ARX Series 22 June 2020
COVID-19 Impact on Bangladesh Economy
Like in most other nations, the outbreak of COVID-19 pandemic is an unprecedented shock to the Bangladesh economy. The report explores the possible impact of the ongoing pandemic on the broad economy and major industries of the country.
Publisher: LankaBangla Asset Management Co. Ltd.Download PDF
- Global and local demand for manufactured goods, particularly in the garments sector, will affect private sector growth and government’s focus in managing the COVID-19 pandemic is expected halt public sector projects. Hence, based on the economic disruptions following the pandemic, GDP growth forecast of Bangladesh by IMF, WB and ADB has been revised downward from 7.8%-8.2% to a range of 2.0% to 3.8% for FY’20. We project export to fall by 15.4%, import to slow down by 11.8% and remittance to grow at 6.0% in FY 20.
- Fiscal stimulus worth BDT 1,029.6bn and various non fiscal stimulus has been announced to tackle the economic fallout of the coronavirus pandemic. However, efficient implementation of the fiscal stimulus will be a key challenge.
- The banking sector was already struggling prior to the COVID-19 situation from skyrocketing Non-Performing loans, declining margins in a capped interest rate regime, deteriorations in various efficiency indicators, government directed restructuring of loans, declining demand for loanable funds, etc. Now, the pandemic has put the sector into further stress.
- The funds from the stimulus package will be distributed through the banking channel; while both credit and collection risk will lie with the banks. The sector being overburdened with nonperforming assets need to mitigate credit risk before disbursing any fresh aids.
- It is high time for the country’s banking sector to develop and implement a truly digitized financial system, which would include a secured, contactless, and converged financial platform for transactions. The post pandemic banking scenario would be unquestionably different than the present and technology would play the dominant factor in creating competitiveness.
- High cost to income ratio (78%) in the banking sector with a sudden pandemic shock made the banks ripe for cost efficiency developments. Cost rationalizations and layoffs in banking sector may come up with an endeavor to increase effiency but if done in biased/ weak governance framework, it may leave the sector demoralized.
- The revenue stream of insurance industry is suffering badly due to COVID-19 pandemic. Due to COVID-19 fire and marine insurance are expected to take the biggest hit. These two components consist of around 77% of non-life insurance companies total premium income.
- The Covid-19 pandemic has completely derailed the textile industry from its growth trajectory. From Mar 2020 to May 2020, RMG exports fell by 54.8% to USD 3.7bn from USD 8.2bn over the same period of 2019. During this time, 1,150 factories reported order cancellation/suspension of USD 3.18bn which impacted around 2.28mn workers in the industry.
- The previous structural weaknesses coupled with pandemic shock has driven the textile industry into a corner and has created a “do or die” situation. The government stimulus gives the industry access to cheap financing which is not enough to address the demand and supply chain disruptions over the long run.
- Bangladesh has excess power generation capacity that results in growing capacity payments every year. Overall power capacity utilization in Bangladesh for 2018-19 was just 43%, while capacity payments to idle plants reached ~BDT 89.3bn in 2018-19. Now, the pandemic driven slowdown in economic activities is likely to further lower energy demand and worsen the excess capacity situation. Many of the power generation and distribution companies are likely to witness significant fall in their topline even with capacity payments, some will face business continuity risk from non-renewal of rental power agreements.
- Cement and Steel producers in Bangladesh made aggressive expansion over the past few years with the aim of supplying to the government for its megaprojects, meeting the rising consumer demand and exporting to neighboring countries. Now, with the advent of the Covid-19 pandemic all activities in the construction industry has come to a grinding halt. With the prospect a prolonged demand slump, broken cash cycle from high credit sales and high debt burden industry players are likely to find it impossible to survive without government assistance.
- The pharmaceutical industry is among the least effected by the pandemic disruption but the industry’s supply chain has been stretched dangerously thin. The industry imports over 97% of its raw materials; however, trade with importing countries has been severely restricted since the start of the pandemic. If this persists, drug producers may have to shift to expensive import destinations which will eat into their profit margins.
- The post-COVID-19 world will not be the same again. The new normal may come up with changed lifestyle, purchasing behavior and way of doing business through new interfaces. The post-pandemic solutions of unique problems that we are facing through this pandemic may lay the foundation for many business ideas and can shape the future of our e-commerce industry in the coming years.
LankaBangla Asset Management Company Limited ('LBAMCL') is the Wealth Management wing of LankaBangla Group. LankaBangla is leading the Capital Markets in Bangladesh for a decade with its first-hand research, high level of professional conduct and uncompromising commitment towards investors' interest. LBAMCL manages Mutual Funds, Institutional Funds, Alternative Funds and provides high-value consulting and corporate advisory services.