NO STIMULUS WITHOUT ADEQUATE FUNDS
● Banks in pressure of lending at 9% interest when cost of fund is 11%
● Only 14.8% workers received full salaries in April despite disbursement of Tk5,000cr package funds
● 27.3% export sector workers received half or less of the gross wages in April
● 50% export-oriented factories did not pay Eid bonuses
● 63% survey respondents could not pay house rent; 39% had unpaid utility bills
● Tk3,765 worth of loans taken by each family of RMG workers during shutdown
● 3.3% workers laid off
● 5% subsidy inadequate for banks to meet high administrative costs of 9% for SME loans
● Tk20,000cr fund can cover only 4-5% of SMEs
● Tk8,000 should be distributed per household under relief package
The financial stimulus packages failed to revitalise domestic economic activities and ensure employment for workers because banks were unwilling to disburse loans to small businesses because of inadequate funds and the need to follow various conditions.
The Centre for Policy Dialogue (CPD) presented this assessment at a virtual dialogue titled "Responding to Covid-19: A Rapid Assessment of Stimulus Packages and Relief Measures," held on Tuesday.
The CPD analysis found that despite getting loans at zero percent interest rate, some garment owners had still cut jobs and did not pay full salaries in April.
On the other hand, banks were reluctant to disburse loans to small and medium enterprises (SMEs) due to liquidity pressure and high risks in recovering the loans.
CPD suggested reforming the implementation mechanism of stimulus packages and increasing the package sizes to get effective results.
"Distribution of the stimulus packages should be done in a proper way," said Dr Fahmida Khatun, executive director of CPD.
She said the government should make sure that those with real need for support from the stimulus package are the one who get it.
Even after providing the RMG sector with stimulus funds, there were job cuts and the workers are not getting full salaries, Fahmida added.
Many countries have added conditions for the institutions getting support from stimulus packages – no job cuts and no deduction of salaries. Some countries are also considering making laws in this regard.
Reforms are needed for the implementation of incentive packages, Fahimda suggested, adding weaknesses will not go away without institutional reforms, and monetary policy alone will not address institutional weaknesses.
"Otherwise, these incentives may keep us afloat for a while. But they cannot save us," she added.
The CPD executive director said that in the future, more packages should be announced for sectoral development, so appropriate designs need to be made for those.
She said there would be social and political instability if inequality increases as it will be difficult to handle the huge number of unemployed people. Therefore, incentive packages have to be designed efficiently, she suggested.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the government should strictly monitor the implementation of stimulus packages.
He said there is a chance of the money from the Tk30,000 crore stimulus package being misused.
"In case of SME loans, banks will give preference to existing clients. As a result, new borrowers will be deprived from getting loans under the stimulus package," he added.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the banking sector has been in a vulnerable situation in terms of return from assets for the past several years.
"In this situation, suspension of interest has exposed banks to more vulnerability," he said.
Banks are also under pressure of lending at a 9 percent interest rate when the cost of funds is 11 percent on average.
Amid this situation, banks are unwilling to lend to SMEs under the stimulus package, Mahbubur added.
Assessment of Tk5,000 crore package
In a survey on the implementation and implications of the Tk5,000 crore stimulus package, the CPD found that most of the loans applied for were disbursed by May 15.
However, despite timely disbursement, only 14.8 percent of interviewed workers received full salaries in April.
About 27.3 percent received 50 percent or less of the gross wages in April, while about 50 percent of the factories did not pay Eid bonuses.
According to the survey, 63 percent of the respondents mentioned they could not pay house rent, 39 percent mentioned unpaid utility bills, and 36 percent mentioned unpaid school fees.
Because of limited employment opportunities during the shutdown, spouses of 35 percent of surveyed workers were jobless. Some 43 percent workers' spouses from Gazipur did not have any income during the shutdown.
In this period, the average amount of loans taken by garment workers from various sources was about Tk3,765 per family.
About 3.3 percent of the workers reported getting laid off.
In his presentation, CPD Research Director Dr Khondaker Golam Moazzem said the major three objectives of the stimulus packages were: revitalising domestic economic activities, ensuring employment of workers, and maintaining competitiveness of the entrepreneurs.
A well-designed stimulus package is judged from a number of aspects, such as size of the stimulus package, level of usefulness of public spending – measured by "elasticity of substitution" between public and private consumption – and the level of decrease in unemployment – measured by the "unemployment multiplier."
Usually, the government provides a large portion of funding under the packages, but in Bangladesh, the packages were bank driven due to the government's financial limitations.
When banks are working as third-party agents to supply stimulus funds to the beneficiaries, it becomes difficult to achieve the main objectives of the stimulus. This is because banks will prioritise risk bearing capacity and the money will be conditional for beneficiaries.
"These challenges have already been reflected in package implementation," Moazzem said.
He added that the government announced the stimulus packages with good intentions, but the economy and employment are facing challenges due to inadequate funds.
Moreover, only domestic preparation will not help retain competitiveness of entrepreneurs. International buyers need to participate as well, he opined.
Moazzem said that a section of export-oriented RMG companies and a large section of enterprises of other export-oriented industries did not take the offered loans. It is important to explore the reasons behind this.
"Most importantly, whether not availing the facility had led to workers of those enterprises not getting wages is an issue that needs to be examined," he suggested.
Assessment of Tk20,000 crore stimulus package for SMEs
According to the Rapid Assessment Survey 2020 conducted by the CPD, 43 percent of the enterprises have experienced a "high" level of adverse impact on production.
Majority of the SMEs are largely dependent on religious festivals, cultural events and festivals for their turnover. Since the outbreak of Covid-19 and the consequent shutdown of economic activities for about two months, SMEs have missed out on several important cultural events such as the Pahela Baishakh and the Eid-ul-Fitr.
The Tk20,000 crore package had offered an opportunity for the SMEs to get the necessary working capital, but the package is still in the preparatory stages of disbursement and it is difficult to undertake a comprehensive assessment of the effectiveness of the package.
In his presentation, Moazzem said that a section of commercial banks is unwilling to sign the agreement. Banks consider the 5 percent subsidy to be inadequate in meeting their high administrative costs of over 9 percent in dealing with SME loans.
With limited human resources, banks may find it difficult to verify loan applications in a speedy manner, which will also increase the administrative pressure.
Moreover, the fund size of Tk20,000 crore is very small as it can cover only 4 to 5 percent of SMEs.
Moazzem said there was little scope for small businesses to get loans under the stimulus package. So the government should give them fiscal support to cover their losses.
Assessment of relief package
Under relief measures, the government undertook two packages – expansion of the coverage of social safety net programmes, which amounts to Tk6,859 crore, and cash assistance equivalent to Tk2,500 for a month to 50 lakh families.
The total package amounts to Tk1,250 crore.
The initiative to support vulnerable people with cash support is a welcome decision. However, the amount is inadequate for a family of four people, said CPD.
CPD in its earlier media briefing recommended that Tk8,000 per household should be distributed to a minimum of 1.70 lakh families or 1.90 lakh families at maximum for two months.
This will require Tk26,962 crores, or about 0.9 percent of the GDP, for the first scenario and Tk29,852 crore, or about 1 percent of GDP, for the second scenario.
A cash transfer of Tk26,962 crore will generate Tk1,68,514 crore worth of demand for goods and services in the economy; and in the second scenario, a cash support of Tk29,852 crore will generate Tk1,86,573 crore worth of demand for goods and services, according to its estimates.