felt through fall in commodity demand and prices. Due to the decline of Chinese consumption, demand for oil could fall by 30 percent.

Bangladesh's dependence on China is significant. China has been the largest trading partner of Bangladesh with a share of 18.94 percent of total trade in 2018. China is Bangladesh's biggest import partner. Bangladesh's main export commodity, readymade garments (RMG), relies heavily on China for its raw materials. Raw materials for pharmaceuticals are also imported from China.

Bangladesh's recent surge in FDI is largely driven by Chinese investment. China has invested in a number of projects including in the transport and energy sectors. Activities of several infrastructure projects in Bangladesh which are being implemented by the Chinese construction firms have slowed down due to COVID-19. Not only has the supply of construction materials been hampered, but many Chinese workers engaged in Bangladesh's infrastructure projects have also been confined in their country. This may lead to time over-run and cost escalation of projects leading the Bangladesh government to borrow more.

With Bangladesh's economy depending so much on China, it is apprehended that the coronavirus outbreak may have serious implications for Bangladesh. UNCTAD has forecasted that if Bangladesh's imports of intermediate inputs from China declines by 2 percent due to the coronavirus, it will cost Bangladesh USD 16 million. The leather sector will lose USD 15 million. The textile and apparel sector will experience a loss of USD 1 million.

The ADB has estimated that Bangladesh will lose about 1.1 percent of its GDP in the worst-case scenario—when the outbreak will last at least for six months. It implies that coronavirus can take away USD 3.02 billion from Bangladesh's economy. Additionally, it is also being apprehended that there could be 894,930 job losses due to a global economic downturn.

Bangladesh's economy is also integrated with the global economy. The degree of trade openness in the economy is currently 38.24 percent. Countries such as Canada, the US, and the European Union are major export destinations for Bangladesh. Middle Eastern and South East Asian countries are sources of Bangladesh's remittances. So, economic effects on those countries will also have significant consequences for Bangladesh.

As the economic damage of the coronavirus outbreak cannot be avoided, policymakers should take a few immediate measures to minimise the losses.

First, the government will have to take all precautionary measures to control the spread of the outbreak. Financial allocations are needed for strengthening the health system with adequate testing facilities, staff, medicine, beds and other medical necessities. The government should provide medical support to the poor affected people and returnee migrant workers.

Second, for essential import items, particularly raw materials which used to be imported from China, the government should immediately look for alternative sources. The prices may be higher. However, given the essential nature of these items such as pharmaceuticals and medical devices, the government can provide special support urgently. Import of non-essential items may be put on hold.

Third, the government should initiate a job support scheme for workers affected by coronavirus. Workers should be retained and employed through reskilling and retraining. They should also be provided with working capital to start small businesses. A special financial scheme for small enterprises may be initiated.

Fourth, banks should have adequate liquidity to support companies with loans on easy terms. Given that the banking sector in Bangladesh is not healthy at this moment, the central bank can help other banks through refinancing schemes so that they can provide loans to small businesses.

Fifth, loans to the affected businesses, particularly the small and medium ones, may be assessed more leniently; the pay-back period may be extended.

Sixth, the government should help the virus affected households and corona-induced unemployed people by providing temporary support in the form of cash transfer.

Seventh, this is also a time when there will be less consumption demand which in turn will slow down the economy. Hence continuation of the investment expenditures in the economy is necessary for job creation. But efficiency in such expenditures will be critically important. Besides, public expenditure has to safeguard the low-income group and the poor through expanded social safety nets.

Eighth, supportive monetary policies are usually suggested during such crisis moments. That is, interest rates are lowered for businesses to make up for their losses. Bangladesh Bank has already instructed the commercial banks to reduce lending rates. Further interest cut should be aimed for small and medium businesses.

Finally, any measure designed for the virus affected workers and businesses should be strictly administered and monitored with full transparency, so that the wilful loan defaulters and fake victims do not take advantage of the facilities provided by the government.

Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.