The main objectives of the stimulus packages were to protect economic activities from the pandemic-driven economic crisis, retain and create employment as well as ensure food security and social security
Immediately after the Covid-19 pandemic hit Bangladesh in March 2020, the government started announcing stimulus packages. The government has approved 23 stimulus packages worth Tk1,240.5 billion, or 4.44% of gross domestic product.
These packages include subsidised working capital loans for industries, subsidised credit facilities for the agriculture sector, special incentives for the export sector, direct cash subsidies for the poor, employment and other support for the people at the grassroots level, etc.
The main objectives of the stimulus packages were to protect economic activities from the pandemic-driven economic crisis, retain and create employment as well as ensure food security and social security.
According to the disbursement plan, the central part of the stimulus package will be disbursed through banking channels, both state-owned and private banks. The remaining stimulus funds have been directed to be disbursed through non-governmental organisations and specialised organisations.
Discussions on the implementation and effectiveness of the stimulus package mostly centre on how quickly the funds reach entrepreneurs – especially, the cottage, micro, small, medium enterprises (CMSMEs) – and how we may serve the enterprises in the informal sector, minimising governance failure in disbursement, etc.
However, the discussions have broadly overlooked the possibility that the Working Capital under Stimulus Package, to be disbursed through the banking channels, may not serve the purpose of such packages effectively, even if implemented fully.
Under the stimulus package, a critical program is the working capital loan facilities for large enterprises and CMSMEs. In both cases, the borrowers will receive loans at subsidised rates – large enterprises at a rate of 4.5% and MSMEs at 4%, while the general lending rate in banks is 9%. The government will pay the remaining part of the interest. A total of Tk500 billion – Tk300 billion for large enterprises and Tk200 billion for MSMEs – has been allocated for this package. No doubt this is a good initiative by the government to lessen the adverse economic impacts of Covid-19. However, can we ensure that its purpose will be served?
Let us look at some conditions of disbursing the working capital loans provided in the respective Bangladesh Bank circulars (BRPD Circular-08, dated 20 April 2020 and SMESPD Circular-01, dated 13 April 2020). According to these circulars, only those industrial or service sector enterprises that have been affected by Covid-19 will be eligible to receive the subsidised working capital loan.
There is no indication of considering the intensity of losses in deciding an enterprise's eligibility to get the loan. The circulars also note that the Guidelines on Internal Credit Risk Rating System for Banks will be applicable for enterprises seeking the loan. Thus the banks have the liberty to choose clients according to their standard rules and procedures on Know-Your-Client check.
Under the standard rules, a good client for banks is such an enterprise that can repay the loan, with interest, on time. Hence, it is very likely that banks prefer marginally-affected enterprises for working capital loans while neglecting those that are intensively affected by Covid-19.
This seems to be a rational decision for the banks that intend to minimise loan default risk. Though the Bangladesh Bank circulars have instructed the banks to give priority to clients who have incurred more losses, it is contradictory to the banks' standard practice to minimise credit risk.
Even after declaring a credit guarantee scheme for the CMSMEs, the fund disbursement for CMSMEs is still slow. Also, it is hard to monitor whether banks have disregarded the applications of severely affected entrepreneurs.
Banks are under heavy pressure from the government to disburse the stimulus funds fully. Consequently, it appears that banks are choosing clients according to their clients' ability to repay the loan, not according to the extent of loss they have incurred.
Most of our discussions on the effectiveness of the stimulus package somehow assume that all enterprises in the economy are adversely affected by Covid-19. However, this is not the case.
Many enterprises – producing goods for daily consumption, supermarkets for groceries, enterprises associated with online delivery, enterprises based on information and communication technology (ICT) – have been able to expand their businesses during Covid-19.
The extent of losses is not the same for the enterprises that have been adversely affected by the pandemic. All export-oriented enterprises are not even facing the impacts of Covid-19 to the same extent. Some enterprises have better strengths than others.
Severely affected enterprises need the subsidised credit more to continue with their operations. Ironically, there is less of a possibility that the banks will prefer such enterprises. Moreover, low-performing enterprises may not even apply for the working capital loan.
If the banks behave rationally, then there is a high possibility that the stimulus package to provide subsidised working capital loans would serve enterprises that needed it less. As the banks are under tremendous pressure from the government to disburse the working capital loan, they may look for "safe" clients to disburse the loans quickly.
Let us proceed further with our rational thinking. In that case, the next question arises, what will these marginally-affected entrepreneurs do with the loan they have taken from the stimulus fund at a subsidised rate? Why would they even take this loan if they did not face much loss during Covid-19?
They must have some way of investing this short-term – one year – loan for a quick or windfall gain. I mean that this subsidised fund allows them to invest some money in short-term deposits, which would otherwise be used as working capital. Such investment is gainful as the prevailing deposit rates on short-term fixed deposit schemes are higher than the subsidised interest rates on the working capital loans under the stimulus package.
Let us analyse the deposit situation documented in the Scheduled Banks Statistics provided by the Bangladesh Bank. During the July-September period of 2020, the number of depositors having at least Tk10 million (Tk1 crore) deposits increased by 1,453.
This information raises the question of how, within three months and during the grave crisis of Covid-19, so many newly rich people could evolve? The total number of depositors and the amount of deposits have also increased during this period.
Theoretically, it is possible that marginally-hurt entrepreneurs took low-cost credit from the stimulus package and deposited it for a windfall gain. If this is so, then we will not fully achieve the main objectives of the stimulus package. While the government has allocated a large amount of money to save the economy by providing subsidies on interest, the entrepreneurs who need them more may remain outside the benefit. Consequently, many enterprises may go out of business and this will result in employment losses.
It is not wrong to have more rich people in the economy if they earn their income legally. In the case of the stimulus package, less-affected entrepreneurs are not doing anything illegal by taking the subsidised loan. It is a "win-win" situation.
Banks win by quickly disbursing the stimulus fund at lower risks of loan default. And less affected entrepreneurs are able to make windfall gains by depositing the borrowed amount at a higher rate than the borrowing rate. Nevertheless, we need to ask ourselves, do we want to give an interest subsidy for this outcome?
We must praise the government for the timely decision to undertake various stimulus packages to protect the economy from the harmful impacts of Covid-19. However, the above analysis reveals that even the full implementation of the working capital stimulus package may not fulfill the objectives of the government.
All the possibilities discussed above need to be explored to evaluate the effectiveness of the stimulus package. Moreover, the government needs to develop alternative programs to support entrepreneurs who have been extensively affected by the pandemic. They not only need funds but also require guidance and monitoring to recover from their losses.
Nazneen Ahmed is a Senior Research Fellow at the Bangladesh Institute of Development Studies