LightCastle Partners releases key findings and webinar panel analysis as a follow-up to the recently published Business Confidence Index 2019-20
LightCastle Partners virtually launched the third edition of their annual flagship publication LightCastle Business Confidence Index (BCI) 2019-20 on July 23.
This year's BCI aimed at gauging the business sentiments of 59 private sector leaders (CXO members) across more than 20 industries, which have a notable contribution to Bangladesh's economy.
The report launching webinar was hosted by Ivdad Ahmed Khan Mojlish, managing director of the LightCastle Partners.
Meanwhile, Zahedul Amin, director of the Finance, Strategy and Consulting Services of LightCastle Partners, delivered the keynote, highlighting major findings from the study.
Bijon Islam, CEO of the LightCastle Partners, moderated a high-powered panel discussion featuring esteemed personnel spanning both the public and private sectors.
The Business Standard was the media partner, Youth Policy Exchange was the knowledge partner, and Youth Policy Forum served as the outreach partner of the event.
As a follow-up of the report, the private firm has released a summary of key report findings and the panel analysis.
Summary of key report findings
The BCI report found this year's business confidence to be critically low, -19.27, influenced largely by the pandemic-induced uncertainties and the fragile state of the financial sector even before the global crisis.
The previous editions of the report saw the private sector confidence at +43 (2018) and +39 (2017) respectively. The index is determined on a scale of -100 to +100 using Harmonised Expectation Indicator (HEI).
Key problem areas at a macro level were the diminishing export receipts and reduced foreign remittances – the two fundamentals in which the nation's economy is dependent upon. At a meso-level, depleted demand, curtailed capacity and inadequate infrastructure were highlighted as the major bottlenecks.
Based on these factors, 80 percent of C-suite members surveyed believe that the performance of the economy would deteriorate in the coming six months.
Commenting on the matter, keynote speaker of the event Zahedul Amin said, "Low debt to GDP ratio and forex reserves will act as a cushion against the current economic shock."
He also emphasised the importance of diversification of export basket to reduce dependency on RMG and considering deferment of LDC graduation in 2024 in order to revive the economic wheel.
Almost 40 percent of the CXO members responded that they are in the process of employee layoff, with the inclination more prominent in manufacturing sectors, such as leather and footwear, and RMG and textile.
Furthermore, one in every three respondents expects lower sales in the coming months. Employment, however, is expected to increase in technology-driven industries such as ITES, digital advertising and, E-platforms.
The study also highlighted the status of the financial sector in accordance with the rising NPLs, low private sector credit growth, high interest rates on government savings schemes and the brunt from the potential wave of defaults that need to be borne by the commercial banks deriving from the Covid-19 stimulus packages.
The top three industries to hold the most promise were found to be the pharmaceuticals sector, agriculture and agro-processing sector, and the IT and ITES (Information Technology Enabled Services) sectors, owing to the structural and competitive strengths of these industries and alignment with anticipated changes in consumer lifestyle.
The selection of these top three sectors remains unchanged since the 2017-18 BCI.
Remarkable gains were made by the money transfer network sector (encompassing fintech, DFS, and MFS), and the e-Commerce and e-Services sectors, which appeared among the most promising sectors in the BCI for the first time in this edition. These sectors represented their intrinsic growth potential, which is buoyed, no doubt, by their emerging importance in a post-pandemic world.
Summary of panel analysis
The discussion was initiated with Masrur Reaz, chairman of Policy Exchange of Bangladesh. He elaborated on the importance of employment protection along with strengthening the Micro, Small, and Medium Enterprises (MSME) in order to revive the post-pandemic economy of the nation.
Barrister Nihad Kabir, president of Metropolitan Chamber of Commerce and Industry (MCCI), focused on the widening skill gap among the youth in Bangladesh, along with the need to create more entrepreneurs.
Dr Nasir Uddin Ahmed, former chairman of the National Board of Revenue (NBR), conveyed the difficulties faced by MSME entrepreneurs to access banking facilities and the need for the government to leverage alternative financial tools to lessen the heavy reliability on the banking sector.
Asif Ibrahim, chairman of the Chittagong Stock Exchange, touched on the need to digitise the capital market as well as the need to adopt new global RMG manufacturing practices for a sustainable economy.
The key insights from the esteemed panellists are summarised below.
Masrur Reaz, chairman of Policy Exchange
Masrur Reaz pointed out that the economic recovery post pandemic will be dependent on the number of jobs lost and the number of new employment opportunities generated in the upcoming few months.
According to the Bangladesh Institute of Development Studies (BIDS), 16 million jobs have been lost in Bangladesh since March 2020, which is almost 1/3rd of the total workforce.
Employment protection in Bangladesh is required in the short-term. The stimulus given to the RMG industry does cover this. However, a broader range of industries require similar incentives to retain workforce and to avoid the unemployment rate going spiral.
Bangladeshi migrant workforce took a significant hit due to the global pandemic as most of them are employed as blue-collar workers in the informal economy in GCC and Western countries.
The remittance inflow for Bangladesh was heavily impacted as these blue-collar migrant workers were the most vulnerable to the impact of economic lockdown on the Western countries and the reduced construction projects in the GCC due to depressed oil prices.
As more migrant workers are returning to their hometown due to layoffs, they can rejuvenate the rural economy through entrepreneurship, leading to further employment generation. The government of Bangladesh needs to strategise and formulate an action plan to assist the MSME in a timely manner. Regulatory burden placed on these MSMEs needs to be reduced by removing advanced VAT and facilitating access to banking.
According to Masrur Reaz, Bangladesh should not be solely focusing on producing solar power as a source of renewable energy due to its lower efficiency and high capacity requirements.
He further elaborated that the Bangladesh government should be exploring the construction of hydro energy power generation, by either developing hydro power generation plants or through purchase of hydro energy from neighbouring countries, as it is a more suitable and efficient way to meet our renewable energy capacity goal.
In his opinion, the subsidy given to the power and energy sector should be better targeted as the Bangladesh government cannot provide subsidy on a mass scale, and appropriate pricing of power and segment-based pricing should be considered.
In the short term following the Covid-19 crisis, Masrur Reaz believes that de-globalisation will be seen through either re-shoring or near-shoring.
With no Free Trade Agreements for Bangladesh at the current stage, the Bangladesh government will need to establish bilateral trade relationships and push for newer trade agreements before graduating from the Least Developed Countries (LDCs) status in order to minimise the loss of trade benefits that are currently in place.
Barrister Nihad Kabir, president of MCCI
According to Barrister Nihad Kabir, president of MCCI, Bangladesh has one of the best policies for FDI in South East Asia. However, it is neither regulated nor implemented properly.
For many of the major multinational corporations such as Unilever, Nestle, and Telenor, Bangladesh is one of the largest markets for them to operate in.
Sadly, Bangladesh has a negative image in the international arena as complexities and volatility in the tax structure make it challenging for foreign investors to plan financial investments in Bangladesh.
Additionally, the perception that doing business in Bangladesh is tough due to red-tapism and complexity of following all the rules and regulations is tedious and discouraging. FDI suffers due to the National Board of Revenue's resource limitations in making appropriate tax policies and establishing an efficient revenue collection system.
Barrister Kabir believes that implementation and regulation of policies should be given due importance like policy formulation.
He opined that the pharmaceutical sector of Bangladesh has an advantage in foreign markets as the industry can experience tax privileges due to its Least Developed Countries (LDCs) status.
Once Bangladesh formally graduates from LDC, the competitive advantage of the industry will be put to test.
For instance, the leather industry, while showing promise, unfortunately could not live up to the expectations due to lack of policy regulation. She also mentioned that the service sector, such as health and elderly care, is currently being overlooked and should be considered due to its high demand in foreign markets following the current global pandemic.
Barrister Kabir further stated that a fundamental shift in the education sector of Bangladesh is required to mitigate the skill gap of the youth. Skill development is the key to facilitating employment generation in the future, as Bangladesh requires more job creators than job seekers.
Nasir Uddin Ahmed, former chairman of NBR
According to Nasir Uddin Ahmed, the Bangladesh government should consider delving into utilising other financial tools such as the bond market.
One possibility could be to use Sovereign Bonds to borrow money from the market, similar to many other countries who have utilised this tool during macro financial crises. In his opinion, the Bangladesh government should focus on expanding the existing shallow bond market.
Using foreign exchange is a good initiative taken by the Bangladesh government, provided it is dealt with caution. Excessive foreign exchange reserve usage will disrupt the balance of payments and could lead to appreciation of Bangladeshi Taka (BDT).
Appreciation of BDT against the United States Dollar (USD) should be discouraged due to its negative impact on the remittance inflow.
Indicators, such as the World Bank's Doing Business, shows that Bangladesh is not well-off in terms of cost of doing business as it is remarkably high, and hence businesses confront much harassment.
In his experience in government offices, there are some bureaucratic challenges that need to be mitigated while a shift in mindset of the policymakers is simultaneously necessary. This change needs to happen so that the overall doing business scenario in the country improves.
Asif Ibrahim, chairman of CSE
Asif Ibrahim has stated that many of the major foreign buyers in the RMG sector have already started to reinstate orders, while several top brands have announced bankruptcy.
The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) had initially reported cancellation of $9 billion worth of orders, but about 43 percent of orders have been reinstated which amounts to $4 billion.
To him, it is imperative for Bangladesh to shift its focus on exporting more to the US market with the prolific growth of Vietnam in the RMG sector. Capturing the US market is vital for the growth of the RMG sector of Bangladesh.
Along with that, Bangladesh's RMG factories must utilise data instead of following their intuition while making business decisions. One study by PwC shows that MMF apparel is going to be the trend in the future.
However, most factories are heavily producing cotton-based fabrics. It is vital for the RMG businesses to redirect their attention to the online marketplace. They need to strategise and focus on smaller batches of production accordingly.
RMG factories need to practice lean manufacturing to reduce waste and increase productivity along with using a modular manufacturing process to help with boutique production.
Adopting the use of fintech is vital for developing the capital market in Bangladesh. The stock market had to be closed for 66 days, which was not ideal, and this could have been avoided if the market was digitised.
In Bangladesh, the base of the digitisation process can be adopted from neighbouring countries so that no fundamental shift in technology is required.
According to Asif Ibrahim, integration in SAARC has not been beneficial for Bangladesh. Joining other trading blocs such as ASEAN can rather be considered. Bangladesh should try to join ASEAN as an observing member first and then try to become a full member.
The discussion put forth the importance of not only creating policies and implementing them in an appropriate method but also to think beyond the big industries and focusing on the MSMEs.
While fundamental changes need to be brought into the banking system to better facilitate the MSMEs, re-integration of the returning blue-collar migrant workers in the Bangladesh economy cannot be neglected either.
Finally, he highlighted the need to venture out in terms of trading and not only export to the traditional markets while also having the need for better trade agreements.