Covid-19 has decimated economies across the world. One of the lucky few emerging unscathed, economically, is Bangladesh — the nation of 160 million which is projected to see its economy grow by nearly 4% this year. However, a careful look behind the headlines reveals that all may not be as well as the numbers portray.

In October, the International Monetary Fund (IMF) predicted that the south Asian nation would see its economy grow this year at 3.8%. That number stood out even more when compared to its much larger neighbour, India, where the IMF expects its economy to shrink by a drastic 10.2%. Not only that, Bangladesh’s per capita gross domestic product of $1888 is set to overtake India’s $1876.5, a prediction which is causing a lot of noise in the Indian media. 

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Driving growth

For the past several years, Bangladesh’s economy has been propelled by what is known as the ‘Two R’s’ approach: ready-made garments (sold predominantly to Western countries) and remittances from workers abroad. Contrary to expectations, both of these have done well so far this year. That money, in turn, has been spent on goods and services in Bangladesh, greasing the wheels of the local economy. 

The garments sector was initially hit by “an unprecedented tsunami” of orders being canceled or held up, says Rubana Huq, president of the Bangladesh Garments Manufacturers and Exporters Association, as the first wave of the coronavirus swept across the world earlier this year, and Dhaka, like many other governments, locked down the country from late March through May to rein in its spread. 

A government handout of a special loan scheme — part of a $9.9bn liquidity support it announced to pay wages to workers while assisting with working capital loans — helped keep the industry on its feet during the lockdown. It prevented the “shock reaction” among manufacturers to lay off employees, says Ashraf Ahmed, chief executive officer at Riverstone Capital, a merchant bank in Dhaka, until exports started recovering in the July-to-September quarter (and ultimately bouncing back to levels similar to the same period a year earlier).

However, a good chunk of those exports was made up of stock that had been manufactured before the lockdown, says Ms Huq. And with a second wave of the virus hitting the US and Europe in autumn, the industry is once again seeing a decline in exports, which is “troubling for the many factories which are already struggling to survive, having been affected by the first wave,” Ms Huq continues.

While the manufacturing cycle is easy to understand and trace through orders and exports, economists in the country have been left puzzled by the other big booster of economic growth — remittances.

Growing remittances

The millions of migrant Bangladeshi workers abroad, including a vast majority in the Gulf, were hit as those economies locked down (and oil prices plummeted). Yet the flow of remittances increased month on month starting in May (after a brief dip in April), and reached a record $2.6bn in July, only to adjust around $2.1bn each in September and October, according to official data. In the previous 2.5 years the monthly inflow of remittances had never exceeded $2bn. 

“This has been slightly a mystery,” says an analyst with a global development finance institution who declined to be named. Economists tracking the inflows initially assumed that workers who were returning home — at least 200,000 as per the analyst cited above — either because they had lost their jobs or to be closer to their families during the pandemic, were bringing back their savings with them. 

They put the increase in money in the formal banking channels down to a couple of factors: the normal flow of people who also ferried cash between expatriates and their families back home had been interrupted because of the lockdown, forcing workers abroad to use the formal system instead; and the success of a government scheme to encourage the use of the banking channels in the form of cashback.

Whatever may be the case, the inflow, for now, is good news for the local economy; however, it may not be enough to cushion the blow from other problems that are currently hidden. For instance, companies have received a deferral on their loans until December; as a result of which, banks will start booking any losses on the loans they have given only in January or February, the analyst cited above warned.

“The crash has been artificially delayed and some of the businesses are operating in a zombie mode,” says the analyst. “The government is hoping that, by then, other sectors will come up and help cushion the blow, but we don’t know as yet if that will happen or not.”

Then there is the problem of unemployment. At least 85% of Bangladesh’s workforce is in the informal sector — people who are rickshaw pullers or working on construction sites, salons or roadside food stalls, among others — says Fahmida Khatun, executive director of the Centre for Policy Dialogue, a nonprofit think tank in the country. With the start of the spread of Covid-19 and the subsequent lockdown, most of them lost their jobs and went back to their villages.

“Those who came to the cities for their betterment are going back to their villages to survive,” says Ms Khatun. “There is a new set of poor people,” she warns. Although there are no official estimates on how many people, some best guesses have put that number at at least 15 million, she says.

And since neither the informal workers, nor the small businesses that employ them — the segment worst hit financially — are tracked by government statisticians, it could be years before the impact of the losses incurred by those businesses and workers is seen in the economy, says Riverstone Capital's Mr Ahmed.

All of this comes at a “very crucial period” for Bangladesh, Mr Ahmed continues. The country had been clocking economic growth of, on average, close to 7% each year for the past decade, helping it push its way from the status of a less developed country into lower middle-income country, and had been working on eradicating the level of extreme poverty to under 5% in the next five years (from 7.57% now.)

“Unless we can create a lot more jobs, that target will remain very challenging,” says Mr Ahmed. “Any erosion of capital in the smallest segment puts a dent in that.”