Covid-19 and the challenges of trade for Bangladesh

The Covid-19 induced economic crisis has affected the export and import of Bangladesh by large margins. The economic crisis has been exacerbated by the closure or limited operation of businesses during the lockdown at home and abroad. In the financial year 2019-20, there was a very high negative growth in exports (17 percent)—which was unprecedented in the recent history of Bangladesh. Although the situation has improved somewhat since the beginning of the current financial year 2020-21, it is uncertain whether exports will return to normal. There are fears that the economic recessions in the United States and Europe, two main export destinations of Bangladesh, are likely to be prolonged, which will slow down the recovery of the export sector in Bangladesh. In the last financial year, there was high negative growth in the import trade (8.6 percent) too. The plight of the import trade is by no means conducive to investment and business expansion in the days to come. 

Despite several rounds of downward revisions, the IMF still hopes for a global recovery in 2021. According to the World Economic Outlook Update in June 2020 by the IMF, global growth will be a negative 4.9 percent in 2020, which is 1.9 percentage points lower than the April 2020 World Economic Outlook forecast. Though the IMF projects for a positive 5.4 percent global growth in 2021, it admits that the recovery will be more gradual than previously forecasted. Even with a 5.4 percent growth in 2021, the global GDP in 2020 will be 6.5 percentage points lower than the pre-Covid-19 projections made by the IMF in January 2020. Europe, on average, will experience a negative growth of 10 percent in 2020 and a positive growth of 6 percent in 2021. In the USA the GDP growth will be negative 8 percent in 2020 and 4.5 percent in 2021.  

However, the positive economic growth in 2021 remains to be dependent on some factors, the primary factor being the availability of reliable vaccines for Covid-19. Nonetheless, only the availability of vaccines in some countries would not help recover business confidence worldwide. There is a need for a fair distribution of vaccines across countries. Given the fact that world trade is heavily dependent on global value chains, unless business confidence rebounds in all segments of the value chains, world trade will continue to remain depressed. According to the WTO's June 2020 estimates, based on a year‑on‑year basis, in 2020 the volume of merchandise trade shrank by 3 percent in the first quarter and further dropped by around 18.5 percent in the second quarter. No doubt, these declines are historically large. 

As far as the major export item of Bangladesh, the readymade garments (RMG), is concerned, in the financial year 2019-2020, the earnings from RMG exports declined by 18.12 percent from the previous year. With a much smaller fall in RMG exports, by around 3 percent, Vietnam outperformed Bangladesh to become the second-largest RMG exporter in the world. Therefore, the negative impacts of depressed global trade are not uniform across countries. While Bangladesh has been struggling to cope up with the disastrous situation, its major competitors, like Vietnam, are in a better position to combat the crisis. The differences in impacts are primarily due to domestic business enabling factors in which Bangladesh seriously lags behind its major competitors.

Given the fact that being a small developing country Bangladesh has little to influence the recovery of global trade, Bangladesh needs to get its domestic business fronts right to cope up during the crisis time and to register a substantial recovery in the post-crisis period.  In this context, there is a need for developments in five major areas:

First, while the government announced stimulus packages for all affected industries, so far, the access and benefit of the stimulus packages have remained unequal. There are complaints that, apart from the RMG, most of the other export-oriented sectors have been facing numerous challenges in availing the stimulus packages. The firm-level survey conducted by SANEM on Business Confidence Index in July also confirms this situation. These challenges include lack of stimulus package for the industry, lengthy procedure, difficulty in bank-related services, difficulty in understanding application procedures, and corruption. There is a need for quick and effective measures to address these challenges.

Second, the lack of export diversification remains a daunting challenge in Bangladesh. While there are pro-RMG biases in the policies and programmes, inadequate and ineffective policies and strategies for the non-RMG sectors are also hurting them. Furthermore, the high cost of doing business disproportionately affects the non-RMG sectors. Low public spending on health and education also leads to low productivity and skill development which are not conducive for export diversification. Therefore, this Covid-19 crisis time can give policymakers a much-warranted opportunity to undertake reform in critical economic domains. No doubt, these reforms should aim to reduce the cost of doing business and establish a favourable environment for the flourishment of non-RMG export sectors. 

Third, the low FDI orientation also acts as a large barrier for further export expansion and diversification in Bangladesh. The challenges in attracting FDI in Bangladesh include high cost of doing business, unfavourable regulatory environment, bureaucratic red-tape, uncertainty in the reform of policy regime, weak enforcement of intellectual property rights, and slow implementation of infrastructural projects including the SEZs. Therefore, reforms should focus on simplifying regulations, enforcing the IPR, and faster and cost-effective implementation of mega-projects and SEZs.

Fourth, as in a few years from now, Bangladesh will graduate from the LDC status and will thus lose trade preferences in its major export markets, it needs to start FTA negotiations with its major trading partners. In particular, Bangladesh should start FTA negotiations with the EU, the UK, India and China for the continuation of the zero-duty trade preference for its export in the post-LDC graduation era. It is noteworthy that such FTA negotiations take a long time, and a lot of effort and homework will be needed to secure special provisions to safeguard Bangladesh's interests in these FTAs.

Finally, Bangladesh's graduation from the LDC status by 2024 will lead to the loss of trade preference in major export destinations and loss of other preferences (i.e. TRIPs waiver for pharmaceuticals). Bangladesh will also face more stringent trade rules as a non-LDC. As the Covid-19 crisis has put Bangladesh into the back foot, there is a need for rethinking the LDC graduation decision. Considering the ongoing crisis time and uncertain future, Bangladesh may reconsider pushing back the transition from the LDC status by three more years.

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