How are firms coping with the pandemic post-shutdown?

On March 8, Bangladesh announced the first confirmed coronavirus case in the country after three people tested positive for the virus. As days passed by, the number of infected patients grew as well.

Bangladesh could do nothing but impose a countrywide shutdown to curb the spread of Covid-19. However, this shutdown had an impact on the country's economy. The imposition of countrywide shutdown resulted in businesses facing work order cancellations or low market demands, restriction on employee mobility, and financial constraints.

The Economic Research Group conducted a survey among 106 firms in May to investigate the impact of Covid-19 and associated mitigation strategies on businesses in four domains – work orientation, adverse market conditions, rental contract renegotiation and employee contract renegotiation. A month later, two follow-up surveys were conducted. The follow-up analysis was conducted among 63 firms. 

The firms were divided into four categories: i) RMG and textiles, leather, mon-leather footwear and fashion industries; ii) chemical products, light engineering and metal works, electrical and electronic goods, and plastics; iii) agribusiness, health, and food and beverages; and iv) other sectors with varied activities and small sample sizes.

Adverse market conditions

The research found 44.4 percent of firms ceased all activities, and another 46 percent faced work order cancellation or low market demand, during the shutdown.

After the shutdown was lifted, RMG and textiles, leather, non-leather footwear and fashion industries faced more work order cancellation or low market demand, unlike the other firms. Agribusiness, health, and food and beverage firms reported lowest workorder revocation and they were the large group that faced no major concern.

Out of the 63 firms, 9.5 percent are facing financial constraints in the post-shutdown period compared to 3.2 percent during shutdown, as working capital was used to sustain the business through the shutdown period. A relatively higher proportion of firms in every category also faced raw material shortage, and employee mobility issue is attributable to the changes in operation status during and post shutdown, as in, those who reported these issues had ceased all activities during shutdown and restarted operation post shutdown.

Operation status and work orientation

While the post-coronavirus era may usher in the use of remote working environment, activity constraints will impede the transition. The proportion of firms which restarted operations after shutdown grants credence to the argument, as the majority of the activities conducted by these firms require hands-on labour.

The firms that had employees working from home to some degree reported meetings, planning, consultation and desk work to be advantageous to be conducted from home, and hands-on, field-level or production activities to be disadvantageous.

Out of the 63 firms, 11.1 percent are currently not in operation, 9.5 percent restarted services during shutdown, 42.9 percent restarted services after the withdrawal of shutdown and 36.5 percent never stopped their operations.

Among those who are currently in operation, 41.1 percent are operating exclusively from office or production unit.

Rent renegotiations

Renegotiations in rental contracts is a coping mechanism for the firms. Distribution of firms according to their operation status and rental arrangements shows that a more significant number of enterprises operating on own premises were not able to continue or restart operations after the withdrawal of the shutdown, relative to the proportion of firms operating on rented or leased premises.

This is the direct result of renegotiation efforts in rental arrangements. Among the 71.4 percent of firms (those operating on rented/leased premises), 24.4 percent renegotiated rent deferral, 4.4 percent renegotiated to lower rent, and 2.2 percent left the premise. An additional 4.4 percent reported that there was no need for a rental contract renegotiation.

The vast majority of firms which have not discussed or initiated renegotiation reported unavailability of the owner, lack of a direct communication channel between owner and tenant, and verbal consideration for post-coronavirus discussion as reasons.

Also, many firms opted to not pay rent in this period without even attempting to renegotiate.

Employment status

Compared to the same months of 2019, the observed capacity of operations was below 50 percent for all categories. In the May survey, firms across all categories expected a higher capacity of operations in June, but only firms in category 2 were able to reach and exceed their expected capacity.

The number of employees who got their salary in April is lower than those who got their salary in January this year. Apart from firms in category 2, other firms have paid salaries to an even lower number of employees on average in May. Layoffs and deferral of salary payments are the primary sources of this fall.

As for salary reduction, firms are less willing to reduce salaries as lay-offs are perceived to be a less costly alternative. According to the responses in May survey, expected salary reduction in July-December period ranged from 0-18 percent on average.

However, in the June survey, only the RMG, leather, non-leather footwear and fashion sector reported expecting a salary reduction, which would be 25 percent maximum.

Perception of shutdown measures

Despite the adverse effects of lockdown , 42.9 percent of firms are in favour of prolonging it. Some have even suggested imposing curfews to curb the transmission of Covid-19.

Among those who are in favour of the lockdown, 60 percent consider a district-wise lockdown to be the ideal spatial coverage, and 37 percent consider 30 days to be the ideal timeframe. However, one-fifth of firms in favour of lockdowns specified no timescale.

Also, only 9.52 percent of firms reported receiving health guidelines in some form. Guidelines were received from the IEDCR, the Department of Inspection for Factories and Establishments or the Civil Surgeon Office.

Status of finance

After the declaration of stimulus packages by the government, we found that almost 40 percent of firms were looking forward to take loans. But, 47.6 percent of firms reported not taking any initiative, partly because there is no need for financial assistance and partly because they are ineligible for these loans. Only 3.2 percent of firms have been able to avail the stimulus package loans.

Lack of coordination and guidelines exchanged between the Bangladesh Bank and the commercial banks, along with structural hurdles, were reported to be the primary reasons behind the low loan sanction rate.

As for loans that were previously taken by the firms, the debt to banks has increased almost by 50 percent  due to non-repayment of installments. About 10 percent were able to renegotiate the details of repayment not to have their debt rise.

Apart from bank loans, 77 percent of firms had some form of due (either payables only, or both receivables and payables). Almost half of these firms were able to reduce their due after the shutdown was lifted.

Suggestions

With adversities being faced by firms across activity, product and service space, it is important to facilitate strategies to recuperate the economy. A few suggestions are outlined below.

1. With the developed countries on their way towards recovery from the pandemic, it is essential to ensure that the cancelled workorders be reinstated, and dues are paid. While the "Pay-Up" movement has gained traction on social media to mitigate some of the losses in the RMG sector, the government initiative to ensure the said situation is required for further improvements.

The ripple-effect of the pandemic streaming through forward and backward linkages between industries can be mitigated by coordinated multi-governmental efforts in ensuring production, distribution and payment of imports and exports. Relaxation of import or export duties and customs formalities may propagate a faster recovery.

2. A temporary industry-zone centric transportation system can be set up to ensure safe movement of employees from residence to office (especially in Dhaka, Gazipur, Narayanganj and Chattogram). A proportion of private buses, allocated according to small industry zones, can be formed where part of the fare comes from the employees availing the service, a matching fee comes from enterprises and the rest is subsidised by the government. Only the health sector had a similar system during the "general holidays" in Dhaka.

3. Investment in IT infrastructure development through government mandates and subsidies may help in allowing some firms to transition to a remote working environment, the facilitation of which may avoid the designation of corporate rental arrangements for SMEs.

However, it is dependent upon clear and informed guidelines for doing business under such a new system. Many governmental services, which are yet to be made available over the internet/telecommunication network (i.e. income tax filing), must be facilitated through IT adoption.

4. A platform may be created to facilitate arbitration of conflicts arising in the rental/employment contract breaches. It is necessary to ensure the rights of both owners and tenants (for rental contract disputes), and between employer and employees (for employment contract disputes). At least the former must be attempted considering it to be relatively easier.

Mutasim Billah Mubde is Senior Research Associate at Economic Research Group.

Sarah Muniyat is Junior Research Associate at Economic Research Group.