Bangladesh's economy will eke out "satisfactory" growth next year provided private investments and international trade remain buoyant, a leading voice on private business has said.
"While uncertainties and volatilities are difficult to predict, there are reasons to be optimistic," newly-elected president of the Dhaka Chamber of Commerce and Industry (DCCI) Rizwan Rahman told the FE in an interview. "… the economy is likely to experience a U-shaped recovery," he said.
Under the U-shaped recovery, the economy bounces back, though the damage at the bottom lingers for a while.
Mr Rahman also made a strong case for a short-term tax incentive for investments, an expansionary monetary policy and effective distribution of Covid-19 vaccine upon availability.
Below are the excerpts of the interview:
Q1. How did the economy fare in 2020?
Indeed, the country's economy went through a turbulent time, likewise the economies of the rest of the world, given the interdependence. According to the government estimates, gross domestic product (GDP) losses caused by the pandemic amounted to a whopping Tk 895 billion. The Covid-19 has affected our local industrial operations, supply chain, disrupted our value chain, trade network, and local commercial operations. The colossal loss to GDP has had an adverse effect on the country's efforts to slash poverty, where Bangladesh previously performed extremely well, with the pre-pandemic poverty and extremely poverty levels being 20 per cent and 10 per cent respectively.
However, the level of poverty seemed to be in an upward trajectory induced by lockdown during the beginning of the pandemic adversely affecting the daily wage earners. Disruptions in the supply chain also had an inflationary impact on the economy as seen with a steep rise in prices in daily essentials. The disposable income of the common people substantially dropped. Private businesses and international trade faced severe blows, squeezing liquidity and working capital and the scope for seasonal and temporary employment. The pandemic-led slump contracted revenue collection of government by Tk 1.0 trillion, export earnings by 16.93 per cent. While revenue collection hit bumps, the expenditure of the government increased to the large extent to contain the pandemic. Around 85 per cent of our economic operations belong to informal sector and this sector consisting of MSME businesses felt the heat in terms of job loss, income reduction, and business closure. On the other hand, extended social safety net programme of the government and support to the farm sector limited the economic devastation.
The government has unveiled a roughly US$15 billion stimulus package intended to ensure a private sector-led economic recovery, which prevented Bangladesh from facing severe economic headwinds like the western economies did and kept the casualties from Cavid-19 to a minimum.
While the pandemic has posed difficult challenges, there are reasons for optimism, because the stimulus package by the government was not just timely but also visionary, directed towards a rapid private sector-led recovery. We appreciate the importance the government has placed on the private sector, which also portrays the government's confidence in businesses. However, this comes with a huge responsibility on the part of entrepreneurs.
Going forward, the pandemic has exposed our vulnerabilities and we have adapted to new innovative techniques to make our businesses more efficient to survive. The private sector rightly made commendable efforts in "survival," which, in current circumstances, can be akin to profits. Given the global impact of the pandemic, Bangladesh has once again shown its resilience and a strong commitment from the private sector, for which Bangladesh's economic impact was not as serious as the developed world's. We understand that such tremendous shocks will inevitably give rise to unemployment, stoke inflationary pressure, and cause fiscal strains. However, we must be cautious about making sure that unemployment problem does not become "chronic" or "structural" in nature.
While there has been inflationary pressure built up by supply disruptions, we must ensure the economy does not experience stagflation. Given the fact the economy still chalked up a 5.24 per cent GDP growth in these unprecedented times, I believe this in itself is a great cause for optimism. As a whole, the visionary mindset and economic leadership of the Prime Minister kept Bangladesh's economy safer than our heavyweight regional peers.
Bangladesh's economy is expected to rebound, propelled by strong and resilient private sector and economic leadership addressing the COVID repercussions.
Q2. What major challenges the economy faced in the bygone year?
As I said earlier, we faced great economic shocks. We have experienced a significant decrease in our exports, which are typical as global consumption has dipped during the pandemic. We have experienced large order cancellations in the RMG sector, other industries were not unscathed as well. This has exposed our vulnerabilities, making it imperative we diversify our products away from apparels. And we must address it seriously moving forward.
I also feel the government must guarantee the incentive schemes offered otherwise it leaves the banking sector vulnerable. As you can understand, the assets of the banking sector are already stressed due to the credit line it extended to businesses and revenue losses caused by the pandemic. Given the circumstances, if the banking sector is not backed by government guarantees there may be reluctance in dispensing credit to the affected businesses, which will compound the economic woes. Furthermore, the tenure of the credit offered as a stimulus must be for a longer term, no less than 7-10 years, and "Interest Only," as we are still not being able to predict or gauge the duration of these economic uncertainties. In this context, we greatly appreciate the government's efforts to lower the interest rates, which will be of great help. Even more, the banks' provisioning requirements must be relaxed for the financial institutions extending credit. The government guarantee against credit will make lending more flexible for the financial institutions and this in turn will boost business confidence and enable businesses to retain employment.
The distribution networks and access to finance have also been affected. We are still fortunate that given the digital penetration of Bangladesh, certain financial products were still accessible in relatively easier terms by the most vulnerable or marginalised segments of our economy, which provided a bit of cushion so far as access to finance is concerned. But I still feel we can improve on distribution channels in all aspects-whether it has been supplies of food, goods or finance. Given the size of our population and the contribution or rather size of our "informal" economy, the distribution of goods and services remains challenging.
Overall, what we are facing is greatly unfamiliar. We are adapting to the circumstances as we move forward. Hence, we are exposed to uncertainties and volatilities and these challenges will remain and we will need to be very versatile and flexible in these changing times.
There were diverse challenges, which our economy came across. The challenges that crippled the economic growth and expansion are disruptions in industrial operations, international trading, job losses, private sector credit crunch, incremental public expenditure, and inadequate health sector infrastructure.
These challenges have constrained smooth economic operations and prosperity of the private sector and people as a whole. Above all, the lack of public health safety was the root cause of deceleration in all major economic indicators and slower pace of economic recovery.
Q3. What is your prediction for the economy in the New Year?
While uncertainties and volatilities are difficult to predict, there are reasons to be optimistic.
Given the government's strong support and timely dispensation of the stimulus package, I feel this will allow businesses to remain a buoyant. With the world economy is increasingly interconnected, a lot will depend on how global consumption gains traction as it will have a direct bearing on our exports. Given that the news of vaccine availability has boosted global business confidence, I feel consumption will slowly begin to pick up.
The government has set a 8.2 per cent GDP growth target, which may seem ambitious as the global economy may not gain pace as fast as anticipated - hence even if the country falls short of that figure, it will not be solely attributable to internal or domestic factors. We have already seen the domestic economic activity is getting momentum, which means the informal segment of our economy has regained life.
Also, since the government has resumed work on mega infrastructure projects, it will help bring vibrancy back to our cement, steel and other ancillary industries. As we know these industries have a significant contribution to employment generation and revenues, especially VAT, this will prove slump in tax collection.
I feel that 2021 will be our road to recovery.
The GDP growth target for the current fiscal year is achievable, though it is considered ambitious. Exports seem to be recovering slowly. In July to November, shipments grew 0.93 per cent over the same period of the last fiscal year. Remittance growth is continuing. The private sector credit growth is about 8.61 per cent. Inflation is contained at 5.52 per cent. If private investment and international trade growth continues, the upcoming year is likely to see a satisfactory economic growth.
Q4. How fast do you expect economic recovery to be in the New Year, amid the second wave of Covid-19 pandemic?
Once again, we must understand these are unprecedented times. I do not think our thoughts should be on the pace of recovery or "how fast" it will be, rather it should be on maintaining our position and averting closures or shutdowns. As I personally feel our first priorities should be to survive, revive and then thrive, which means we must maintain our present position and avoid a decline at all economic levels, continuation will cause the recovery or "revive" - and inevitably this will cause us to thrive once again InshAllah.
Though we had earlier expected a V-shaped recovery due to the prolonged spread of Covid-19, the economy is likely to experience U-shaped recovery. Due to the second wave of the pandemic, many European countries, which are our major export destinations, are going through repeated lockdown. Definitely, it has an implication for the international trade of Bangladesh. Sagging demand coupled with financing constraints may further reduce industrial production. In addition to international trade, if we can keep the local economy vibrant by strengthening and equipping MSMEs, the lifeline of economy, and financial sector, the economic recovery process may be faster.
Q5. As the president of the DCCI, what measures do you suggest the government should take for the quick economic recovery in the New Year?
As I said earlier, this pandemic has exposed the vulnerabilities of our economy, which might not be all that bad as we can now understand how and in which element we need to improve.
From my perspective, the government must ensure effective distribution of vaccine and its availability, the disbursement of stimulus packages, increase the tenures of repayment, extending the moratorium period for principal pay off, improving distribution channels for goods and services and continue the emphasis on digital penetration.
The government can also adopt very innovative approaches by offering short-term tax incentives for investments made during this period. The government may adopt a timeline, for example, to allow tax incentives for investments made over 2021-2023, which may stimulate business and investment activities. We have seen that in the United Kingdom, VAT on certain services like hospitality has been lowered to 5.0 per cent from 20 per cent, perhaps we can offer this stimulus to the small and micro industries to boost their sales, which will enable them to make up for the losses incurred during the pandemic.
Overall, I feel there should be an expansionary monetary policy and short-term tax incentives, which will help businesses maintain a robust cash flow. We suggest expediting and facilitating the loan disbursement process under the stimulus packages, introducing innovative financing options while exploring low-cost financing sources.
Most of the formal and informal sector businesses are deprived of borrowing and only 1.0 per cent of the affected businesses came under the stimulus facility as of now. Therefore, we feel the need for a second stimulus package for CMSMEs with larger amount and with flexible terms and conditions. To widen the outreach of the financing having a minimum fiscal effect on the government, low-cost financing sourcing mix, including development agencies, capital market and the banking sector sourced financing is required for reducing the extreme burden on the banking sector against the backdrop of lower revenue collection.
We also need to ensure and expand the digital infrastructure facilities in all trade and economic activities to keep the business up and running. In addition, the enforcement of the rules and regulations related to hygiene practices is vital. We also believe that doing business needs to be eased to attract local as well as foreign investors willing to relocate factories.
syful-islam@outlook.com