History shows unconventional measures to ensure big spending helped the USA, Japan, Sweden and other countries to recover their economies from recession in the past
When about everyone was experiencing the global economic recession in 2018, we were lucky. But this time luck could not save us.
Like every other economy – be it big or small – we are feeling the heat of an ensuing unprecedented global economic recession as the current pandemic emergency forced us to shut down the economy, first for a week and later extended by another week.
Nobody, neither the people nor the government, was ready for this situation we are facing now. We shall have to face its fallout tomorrow even after the pandemic comes under control.
Economist Zahid Hussain stressed three Rs – relief, recovery and resiliency – to help the shutdown damaged economy jumpstart once the health risk from the coronavirus comes under control.
"It may take three weeks, four weeks. But you cannot wait. You have to make the ground ready for the economy to go back to normalcy in full gear," he said.
Like other countries, we are in the first phase carrying out a relief operation, which is fighting the spread of the coronavirus pandemic by shutting down the economy for enforcing social distancing.
"As the shutdown has been in force, immediate response must be relief, both for individuals and institutions including small and micro businesses. Stimulus package should be kept ready for these sectors so that they have money to restart business as soon as the recovery period starts," says Zahid Hussain.
Like the other nations, we have started taking preparations in our own way for economic recovery.
How big is our fight?
Belatedly, we have strengthened measures required in the first phase by enforcing social distancing and increasing the number of tests of coronavirus.
But the preparations for the recovery phase are still inadequate, say economists and businesses who are fearing a severe impact on people and the economy as consequences of the shutdown.
In the absence of effective and efficient recovery operations, the economy may enter a slump. This may cause food crisis, unemployment, liquidity crisis, transportation problems, remittance shortage, negative export position, shutdown of industries and more, they fear.
Their fear is justified and based on historical data.
When an economy is in recession, suddenly buyers of imports, particularly in developing countries, turn out to be unable to carry through on their deals, and ships stay idle. This happened in the last recession 12 years ago.
Even before the pandemic hit the world, our economy was under pressure, though not on a large scale, because of a fall in RMG export, revenue shortfall, and a decline in private sector credit growth.
The apparel industry, which accounted for 84 percent of the country's $40 billion export last year, has already faced cancellation and holding off orders worth nearly $3 billion.
Any negative impact on the industry also affects the backward linkage industries – 450 spinning mills, 850 weaving mills and 250 dyeing factories – where some 10 lakh people are employed.
Considering the situation, the government has announced a Tk5,000 crore scheme for export sector workers.
But no support is available for deemed export, domestic market-oriented industries and those in services, who too will face cash flow disruption to resume businesses.
The restaurant, transport and hospitality sectors are some of the hardest hit by social distancing. Most workers of the sectors are either being laid off or put on unpaid leave.
The major sub-sectors of the rural economy such as poultry, dairy, fishery and vegetable farming are also badly hit.
"This section of people, who helped themselves by running small business and low-paid work, are most vulnerable but are thrown out of job by the abrupt shutdown, must be given food," says Dr Ahsan H Mansur, executive director of Policy Research Institute.
"Our informal sector is orphaned. No arrangement is in place for them to automatically get assistance in time of need," economist Zahid Hussain said.
For the rural vulnerable people, the government has programmes like VGD, VGF, and Food for Work. There is no such scheme for urban informal sector people, he pointed out.
Referring to the refinancing scheme announced for the export sectors, he said domestic market-based industries are more vulnerable to such shocks, but nothing is there for them.
Economist Ahsan H Mansur thinks house rent is the number one cost burden for low income people at this moment. The government needs to make an announcement immediately asking house-owners to cut rents to half, he suggested.
House rent is a burden also for small businesses like grocery shops and barber shops. Most of them will certainly default on paying house rent while trying to run life and businesses afresh, said Mansur, also a former senior official of the IMF.
"If they can save on food and house rent, they will retain some of their purchasing capacity. Otherwise domestic demand will dwindle, people will not buy clothes for Pahela Baishakh or Eid. Then lakhs of people – small and medium entrepreneurs, dressmakers, sellers, workers – will be left without any support, and our economy will plunge into a prolonged slowdown," warns the economist.
Economy needs a big push
This is an extraordinary situation for our economy that has never experienced such a thing. An emergency situation requires desperate moves. A conventional and usual approach will not work in such a situation.
"You have to forget orthodox economic measures for now. The budget deficit has to be within 7 percent or 5 percent – forget about all these things. You will get time to fix those when normalcy returns," said Zahid Hussain, providing his thoughts on what recovery plans should be laid out in the next fiscal year's budget.
Using an analogy, he said, "Our economy will need a jump-start in the recovery period."
For this, radical fiscal support is needed so the economic shock is as short-lived as possible, suggested a number of economists.
Dr Selim Raihan, executive director of Sanem, proposes some unusual measures such as a two-year recovery plan for the country by delaying the beginning of the 8th Five Year Plan now as he thinks a large part of it seems to be irrelevant at this stage.
In a financial recession policymakers need to do two things: get credit flowing again and prop up spending in the recovery period, writes Nobel laureate economist Paul Krugman in his authoritative book "The Return of Depression Economics".
For a jump-start of the economy, he writes, the plan should focus on sustaining and expanding government spending-sustaining by providing aid to local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.
This will ensure that people have money to spend and this will help to increase demand and factories will keep running creating more jobs.
But for our economy, large scale resource mobilisation for big spending is a major problem due to mainly low tax-GDP ratio along with other concerns such as inept bureaucracy and corrupt practices.
Economist Zahid Hussain has some suggestions in this regard.
He thinks the Annual Development Programmes need to be rationalised in view of the changed public expenditure priorities to produce some savings.
Restrictions imposed on the purchase of national savings certificate can be removed after linking the interest rates to the fixed deposit rates of comparable maturities. Concessional external financing windows must be availed as much as possible, he says.
"If there are still financing gaps, bank borrowing should be used. If this crowds out private credit, they have to turn to the lender of last resort – the Bangladesh Bank – for monetising the deficit. This may increase inflation risk, but so be it," Zahid Hussain adds.
Professor Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue, suggested re-prioritising in annual development programme and focusing now on more labour-intensive projects to create jobs. For this, midcourse correction of the current budget is needed, and the next budget should be tailored suiting the need of the time, he felt.
One thing is certain that big spending means big increases in government debt. Should the government be worried?
Global economists forbid to do so right now. Wars, disasters, epidemics and deep recessions are textbook examples for running large fiscal deficits and accumulating debt, write 40 high profile economists in an e-book published recently by the World Economic Forum.
For instance, the UK used debt financing backed by monetisation to finance World War II, increasing debt to a peak of almost 250 percent of GDP.
Our economists however say the government should not prop up spending haphazardly. It should expedite the stalled works of the mega projects to ensure quality spending and smooth supply of money into the economy.
Fiscal or monetary support?
Alongside some fiscal supports such as distributing foods and Tk5,000 crore stimulus, some monetary supports have been made available in Bangladesh.
The central bank has reduced the repo rate from 6 percent to 5.75 percent and the cash reserve ratio from 5.5 percent to 5 percent. The latter is estimated to inject about Tk6,500 crore liquidity into the banking system.
But economists are advocating for aggressive fiscal support.
"Monetary policy, as announced by the central bank to help business stay afloat, alone is not enough. It must be backed by proper fiscal policy," said Dr Salehuddin Ahmed, former governor of Bangladesh Bank.
During the last global financial crisis central banks came to the rescue, and the same happened during the euro crisis of 2011.
"But for the coronavirus crisis, monetary policy has not been very effective," argue the group of top economists in their e-Book published by the World Economic Forum.
"This time, fiscal policy should be the first to the rescue because the main shock is coming from the real economy."
Real economy concerns the flow of goods and services, compared with the monetary sector that covers the circulation of money and other documents.
Many governments have already reacted with fiscal force. The largest package of measures announced so far is in Hong Kong, amounting to 4 percent of GDP.
Italy, Spain, and the UK have all put programmes of about 1.5 percent of GDP on the table, mostly with targeted fiscal support for households and firms.
The measures include income subsidies for affected workers, tax deferrals, social security deferrals or subsidies, debt repayment holidays, and state loans or credit guarantees for companies.
They are taking big measures as history shows unconventional measures to ensure big spending helped the USA, Japan, Sweden and other countries to recover their economies from recession in the past.
In Bangladesh, the most significant fiscal response in terms of the amount of financial resources is the Tk5,000 crore – which is equivalent to 0.2 percent of fiscal 2018-19's GDP – wage support to workers in the export-oriented industries.
The standard response in a financial crisis, in view of Paul Krugman, is to put in more capital with the spirit that we will do whatever it takes to turn things around.
"If what has been done so far is not enough, do more and do something different, until credits start to flow and the real economy starts to recover.
"And once the recovery effort is well underway, it will be time to turn to a prophylactic system: reforming the system so that the crisis does not happen again."