Govt has been rather slow in enacting reforms

With two recent studies by Sanem and the CPD showing mixed recovery trends in Bangladesh's economy where large businesses saw a good turnaround but the small ones are still suffering, economist Syed Akhtar Mahmood says implementing reforms in the country is historically a rather slow process and that has not changed during the pandemic. In an interview with The Business Standard's Masum Billah, the former Lead Private Sector Specialist in the World Bank Group opens up about enabling business environment, the unequal recovery, and business confidence. He also enlightens on the debate if a second round of stimulus package is necessary and whether Bangladesh's recovery was K-shaped or V-shaped.

Sanem's survey says Enabling Business-Environment Index (EBI) is deteriorating, which should indeed have improved considering the Covid factor. What are we doing wrong?

With the exception of one Covid-specific indicator – Management of Covid-19 Crisis – and another indicator which may have some relevance to the Covid situation (Government Support for Industry), all the indicators reflect long-standing issues which do not have anything to do with Covid-19 per se. One would have expected the government to focus more than before on improving these dimensions given the pressures created on businesses by Covid-19. Hence, it is a surprise that these indicators don't show an improvement.

However, I am not so surprised. Most of these dimensions, such as availability of skilled workers, transport quality, electricity connection and quality, are not amenable to much change in the short run. In other areas, such as the tax system and business registration, the government can improve things in the short run if it wants to.

However, historically, the government has been rather slow in enacting reforms. Even if some parts of the government are keen on faster reforms, others are not. This is a problem because most reforms require coordination between different government agencies. As I had mentioned in a recent opinion piece in TBS, a lack of coordination has traditionally been one of the weaknesses of the Bangladesh government.

Another problem is the tendency to take ad hoc decisions, using tools such as the Statutory Regulatory Orders (SROs). This is particularly true for tax related decisions. Such decisions are often made without carefully considering their likely impact on businesses.

Finally, I would say that the enabling business environment is often weakened by implementation gaps. For example, under the Duty-Drawback Scheme, exporters pay duties upfront on imported inputs with the understanding that once they show proof of having utilised the inputs, they will be reimbursed for the duties paid. Such reimbursement is often delayed for long periods of time. This causes cash flow problems, especially for small businesses. So, this is an example of weak implementation. These things have not necessarily improved during the pandemic.

Both Sanem and CPD in their reports – published in a day apart – said the smaller firms are ailing whereas the larger ones have recovered fast. Some researchers believe if NGOs could be included in stimulus disbursement, the scenario would have been different. What is your take on that?

We can see from the survey that an important reason why so many enterprises did not get the stimulus payments has to do with bank procedures. For example, of the enterprises that did not avail of the stimulus payments, 82% felt that the procedures for obtaining the loan were too lengthy, and 63% felt that they did not have adequate information or did not understand the procedures. Interestingly, a large proportion of those who availed of the loans also complained about the same things. So, while some may have overcome the problem of cumbersome bank procedures, for others it was a deal breaker.

The suggestion about including NGOs in stimulus disbursement thus makes sense because NGOs may be better able to disburse loans through simplified procedures. But their comparative advantage may be with micro and some segments of small businesses. I am not sure how well they can do with other small businesses and medium-sized businesses. It is also likely that many small businesses did not avail of the facilities because the support was in the form of a loan, even though subsidised, and they were either unable, or unwilling, to take loans. This demand side problem may not be solved by engaging NGOs.

Sanem's report also mentioned that business confidence for strong recovery jumped and worries about recovery also dropped. How do we observe this change?

It is a mixed picture. The early lifting of lockdown in Bangladesh has allowed economic activity to recover and we see this reflected in a recovery of domestic demand. But export recovery may not be sustained due to the second wave of the pandemic in the developed world.

The CPD advocated for a second round of stimulus package.Do we need a second round?

There are at least two groups of businesses which may require a second round of stimulus. First, we have the export-oriented sectors, such as RMG and leather products, that achieved reasonably good recovery after the initial, sharp drop in production and exports. However, as indicated above, representatives of these sectors are now expressing doubts about sustaining this recovery due to the second wave of the pandemic in the developed countries where their markets are.

The second group consists of SMEs that are supplying to the domestic market. These businesses are still struggling despite the recovery on domestic demand. Small and micro enterprises, and even some medium-sized enterprises, foresee difficult days ahead.

To this we must add the fact that most small and many medium enterprises have not received much support during the pandemic. For example, only 8% of small and micro enterprises and 20% of medium-sized enterprises in the Sanem survey received any stimulus during October-December 2020, compared to 40% of large enterprises. There are also significant sectoral differences in the receipt of stimulus. For example, almost 60% of RMG firms, 40% of textile firms and 30% of leather firms covered by the Sanem survey have received stimulus payments compared to 13% in light engineering, 9% in retail and 0% in restaurants. I have already mentioned some of the possible reasons why many businesses did not receive the payments.

When we put all these facts together, we begin to understand the logic behind CPD's suggestion about a second round of stimulus. But the Sanem findings also raise an important question. Will a second stimulus package really benefit the enterprises who may need these the most? There is a risk that a large number of companies may be bypassed by a second round of stimulus payments.

Do we have a V-shaped recovery? Or a K-shaped as CPD suggests?

So far, it appears to have been a K-shaped recovery and the expectations for the near future as described above point in the same direction.

According to the recent CPD presentation on the state of the economy, industrial production for large and medium industries increased by 7.7% during the July-October FY21 period, compared to 5.4% in the corresponding figure for FY20. This is a sign of good recovery which, according to the CPD, is primarily due to domestic market-oriented industries.

Some sectors are recovering well, such as agri-business and pharmaceuticals, while e-commerce has in fact benefited from Covid. Others have had a mixed record. Agriculture showed resilience in the face of Covid but its subsequent performance has been weak, to a large extent due to the floods. As mentioned before, exports recovered but that recovery will slow down at least till things become normal in the developed world. Within the garment sector, the initial recovery was slower for the smaller players.

So, in brief it looks more like a K-shaped recovery for now with some activities recovering fast or even booming, and others experiencing much slower growth.

However, I do not expect the K-shaped pattern to last long as I expect the lagging sectors or activities to start growing at faster rates within the next six months.