GDP per capita and its growth are important indicators of the level and progress of measured affluence in any economy in normal times. These are not normal times. The world is in a pandemic. Per capita GDP growth pales in significance compared with the health and livelihood challenges facing every single society in this planet today. GDP growth numbers are at best a partial indicator of how the economy is responding to the new supply and demand dynamics precipitated by the virus.
Hard to look through blazing fire
When your house is on fire, the least of your worry is progress on its expansion. Putting out the fire with minimal collateral damage is the immediate and only priority. Rebuilding it after extinguishing the fire is next followed by resumption of expansion with precautions built in to prevent future fires.
The same is true in a global pandemic. Controlling virus transmission is the immediate priority. How this is done is critical to contain the recessionary impact of the public health response. The pandemic struck the Bangladesh economy on both the demand and supply sides by reducing mobility and assembly. This was both spontaneous and policy induced. The consequent decline in income and employment combined with persisting spread of the virus reduced confidence in goods, labor, and financial markets, thus deepening the economic contraction.
The economy is experiencing a structural swivel that could turn into a hinge—a nightmare for economists whose business it is to make projections. The World Bank has projected a U-shaped path with growth slowing further in FY21 and a modest recovery in FY22. The IMF is projecting a weak V with growth rising slightly in FY21 followed by a gradual ascent back to the +7 percent potential growth rate by FY25. Both the ADB and the government are projecting stronger recovery, respectively 6.8 and 8.2 percent, in the current fiscal year followed by further rise in FY22.
The pandemic has taught us to stick to the facts in assessing the current state of the economy. Have we put out the fire? What has been the collateral damage? What is the state of the recovery? What is the appropriate mix of policy response?
No such thing as herd immunity
A recent study has suggested the onset of “herd immunity”, at least in Dhaka slums. It finds evidence of antibodies in 45 percent of their Dhaka sample and 74 percent of the slum sample. Herd immunity through infecting the vast majority can be very costly and even futile. There is no certainty on the duration of immunity assuming, based on sparse reported reinfection rates, it exists.
Even if the duration of immunity through infection is long enough, the “herd” may not be able to protect those at risk such as the elderlies and people with comorbidities such as diabetes, lungs, heart, and respiratory problems. This group cannot be isolated from the herd because of social connectivity. Herd immunity can work only if it is achieved through vaccination. Or else, masking, and social distancing are the only protection.
It is delusional to think that the pandemic passed in Bangladesh. The daily test positivity rates are still in double digits, notwithstanding the reluctance to test due to social stigma and economic costs. The fire is still out there. There is evidently and understandably a virus fatigue at both the individual and collective levels. Unfortunately, the virus strikes back when the guards are down. Keeping the guards up is more of a sociological challenge than a medical one.
The damage has been pervasive and uneven
The economic damage, caused by the virus itself and measures taken to fight it, has been significant in magnitude and unequal in its distribution. Contact intensive informal services have suffered the most. Most rapid surveys report large declines in the average incomes and expenditures of households during March-May.
The downturn started in economic hotspots such as Dhaka, Chittagong and Narayangonj and spread subsequently through decline in internal remittances, reverse migration and multiplier effects. A World Bank labor market monitoring survey in the poor and slum areas in Dhaka and Chittagong, during June 10-July 10 found job losses, observed across different occupations, have translated into a mix of unemployment and departures from the labor force.
We talk about k-shaped recovery, but not enough about k-shaped downturns. Downward mobility was experienced by many in most income and occupation categories, particularly urban rickshaw pullers and daily wage workers. Unemployment (self-reported) soared from less than 4 to 22 percent plus during April-July, according to the BBS rapid survey. Some prospered. Balances in accounts with Tk 40 crores and above increased by 16.4 percent by end-June relative to end-March, according to Bangladesh Bank (BB) data.
Recovery is uncertain
Google Mobility Report shows mobility has returned to the pre-pandemic state with the sole exception of retail and recreation, where it was still down by 9 percent. Evidence from rapid surveys suggest work has returned to near pandemic levels, but income is lagging. This is true for both the formal and informal sector activities outside agriculture that account for over 80 percent of domestic output.
The first quarter data on exports, imports, tax revenue collections, and private credit growth all signal gradual recovery, but the magnitude varies by indicators. Export growth is positive but small, production and investment related imports still down, tax collection and credit growth are nearly flat. All these indicators are significantly higher than the bottom reached in the last quarter of FY20. That reflects more a recovery of what was lost than a rise relative to pre-pandemic levels. The public expenditure increased at its slowest pace in the first quarter. Government is releasing funds only for the top-priority development projects and cutting contingency expenditures. The budget deficit has narrowed. Remittance has been a significant exception with 45 percent spike in the first four months.
There is strong perception of uncertainty about keeping jobs and businesses running. Both the IMF and the WB are projecting subdued consumption growth in the current fiscal year. In addition, private investment is likely to remain depressed because of uncertainties relating to the dynamics of the pandemic locally and globally. External demand cannot be counted upon given the start of a second wave in Europe and North America.
Covid-19 has proved wrong fears that policymakers cannot fight downturns. They can calm markets, stop businesses from collapsing and protect household incomes. The policy response will be most critical because the risks predominantly are on the downside. Policy support to keep inherently viable enterprises afloat and protect the incomes of the poor and the vulnerable will need to complement a ramped-up response on the public health front to contain the spread of the virus.
Capitalizing the blissful initial conditions
The pre-existing macroeconomic stability in Bangladesh has been blissful for undertaking bold policy measures. Surplus in overall balance of payments has increased foreign exchange reserves. Expansionary measures by BB since March and foreign exchange purchases have boosted liquidity in the banking system leading to sharp decline in on short term government securities, deposits, and private credit. A low public debt level initially provides space for well-directed fiscal expansion. The risk of external and total debt distress continues to be assessed low by WB-IMF joint Debt Sustainability Analysis. The health of the financial sector is a major concern as highlighted in a recent Fitch report.
The country will be better served if the focus moves from growth numbers to rebuilding livelihood systems better. The government has recently expanded financial stimulus packages, some of which target the micro and small enterprises as well as the unemployed workers. Reaching this group has been a struggle so far when compared with the implementation of the big and expanding packages for the large enterprises in the formal sector. The barriers separating many small economic players from the outreach of the public support apparatus must be broken to get the informal economy running in full swing. Structural reforms to address financial sector distress, regulatory complexities, bureaucratic red tape, infrastructure gaps, and skill deficiency will be critical for rising back from the economic malaise created by the pandemic.
The author is ex-Lead Economist, The World Bank, Dhaka