Coronavirus Putting the Brakes on Economic Growth in Bangladesh

9 April 2020 Tridivesh Singh Maini, FDI Visiting Fellow

Background

Bangladesh has emerged as an engine of regional growth in South Asia, enjoying Gross Domestic Product growth of around eight per cent in 2018 and 2019. A significant source of that growth has been the very successful garment industry, which accounts for 13 per cent of the country’s GDP. Bangladeshi garment exports have been enjoying increasing demand globally, and especially from the United States.

Now, however, Bangladesh is being confronted by the coronavirus and its economic consequences, which, in addition to falling remittances from Bangladeshis working overseas, could lead to the loss of large numbers of jobs at home. The garment industry alone employs four million workers and the Bangladeshi Garment Manufacturers and Exporters Association (BGMEA), for instance, estimates that up to two million workers in garment factories stand to lose their jobs.

Comment

An Engine of Growth

Bangladesh has emerged in recent times as an engine of South Asian growth, its GDP growing at 8.1% in 2019 and, in 2018, at 7.9%.

Its economic rise has been acknowledged globally. The country has improved in terms of attracting foreign direct investment (FDI). It is not solely dependent on China, having also drawn FDI from Japan and South Korea. In 2018-19, there was a sudden jump in FDI, when Bangladesh received US$3.88 billion ($6.3 billion). In 2019-20, Bangladesh received a little over US$3 billion ($4.8 billion) in FDI. Those investments are, however, considerably less than Bangladesh’s true potential to attract FDI, which is estimated at US$9 billion ($14.6 billion).

A Beneficiary of the US-China Trade War

Bangladesh’s textile industry has benefitted from the US-China trade war. The sale of Bangladeshi garments rose significantly – to a record US$3.81 billion ($6.2 billion) – as demand for Bangladeshi garments rose, especially in the United States.

The coronavirus (Covid-19) pandemic will have an impact on the Bangladeshi economy, just as it will across South Asia; the estimated growth rate for South Asia for 2020 has been revised downward to 4.1%. Bangladesh announced a lockdown on 26 March, with the total number of coronavirus-related cases standing at 218 as of 8 April, with 20 fatalities.

According to estimates in a report from the Asian Development Bank (ADB), the coronavirus could wipe out around US$3 billion of Bangladesh’s US$300 billion economy. That could lead to the loss of close to 900,000 jobs.

The report highlighted three key impacts of the coronavirus: ‘… disruptions in export demands, suppressed consumption, and curbed remittances.’ All three have played a significant role in Bangladesh’s economic growth in recent years.

Workers Already Losing Jobs

While the ADB’s estimate of loss of jobs was 900,000, around a million Bangladeshi workers in garment factories have been laid off, after big retailers like Primark, Matalan and the Edinburgh Woollen Mill cancelled orders worth over US$2.4 billion ($3.85 billion), according to estimates of the Bangladeshi Garment Manufacturers and Exporters Association (BGMEA). According to that body’s estimates, up to two million workers in garment factories could lose their jobs.

That is significant, because four million workers are employed in the garment industry, which accounts for 13 per cent of the country’s GDP. Garment exports, at US$34.12 billion ($55.5 billion), account for 84 per cent of Bangladesh’s total exports of US$40 billion ($65 billion).

According to a survey of 300 garment suppliers by the Worker Rights Consortium (WRC) and Penn State University, the biggest problem for Bangladeshi suppliers is that retailers have refused to pay them even for goods already produced. As a result, many workers in textile mills do not receive their salaries on time. Some retailers, such as H&M, Marks and Spencer, Next and Zara, have agreed to honour existing orders, but none have provided any assistance in paying severance costs to the workers.

Beyond exports and the garment sector, Bangladesh is dependent upon remittances. There are many immigrants working overseas (especially in the Gulf region), whose remittances are crucial for the Bangladeshi economy. In 2018-19, remittances reached an all-time high of US$16.4 billion ($26.6 billion), a large portion of which stemmed from the Gulf. In recent months, Bangladesh has been prepared for a dip because around two-thirds of those workers returned to Bangladesh between January and March 2020, at the beginning of the Covid-19 outbreak. The consequent reduction of remittances will have an impact on the country’s economy. Workers who return from overseas and lose their jobs will also need to be rehabilitated by the government. The Bangladeshi Government needs a strategy to deal with this challenge.

To arrest a potential decline in the economy, Bangladeshi Prime Minister Sheikh Hasina announced a stimulus package on 25 March.  During her speech, she announced a stimulus package (estimated at US$590 million) to help export-oriented manufacturing industries that have been affected by the pandemic. Those industries could use the money to pay their workers’ wages. More stimulus measures (estimated at US$8 billion) were unveiled on 5 April. The focus of the second package was twofold. First, it was to help entrepreneurs. According to Hasina:

The main aim of the financial packages is to introduce loan facilities through the banking system. Reviving economic activities, stopping [fiscal] retrenchment and helping the entrepreneurs maintain their competitiveness are the main purposes of the financial packages.

Second, it is also intended to expand social safety-net programmes to help those living below the poverty line meet their basic necessities. The Bangladeshi PM also stated that the government would distribute free food – with a focus on the poor and elderly – and also help them buy to rice at a subsidised price.

Some observers suggest that the damage to Bangladesh’s economy could be far more profound than is being forecast. They also suggest that it is important not to be fixated on GDP figures, which may not reflect the actual challenges that the economy faces. It is important to raise taxes so that more resources can be channelled towards assisting those workers who have lost their jobs. Apart from helping businesses, moreover, there is a dire need to increase welfare spending for those workers.

Bangladesh needs to make some major alterations to deal with the disruptions caused by the coronavirus. It will need to formulate and implement innovative policies that focus on spending. It is also important for Bangladesh to work with other regional countries that have also been affected by the pandemic. While Bangladesh has immense potential and can bounce back, for the time being at least, the coronavirus will prove to be a serious setback to its economic success.

*****

About the Author

Tridivesh Singh Maini is a New Delhi-based Policy Analyst and FDI Visiting Fellow.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

Published by Future Directions International Pty Ltd.
Suite 5, 202 Hampden Road, Nedlands WA 6009, Australia.