Since banks will deliver the first two packages from their own funds, the default risk will be on them
Covid-19 is a shock of seismic proportion unprecedented in living memory. It is a combination of a health pandemic and an economic crisis that threatens to reach heights and depths never seen before. Its devastating impact at both the human and economic levels is mutually reinforcing with rising ferocity. It is both a demand and supply shock. The world has never seen the two at the same time. The design of a policy response in such an uncharted territory is a challenge that has little experience to draw from.
Such lack of tested policy packages notwithstanding, we know what needs to be dealt with.
The human suffering first. This is manifest in the loss of life and deterioration of health, loss of jobs and livelihoods. To help limit the spread of the virus, the country's citizens are under restrictions and are advised not to leave their homes. If the economic suffering is protracted, this will further hurt all, the poor most disproportionately, including through impact on nutrition, education, and indebtedness. There is no need for providing concrete evidence on the extent of human suffering. All you need is open eyes to see it and a heart soft enough to do something about it.
The second adverse impact is on production and commerce. It is now a foregone conclusion that the global economy will slip into a recession in 2020. The only question is how deep and for how long? If the virus continues to rampage longer than what is currently expected (6 months), the recession will be much deeper. The financial and corporate sectors are facing large-scale economic disruption. Unlike the GFC when the crisis propagated from the financial sector, this time it is the real economy that is the epicentre of the financial distress. Banks are likely to see huge pressures on their balance sheets as debtors default and new borrowers and depositors disappear. Businesses – big and small, formal and informal – are being hurt by the collapse in domestic and foreign demand and disruption in supply chains. With a large drop of consumer demand and impediments to transporting inputs and goods, production losses and large-scale bankruptcies are increasingly likely.
In this context, an urgent and sizable policy response was immediately needed not just to alleviate human sufferings, mitigate financial distress and keep businesses afloat but also to nourish public confidence. The Tk72,750 crore package announced by the prime minister is undoubtedly a step in the right direction. It promises to provide adequate support to small and large businesses in industry and services to tide over the disruptive stage of the pandemic with specific allocations, terms of assistance and a general indication of the modes of delivery.
There is Tk30,000 crore allocation presumably for large enterprises in industry and services and Tk20,000 crore for micro, small and medium enterprises. All these monies will be channelled through banks in the form of working capital loans at 9 percent interest rate, of which 4.5 percent and 5 percent will be borne by the government for large and MSMEs respectively. There is an additional Tk12,750 crore infusion into the Export Development Fund for pre-shipment credit finance to facilitate the production of exports prior to shipment and hopefully to promote backward linkages to benefit the deemed exporters. This will complement the Tk5,000 crore support for the directly export oriented industries announced earlier.
Since banks will deliver the first two packages from their own funds, the default risk will be on them. It will therefore be critical to make sure the known wilful defaulters do not prey on these crisis supports. As the Bangladesh Bank works out the details of the implementation modalities, special attention must be given to making sure that the subsidised loans are used to support employment and payroll.
The package lacks specifics on supporting the poor (daily wage workers, self-employed in the informal sector, migrant labour, the floating population and the poor in urban slums) directly. Targeted cash transfers, free food and OMS rice at Tk10 per kg is mentioned. In addition, housing for the homeless will be provided using funds originally collected for Mujib Borsho celebrations. These are indeed the right steps and ideas. Supporting the poorest is essential because this crisis cannot be defeated for any of us if it is not defeated for all. The size and form of the assistance and the modes of delivery need to be worked out the soonest so that we do not lose to hunger the lives we save from Covid-19.
The immediate priority is to ensure that the government has the hard currency it needs for the scaled-up health response, essential imports, and cash transfers to those unable to work, supplemented by other mechanisms for families these cannot reach. We do not yet know exactly how much all of this will cost, but we can make reasonable provisions based on the needs that are already self-evident. These point to a fiscal need of about 4-5 percent of GDP which could rise with the unfolding of the pandemic.
The total package announced already supporting largely businesses and workers employed in the same businesses constitutes 2.5 percent of GDP. Can we hope at least an equal amount, if not more, will be allocated to fund the cash and food transfers to the deprived poor in the urban and rural areas? Delivering the assistance will require beefing up the government's existing cash and food transfer programmes to include additional beneficiaries and partnering with parastatals such as, for instance, the PKSF and NGOs such as Brac who know how to reach the targeted groups.