Second wave could inflict bigger damage to economy

The second wave of Covid-19 will derail Bangladesh’s feeble economic recovery, deal a massive blow to the poor and low-income groups, reduce fiscal space and constrain public expenditure, said economists.

The crisis, which compelled the government to enforce a countrywide strict lockdown for at least two months before easing restrictions in June, wiped out at least 50 per cent of the gross domestic product (GDP) growth potential last fiscal year, which ended in June.

It undid the country’s gains in poverty reduction in the last couple of decades, created 20 per cent new poor and ate away millions of jobs as the economy came to an unprecedented halt.

The economic misfortunes can continue at least for a larger part of the current fiscal year even at the current pace of economic revival and infections. The situation may exacerbate if the country is hit with a second wave, as is being witnessed in many other countries.

“The second wave would be more painful than the first one and it would rub salt into the wound,” said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.

“So, it would be a wise strategy for the government to avoid the second wave instead of looking at whether the economy can bear it or not.”

The export sector would face pressures again as the number of infections is rising in the developed world, said Ahsan H Mansur, executive director of the Policy Research Institute (PRI) of Bangladesh.

Economic recovery is underway and the country is expected to return to positive territory in the third quarter of the current fiscal year, he said.

“But if there is a second wave and massive impact, the economic recovery would be further delayed.”

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said low business activity and the resultant low income from businesses would reduce tax collection of the National Board of Revenue (NBR).

“This, in turn, will reduce the fiscal space of the government and may constrain the government’s expenditure.”

If the second wave hits, the cottage, micro, small and medium enterprises (CMSMEs) would be the hardest hit again, said Hossain Zillur Rahman, executive chairman of the Power and Participation Research Centre.

The warning from the economists came against the backdrop of many countries around the world, from England, France, Spain, Germany and the Czech Republic to Iran and South Korea, being forced to reintroduce lockdowns amid rising coronavirus infections and deaths.

In September, Prime Minister Sheikh Hasina warned of a second wave in the upcoming winter.

Mansur of the PRI said the fiscal situation may worsen in the event of a second wave as revenue collection has slowed. Value-added tax collection grew only 1 per cent in the first quarter of the current fiscal year whereas inflation stood at 6 per cent.

There might be a revenue shortfall of Tk 80,000 crore at the end of the fiscal year, the same level of which was also witnessed last fiscal year.

“The government’s expenditure management would face difficulty as it would not be able to keep the deficit financing within the target,” said the former economist of the International Monetary Fund.

Zahid Hussain said the economic recovery was taking place in Bangladesh but its outcome was far from what was at the pre-pandemic period. If the transmissions accelerate, the situation may warrant lockdowns.

“We may choose not to enforce lockdowns. But if things go out of control there might be no other alternative but to impose it.”

That means a supply and demand shock to the economy as it witnessed in April and May.

“The second wave would undo the economic gains and the economy might face the W-shaped recovery,” Hussain said.

A W-shaped recovery is when an economy passes through a recession into recovery and then immediately turns down into another recession.

The first wave has already caused massive job and income losses, particularly in the urban informal sector.

Winter is one of the major spending seasons in Bangladesh. Social and community interactions would pause because of the second wave.

A critical factor in recovery is the state of mobility. The 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 per cent in early October.

“If the mobility shrinks, there would be contraction on both demand and supply sides,” Zahid Hussain said.

The former World Bank economist welcomed the recent government policy of “no mask no service”. Under the stance, the authorities ordered public and private organisations to refuse services to people not wearing a face covering.

“Scientists are universally in agreement about some issues and data are also available. It has been shown in all cases that masks work if you properly maintain it,” he said.

“The use of masks had been at a satisfactory level in the initial days of the lockdown. Now there is lackadaisical attitude. The government would have to raise public awareness about the benefit of putting on masks.”

Crores of families are still struggling because of the devastating impacts of the first lockdown.

“We don’t have any idea how deep their struggle is. If the second wave comes, it would rub salt to the injury. But how much can the government protect them through social protections?”

Rahman of the PPRC said both the government and the general public have decided to operate on their terms no matter what the coronavirus brings in.

“We may move ahead with this co-existence but we have to think about how to make this co-existence even more effective.”

The government should start preparations, particularly in case of social protection programmes, Rahman said.

“We could not do it properly when the pandemic hit the country. This time, we can at least take preparation in case of social protections.”

He said the export-oriented industries have been going through uncertainties and there was a need to give encouragement to the domestic sector.

The stimulus packages unveiled for the large industries have worked well but the support packages for the small-scale enterprises have not proportionately done well.

“The government would have to find out why the stimulus packages for the CMSMEs failed to deliver the expected results. If needed, the government may change the delivery agents and give the responsibility to the microfinance institutions in place of banks,” said Rahman.

The virus is being tackled locally so funding for local governments such as municipalities should be increased.

The health sector should see an overall reform, the former adviser said. “The health sector is operating as usual. If you want to do something, you will have to bring in serious reforms.”

But the government is still having the Ostrich syndrome, sticking its head in the sand and hoping that the problem would just go away, Rahman said.

“Mobility restrictions would have to be reintroduced if there is any second wave.”

Monzur Hossain, research director of the Bangladesh Institute of Development Studies, said lockdowns would not be feasible options if the second wave comes about. Health protocols have to be maintained so that industries, small and big, can continue running.

The CMSME sector has not received the stimulus package as expected as only 20 per cent of the Tk 20,000 crore fund has been disbursed so far.

“The rest of the fund should be released by next one or two months. The packages could be implemented quickly through other (disbursement) models such as NGOs.”

The government would have to continue running its development projects aimed at poverty reduction and infrastructure development in the rural areas following health protocols. This would create jobs for the people, Monzur said.

The government should give a thought to whether it can revive its employment generation programmes. A one-time loan facility should be made available for the returnee migrant workers.

Mansur of the PRI said the country would be able to bear the economic shock.

“Our agriculture might have been affected by the recent floods. But I think we would be able to cope up with the losses.”

“We may be needed to go for some imports of rice until the next boro crop. We have the reserves to afford the imports. So, we will not face any economic crisis.”

Mansur said hospitals would have to take up massive preparations for admitting Covid-19 patients again.

Fahmida said foreign direct investment has already slowed down due to the pandemic and it may further be delayed as the developed economies would face economic challenges.

She said as the global recovery would be delayed due to the second wave, employment opportunities would come under pressure.

“So, the prospect of Bangladeshi returnee migrants getting back their jobs will be delayed further as those economies will also be under stress.”

She said Bangladesh’s health sector may face more pressure again if the number of affected people increases.

She said many businesses, particularly the small business, were yet to recover from the impact of the first wave. Most of them did not receive stimulus package as of yet.

Employment is an area of vulnerability. Lack of employment and income will increase their hardship.

“During economic shocks, the role of public expenditure is extremely important as it helps create employment and increases domestic demand.”

The call for action from the economists is also in line with a new report that said it would be hundreds of times cheaper to prevent outbreaks than to suffer the grim consequences.

The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, set up by the United Nations, said the current pandemic might cost the world economy $16 trillion by next summer.

But preventive measures – such as cracking down on the wildlife trade – would cost between $22 billion and $31 billion annually. It’s a large sum, but a fraction of the economic cost of coping with a pandemic like the Covid-19, the report said.