Economic measures we should take in response to COVID-19

The 2020-21 budget of Bangladesh, under preparation now, could have been exciting. The country was having an unbroken run of 6 percent or higher growth rate for the last nine years. In 2019, it reached 8.2 percent. Poverty declined to reach 24.3 percent in 2016 (Wold Bank). Export earnings and remittance income, put together, covered more than three-fourths of the country's import bill, and the country's debt service ratio was at a comfortable level of 5.7 percent (in 2018). The achievements in the social sectors (in child and maternal mortality, in education, and nutrition) were praiseworthy, better than many other countries at similar levels of income.  

A number of mega projects involving huge expenditures (such as the Padma Bridge, Deep Sea Port, Rooppur Nuclear Power Plant, Karnaphuli Tunnel, Metro Rail Project) were taken up to develop and modernise the country further. The country was looking forward to celebrating 50 years of its independence (towards the end of 2021) in style.

COVID-19 pandemic has put an end to this euphoria. The highly contagious virus, with its high toll of human lives and livelihoods, pushed the world to a recession. The IMF estimates the world GDP to shrink by 3 percent this year. With supply chains broken, factories, trades and businesses either closed or nearly so, unemployment is expected to rise. The level of unemployment has already reached 26 million in the USA and 22 million in EU. The World Health Organisation (WHO) warned that the virus had not reached its peak yet, and that there could be multiple spells of the virus.

Bangladesh has not been spared either. Although the impact of COVID-19 in terms of infection and fatalities (going by official statistics) remains lower than some developed countries, the casualties (which do not include community deaths and deaths in hundreds of private clinics around the country) can mount in the coming months. Like in most other countries, Bangladesh also imposed lockdown measures. Educational institutions, non-essential services, offices, shops and transportation services, small, medium and large industries including the vibrant and major foreign exchange earner, the readymade garment (RMG) factories, have been closed down.  However, some are opening slowly in recent days after the relaxation of lockdown measures.

The World Bank estimates a sharp decline of Bangladesh's growth rate to around 2-3 percent in 2020, and further to 1.2-2.9 percent in 2021 from the 2019 growth rate of 8.2 percent. These are way below the 7-8 percent growth needed to reach the middle income status by 2024.

The lockdowns have seriously disrupted normal economic and social activities in the country. Millions of workers engaged in shops and restaurants, in transport and communication sector, working as domestic help, self-employed as traders, hawkers, day labourers, totalling anywhere between 15-20 million, are expected to lose their livelihoods. With the closure of the readymade garment (RMGs) industry, another four million employees, mostly young women and their families, are expected to face difficult economic and social situation. Their low incomes make them vulnerable even to short periods of unemployment. 

Fear of the virus as well as loss of income are driving thousands of these vulnerable low income urban people to their rural roots. Others, who do not have this option, are staying back in urban slums, where congested living can be the breeding ground of the virus.

Given this background of unprecedented economic and social circumstances, the budget of 2020-21 will have to be significantly different from what could have been an "euphoric" budget. Instead, the budget will be one of damage repair, caused by external circumstances and rebuilding.

The emergency measuresare expected to tackle the emergencies created by the COVID-19 pandemic (in terms of both halting the progress of the virus and providing medical care to those infected), and supporting people survive through their immense economic hardship. The rebuilding measures, on the other hand, will address the issues of restarting the economy with directed support, subsidies, grants, and helping to build institutions to tackle future pandemics, including resurgence of COVID-19.

The emergency measures will have to focus on expanding the capacity of public healthcare institutions, through infrastructure development, procurement of equipment (PPE, masks, ventilators) and medicines (both anti-COVID-19 and for curing COVID-19 infection), and of course providing due support to all medical care staff, most importantly to the frontline care staff. And it will also have to beef up the country's poor social protection initiatives (which is lowest in the Asia Pacific Region: UN Asia Pacific Region Report April 13, 2020). Part of the prime minister's cash incentive of about 95.6 thousand crores taka could give the social protection initiative a boost, as well as provide cash incentives to medical workers.

The rebuilding measures, on the other hand, will focus on those sectors which are the main drivers of the economy, i.e. restarting RMGs, facilitating the repatriation of those who might have gotten stuck in Bangladesh. The measures could also include working capital support to small and medium industries, and small loans to traders. Low interest loans could also be provided to small businesses and industries who would like to configure their factory floors and work spaces to conform to the need for social distancing, to avoid further spread of COVID-19.

Beyond these, it will be immensely worthwhile to support agriculture, especially the smallholder farmers, through small loans to farmers, subsidised inputs, water and uninterrupted electricity supply during the dry season (now) and through ensuring availability of seasonal labour for harvesting.

Microfinance institutions (MFIs), refinanced by Bangladesh Bank, could play an effective role in this area.

RMG sector, a major foreign exchange earner of the country, and employer of nearly four million workers (mostly for women), will need to be beefed up as early as possible. There could be a special fund to provide subsidised loans to the RMG industries on a case by case basis, judged by their ability to restart production, export and re-employment of staff laid off during the COVID crisis.

All these measures, detailed out and costed, will be a very tall order. The critical issue is how to get the budget financed.

The pandemic related crisis will severely restrict the growth of Bangladesh, and also imports, through reduction of economic activities. Both of these will severely reduce the government's ability to raise revenue; the latter through reduction of revenue from import duties. The country will have to borrow: from external sources to the extent they are available, but also from domestic sources. These will create inflationary pressure, both because of reduced supply response and lower imports. The challenge will be to channel support to activities which could quickly respond through increased production.

Dr Atiqur Rahman, economist and former lead strategist of IFAD, Rome, Italy.