Unclear road to recovery

Economist John Maynard Keynes suggested higher government spending on infrastructure, unemployment benefits and education during the time of the Great Depression in the 1930s as a means of stimulating consumer demand. This is the essence of what is now known as Keynesian Economics. It is also known as the "demand-side" theory focusing on the changes in the economy over the short run.

On the other hand, classical economists see danger in government spending, which they fear would crowd out the private sector and raise the costs of borrowing and inflation. Self-regulating democracies and capitalistic market developments are the mantras of economists of this school.

These are the debates among economists during normal times.

Textbook economic theories do not provide any quick fix in a time of recession, which calls for some unconventional measures.

At the very beginning of the shutdown, our economists could foresee a severe impact on people and the economy as consequences of the "general holidays" and movement restriction.

Echoing the concerns raised by their global peers, they had forewarned of a slump in businesses. Unemployment, income erosion, supply chain disruption, shutdown of businesses and industries, negative growth in export, revenue and remittance were among the fallouts they feared.

They had called for efficient recovery plans when the health crisis was over and the economy restarted operation.

After a 66-day pause, the economy started reopening while health concerns persisted. The havoc wreaked by the shutdown is evident now.

Were our preparations for the recovery phase adequate?

Exports and revenues were in the red well before the pandemic had stuck. And the service sector – including transport, restaurant and hospitality businesses was the first to take the hit.

Small businesses in the informal sector are the biggest employer and the worst hit by the shutdown, throwing millions – waged and self-employed – out of work.

According to a Sanem and ActionAid study, Bangladesh's 20 million stong youth labour force is currently at risk of permanent wage moderations or no income.

Assuming a 25% income shock due to the pandemic, 48% of the youth population will fall below the poverty line.

Besides, 89% of the employed youths engaged in the informal sector are facing the highest risk of job loss. Young workers will also become permanently unemployed or underemployed due to factory closures and reduced production.

The major sub-sectors of the rural economy such as poultry, dairy, fishery and vegetable farming are also badly hit due to supply chain disruption and a slump in demand caused by diminishing incomes.

Two major festivals – Eid-ul-Fitr and Pahela Baishakh – passed during the shutdown generating little or no business.

To jump-start the economy, economists had called for a desperate and unconventional approach, a big push – a combination of monetary and fiscal policies.

"You have to forget orthodox economic measures for now. The budget deficit has to be within 7% or 5% – forget about all these things," Zahid Hussain, former lead economist of World Bank's Dhaka office, was quoted by The Business Standard on April 4 in the week after general holidays were announced.

In a financial recession, policymakers need to do two things: get credit flowing again and prop up spending in the recovery period, writes Nobel laureate economist Paul Krugman in his authoritative book "The Return of Depression Economics".

Our economists however say the government should not prop up spending haphazardly. It should expedite the stalled works of the mega projects to ensure quality spending and smooth supply of money into the economy.

Annual Development Programmes need to be rationalised and public expenditure priorities should be reset in the new fiscal year's budget, Zahid Hussain felt.

To increase money flow into the economy and businesses, the central bank took some measures like reduction in repo rate and the cash reserve ratio, which helped banks have additional funds in hand to lend.

Even then, Economists say, monetary policy alone cannot help. There is a need for aggressive fiscal support.

For the coronavirus crisis, monetary policy has not been very effective," argue a group of top economists in their e-Book published by the World Economic Forum.

"This time, fiscal policy should be the first to the rescue because the main shock is coming from the real economy," they added.

"Monetary policy, as announced by the central bank to help business stay afloat, alone is not enough. It must be backed by proper fiscal policy," said Dr Salehuddin Ahmed, former governor of Bangladesh Bank.

Many governments have already reacted with fiscal force.

Income subsidies for workers, tax deferrals, social security deposit deferrals, subsidy, debt repayment holidays and state loans or credit guarantees for companies are among the unconventional financial supports offered globally in response to the Covid-19 generated economic crisis.

The Bangladesh government too announced a series of stimulus packages – to the tune of Tk1 lakh crore or over 3 percent of the GDP.

These are the cash support or loans at subsidised interest rate to be channelled mainly by banks to businesses and individuals.

Meanwhile, the new fiscal year just began and we have our pandemic-time budget passed by this time.

How far are the suggestions of economists reflected in the new fiscal year's budget? Does it have enough fiscal stimulus in the forms of tax cuts or new government spending, which are needed for the jump-start of the Covid-19 ravaged economy?

Not at all.

Businesses began the new financial year on July 1 with some of their key concerns to help the economy recover from the Covid-19 fallout going unaddressed.

As the tax year approaches its deadline, no tax deferrals were offered. Rather businesses will face lower ranking tax officials more empowered now than before to "harass" them.

They said withholding VAT will deprive firms of the benefit of the corporate tax cut as the effective tax rate will be higher.

Their demand for withdrawal of cap on promotional expenses of companies was unattended, which will limit promotional campaigns of fast-moving consumer goods makers, telecom and pharmaceuticals.

Additional tax has been imposed on mobile phone use at a time of social distancing when virtual communication, mobile banking and internet service dependence are at their peak.

Rental relief is a new support offered to shutdown-hit businesses in many countries. Economist Ahsan H Mansur had identified rent as a major cost burden for low income people and small businesses, and expected that the government would "ask house-owners to cut rents to half".

That did not happen and unpaid house-rent accumulated for three months or more are a key reason for many to pack up houses and businesses in Dhaka and leave for their village homes.

Economist Zahid Hussain finds the new fiscal year's budget "divorced from reality". The budget talks the talk as it rightly points out expenditure priorities for economic and public health recoveries. But when it comes to walking the talk, disconnect starts right from macro framework to implementation, he said.