Have the instruments been used effectively for recovery?

Over the years, global economic crises have prompted governments to actively resort to two instruments of economic policies – fiscal expansion and eased credit – to stabilise and boost the economy. The COVID-19 is no exception. This points to the question of whether fiscal expansion and eased credit have been effectively incorporated in the pandemic response and recovery policies in Bangladesh to stave off the fallouts. 

In response to the contraction, the government has at least four avenues of fiscal expansion available—increase the annual development expenditure, increase current or revenue expenditure, offer direct cash payments to citizens, and adopt medium-term strategies for improving shock absorption capacity. The fiscal expansion has been relatively indiscernible in the government policies. During the 10 months to April, the government utilised only 44.27% of its budgeted expenditure, and to reach the pre-pandemic average implementation rate of 85% may be a colossal, and to some extent, unrealistic, task. 29.94% of the annual development programme (ADP) and 54.04% of revenue expenditure have been spent upto April, 2021. Simultaneously, direct cash payments would not reach more than 3.5 million households due to lack of data, and the planned second payment would not reach beyond that number, despite the number of the new poor mounting, particularly in cities and towns, following the first and second waves. The government missed an opportunity to introduce a universal social security system, on a medium-term basis, as the current safety net programmes are fraught with fragmentation, certain degrees of exclusion and inclusion errors, and political bias.  

Emergence of a K-shaped path

Governments have adopted monetary expansion policies, as advocated for by the reigning modern monetary theory. The government promised a Tk1,213.53 billion stimulus package. Large industries received the greatest share of the government's allocation and experienced the highest rate of disbursement. CMSMEs were allotted Tk252 billion, of which 167 billion or 66% was disbursed till March 2021 in total. Simultaneously, the CMSMEs fund of Tk100 billion still remains undisbursed due to bureaucratic complexities. As a result, money has not reached firms and households but rather was left in the banks, leading to a 93% excess liquidity in the banking system. The system is awash with money, yet the private sector credit growth dips in March to 8.79% against the central bank's revised target of 14.8%, lesser than the pre-pandemic level. 

Owing to the differential impacts of policies, the country lies at the brink of an emergence of a K-shaped path, consisting of the two diverging arms of the letter K. The upper arm indicates how wealth is becoming more concentrated for the wealthier classes. The lower arm indicates how wealth concentration is declining for the many small businesses and informal sector losing out due to the prolonged economic shutdown. 

In terms of policies, the government has been adept on empty rhetoric, but short on realistic assumptions. A key shortcoming of the pandemic response policies was that the possibility of a second, or potentially third, wave was not taken into consideration. Optimist policymakers predicted a V-shaped growth path for the country, yet the second wave may have triggered further contraction. These impacted different groups of people disproportionately and worsened conditions of the marginalised sections of the population. 

Agriculture sector saved rural economy 

The GDP squeeze could have been worse, if not for the rural economy, with 62% of the population, that was not as badly affected compared to urban areas. A relatively less sweeping impact on the agriculture sector protected the livelihoods of those employed in the rural economy. In addition, the majority of the families of migrant workers are rural dwellers. A negligible dip in remittances ensured that the level of consumption stayed constant. Bangladesh has a largely domestic consumption-led growth, and consumption levels of households in rural areas being mostly consistent with their pre-pandemic levels while the worst-hit populations were the urban poor and vulnerable non-poor households.

A shortfall in understanding the nature of the asymmetric shock of Covid-19 and the apparent lapse in prudential planning for relief and rehabilitation, forms the premise for using structural and institutional reforms for mitigating a discriminatory K-shaped path. Policies should therefore address both short-term goals of relief and rehabilitation to recover from the pandemic and medium-term goals of recovery and reconstruction. 

Short-term goals may consist of direct cash payments that reach the last mile citizens. Medium-term goals should address the recovery and reconstruction for households and firms. For firms, stagnant industrial growth can be addressed through reforms focusing on diversification and employment creation. 

For households, the medium-term framework should address the fundamental issues of equipping low-income households with shock absorption capacity, increasing the median wage, and creating opportunities for women. A fully-fledged life-cycle-based social security system, reforms for universal health system and universal education are needed, and earlier allocations in the budget have not been ample enough to secure a decent living for the population that has drowned into poverty and unemployment due to the pandemic.