Key data looks good, but 2nd wave casts shadow

When major economic indicators were turning around after the first wave of Covid-19, the second wave of the pandemic has emerged as a potent threat to that recovery.

After reaching almost a standstill during the first shutdown period, industrial production had posted an 8.62% growth year-on-year in December last year.

Until March this year, data on the use of gas and electricity in the country and the increase in container handling at ports were clear indications of a return to economic recovery.

Most of the growth indicators – import-export and industrial raw material imports – were in a strong position to bring the economy back to its strong pre-pandemic status.

Revenue collection was also on the rise. Remittance inflows and disbursement of loans to the agricultural sector had always been encouraging.

A report prepared by the Finance Division says the ongoing countrywide lockdown put in force in the wake of the second Covid wave might negatively affect these indicators.

Finance Secretary Abdur Rouf Talukder recently presented the report to the Public Resources and Budget Monitoring Committee.

The finance ministry, however, is hopeful about bumper yields this Boro season and a double-digit growth in exports by next June.

Even though the demand-generating indicators showed a positive trend over the past year after recovering from Covid-19 fallout, indicators vital for ensuring long-term sustainability of the economy by creating investment and employment were far behind the pre-pandemic level before the renewed outbreak.

Import of capital machinery in the July-February period of the current fiscal year has seen a negative growth of over 24% compared to the previous fiscal year.

Credit flows to the private sector were declining and growths of domestic and foreign investments were in a negative trend. The finance ministry fears these would worsen further due to the ongoing lockdown.

In the wake of a declining trend in private and foreign investments, the last budget plan spoke of initiatives to keep the economy strong by increasing government spending. However, the reality is quite the opposite.

During July-February of this fiscal year, both development and current expenditures of the government decreased compared to the previous year. This shows the government has failed to execute its plan to increase investment and encourage the private sector to invest amid the ongoing economic crisis.

In July-February of the last financial year, the total expenditure of the government was Tk2,17,441 crore, while in the same period of the current fiscal, it was Tk1,96,061 crore.

Considering the size of the budget, government expenditure was 41.56% of the total budget at this time of the last financial year, while it was 34.52% in the same period this year.

However, in the eight months till February of the current 2020-2021 financial year, the government earned Tk20,000 crore more in revenue as compared to the same period of the previous year.

The government could spend about 42% of the annual development programme in the first nine months of the current financial year, which was 45% during the same period of the previous year.

The finance ministry fears that the ADP implementation performance will not be satisfactory even at the end of the current financial year.

Notwithstanding that the government announced Tk1,28,441 crore loan support under 23 incentive packages aimed at mitigating pandemic induced shocks, private sector credit growth has slowed down compared to the pre-pandemic level.

Businesses have been reluctant to invest because of an uncertain future amid the pandemic. The authorities' failure to implement the economic zones on time and the stoppage of gas and electricity connections to new industries outside economic zones are also discouraging investment.

Foreign direct investment also fell by about one-third to $530 million year-on-year in the July-February period of this fiscal.

Economists and businessmen are of the opinion that the government has not been completely successful in its effort to support economic activities by increasing public spending and supply of money to the private sector during the ongoing pandemic.

In the meantime, economic indicators that had already returned to a positive trend will go back to negative growth again due to the ongoing lockdown enforced to tackle the second wave of Covid-19, they said.

On the other hand, investment, import of capital machinery and flow of credit to the private sector are linked, they pointed out, adding these will not return to a positive trend unless the global coronavirus situation, including that in Bangladesh, improves.

Noted economist Dr Zahid Hussain said, "The economy was in a recovery trend from July to March this fiscal after it faced a deep crisis in March-April last year. If the economy could move ahead recouping the damage, it would see growth.

"However, the second wave of the coronavirus has started in the meantime. It cannot be predicted at this moment as to how deep the scourge of the renewed outbreaks will be and for how long this trend will continue."

He further added, "Export earnings till March this fiscal were slightly lower compared to the previous year. None of the investment indicators returned to the pre-pandemic level. Due to inefficiency in the ADP implementation, there is no sign of the government's financial spending to revive the economy from the deep crisis."

Noting that there was a slight recovery in consumption spending in the private sector that accounts for the largest share of GDP, he said there was some growth in VAT collection due to increased shopping and travelling by people.

"Therefore, it goes without saying that the economy was starting to recover. But before it could get back to a growth trajectory, a fresh crisis has begun."

"In foreign trade, there was a surplus in the current account throughout the year. As a result, the reserve has increased. However, the main reason for stability in foreign trade is the stagnation of the economy."

"If there were more investments, more capital machinery could be imported. If the production was normal, the import of raw materials would have increased further. This would have put pressure on the current account. At least the trade balance could be negative," he explained.

Despite a huge demand for money in the health sector and economic protection amid the pandemic, the government's spending in these areas has actually declined. As a result, even though the budget is given by estimating a large deficit, the overall budget deficit is less than the target.

 "Nonetheless, the stability of the financial sector is most at risk at this time. The extended deadlines of loan repayment in various sectors have not expired yet. As a result, it is not possible to estimate the amount of non-performing loans in the banking sector," said Zahid Hussain.

He, however, expressed apprehension that this indicator also would deteriorate as the business climate is yet to improve.

He said there is an opportunity to increase the government's expenditure in the current budget. Due to the low budget deficit, the government has the opportunity to borrow from domestic and foreign sources.

Shafiul Islam Mohiuddin, former president of the Bangladesh Federation of Chambers of Commerce and Industries (FBCCI), told The Business Standard that Europe, the United States and the United Kingdom are administering the vaccine extensively.

"If the confidence of the buyers of those countries returns in the next few months, Bangladesh's exports will also return to a positive trend," he added.

"No one thought the second wave would have such an impact on the economy. Traders were trying to turn around by overcoming the damage inflicted by the first wave, but this time it will take more time for them to recover due to the new crisis.

"Many are fighting for survival. The government also is trying to find a balance between life and livelihood. Small traders made losses on the Pahela Baishakh and Eid-ul-Fitr last year. This time too their Eid sale will not be good because buyers are not showing confidence. So, the negative impact on the economy as a whole is growing," he continued.

Emphasizing the need for restoring people's confidence through large-scale vaccination after the import of vaccines from China and Russia, he said, the government should try to bring Covid-19 under control by the time different countries and regions including Europe and the United States bring it under control.

Then investment will increase, he added.

"At the same time, government investment needs to increase a lot to attract private investment. If government spending does not increase, private and foreign investment will not increase."

Dr Ahsan H Mansur, executive director of the Policy Research Institute, told TBS that most of the economic indicators were sluggish even before the second wave of the coronavirus began.

"The government's revenue did not increase much after the first wave. There is stagnation at every level of investment and production. Domestic production is not increasing due to a lack of purchasing power of people. The amount of import is also decreasing."

How long the recession will last depends on the intensity and stability of the second wave, he maintained, adding, "I don't think the impact of the second wave will be as hard as that of the first wave. However, the economy will slow down, for sure."

He said it would be difficult to maintain the momentum of the economy amid the current situation. "In my opinion, this time the growth will not be more than 2-3%."

He added that traders are not confident about new investment decisions. "They will never want to invest unless the uncertainty is over. More than 30% of the GDP comes from investment. The economy cannot grow without investment."

"The biggest impediment to investment at the moment is the spread of the coronavirus. Countries that have been able to control the pandemic are increasing their investment, production and growth. Therefore, if we want to keep our economy afloat, we have to control the pandemic. Effective vaccination initiatives must be taken, where the government has been indifferent for so long."

However, it is true that it will take a long time to confirm 100% corona vaccination, he noted, adding that sometimes a lockdown will have to be put in force and sometimes the economy has to be kept open by striking a balance between life and livelihood during this period.