EDEN BUILDING TO STOCK EXCHANGE

Published: 14 June 2020

Challenge of big business stimulus package

https://dailyasianage.com/news/232107/challenge-of-big-business-stimulus-package

M S Siddiqui

There is no way to tell exactly how much the economic loss from the global COVID-19 pandemic will be. Nonetheless, there is widespread agreement among economists that it will have severe negative impacts on the global economy as well as threat to human life. Economist Intelligence Unit of the International Monetary Fund or IMF on 26 March announced that the global economy is expected to contract by -2.2% in 2020. ADB said the Covid-19 pandemic could wipe out $3.02 billion off Bangladesh's $300 billion-plus economy in the worst-case scenario of a significant outbreak. The growth of GDP will come down to 4 percent from as projected growth of 8.5 percent. PM has announced a stimulus package for coronavirus effected economy for an amount of Tk 72,750 crore for different business sectors. This amount is about 2.5 percent of Bangladesh's gross domestic product (GDP). This support is set to help both local and export-oriented sectors, which are facing the odd of Covid-19. This package is meant to keep the economy moving, minimize hardship for the population, especially the more vulnerable, and preserve social stability. On March 25, 2020, the government declared the first stimulus package amounting to Tk 5,000 crore for paying salaries and allowances of workers and employees of export-oriented industries. The second stimulus package amounts to Tk 67,750 crore for the affected sectors on April 5, 2020. Thus, the total size of the stimulus packages stands at Tk 72,750 crore, The Banking sector has liquidity problem and the stimulus packages will increase the shortage of funds. To overcome the crisis of fund, Bangladesh Bank has announced a new credit refinance facility for financial institutions. As per the BB's circular issued on Sunday, the banks and non-bank financial institutions would be entitled to get fund from the central bank's refinance scheme at 4 per cent interest. BB has also undertaken quantitative easing by reducing policy rates. The Cash Reserve Ratio (CRR) has been reduced by 0.5 percentage point. This will generate an additional Tk 6,200 crore. If needed, BB is also considering reducing the CRR further and reduces other rates such as the Statutory Liquidity Ratio (SLR) and REPO given the demand for liquidity during the Covid-19 crisis.

The first announced package of Tk5,000 crore fund would be disbursed as wages to workers and employees equally for three months from April to June, according to BB guidelines. As per the guidelines, companies availing the loans under the package will have to pay back the sum within two years, or otherwise, they will be considered as defaulters. The interest-free loan will carry 2% service charge and has a repayment period of two years, including a grace period for six months from July to December this year. Out of this total amount, the packages, Tk 30,000 crore is set aside for large industries and the service sector which will be distributed by commercial banks as working capital loan. The interest rate has been fixed at 9 percent. The borrower industries and business organizations will pay 4.50 percent, while the rest amount of interest will pay by the government to banks as subsidy. Later under this large business package, the BB has also introduced a new credit refinance facility for financial institutions of Tk15,000 crore (50% of the package) as "Refinance Scheme for large industry and service sector" and its interest rate would be 4 percent, payable by the financial institutions. The Third package for micro, small and medium enterprises (MSMEs), including the cottage industries, will get Tk 20,000 crore as working capital loan at low interest rate, and the interest rate for this package set @ 9 percent of which 4 percent will be paid by the concerned industries and businesses, while the government will subsidize the remaining 5 percent. BB again offered a new revolving credit refinance facility for financial institutions of Tk10,000 crore (50% of the package) as "Re-finance Scheme for providing working capital loan/investment facilities to CMSME Sector and its interest rate would be 4 percent, payable by financial institutions. The fourth package offered from BB's Export Development Fund or EDF, which will be increased to $5 billion from $3.5 billion now to facilitate import of raw materials under back-to-back letters of credit (LC). An additional amount of Tk 12,750 crore has been allocated under the Export Development Fund (EDF) of Bangladesh Bank to facilitate raw materials imports under back-to-back Letter of Credit. The interest rate has been reduced to 2 percent from 2.73 percent. The existing EDF interest rate is 2.73 percent in line with current London Interbank Offered Rate-LIBOR + 1.5 percent. Under this fourth package, the central bank has introduced a new credit refinance facility of Tk5,000 crore as "Pre-shipment Credit Refinance Scheme" and its interest rate would be 7 percent. The export-oriented businesses were asked to submit loan application to their respective banks within May 2 to avail the benefits of the government's stimulus package. Another is Tk3,000 crore for small professional, marginal businessman etc at interest of 9 percent. Of the 9 per cent interest, the government would provide 5 per cent a subsidy and 4 per cent would be paid by the borrower. The loan defaulters will not get any money the stimulus announced by the government. The borrowers who have their debts rescheduled more than three times through a special scheme for defaulters to repay will not get the bailout funds either. The agricultural sector offered fund for the low-income people and for the farmers. The bailout package is to the tune of Tk 50.0 billion. This amount will be distributed by four state entities: Palli Shanchay Bank, Probashi Kalyan Bank, Karmasangsthan Bank and Palli Karma-Sahayak Foundation (PKSF). The PM simultaneously announced allocation of an increased amount of Tk 90 billion as a subsidy in fertiliser in the next budget as part of government strategy to minimise the impact of the deadly virus. According to reports, the government's plan is to provide farmers in various fields of the farm sector with loans at 5.0 per cent interest, as against the existing interest rate of 9.0 per cent. In addition, the central bank will give subsidy of 2.0 per cent to banks in order that they can enjoy

returns of 5.0 per cent from the lending. The refinance scheme will be composed of BB's own funds. The stimulus package is a timely and much-needed measure. But the guidelines put the onus of mobilising funds on commercial banks by stipulating that the banks will have to use their own funds to finance this component of the stimulus. Although BB has offered them half of the funds at credit to Financial institution at a subsidised interest rate. The finance under these packages are depend upon Bank- customer relationship. However, the process already started. Banks have been disbursed a large amount to the garments under the stimulus package. Now different FIs are working to formulate their own guidelines in line with central bank's directives. There is a fear that the powerful clients could eat up most of the rescue cash in collusion with their peers in another and deserving companies may not get loans. The government should also explore options for support from the international development agencies and donors. International Monetary Fund, World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, Islamic Development Bank and other agencies have enhanced their support packages during this crisis moment. Bangladesh will have to move fast since there are several countries in line to receive their support to tackle the impact of Covid-19 crisis. Bangladesh sought budget aid from some multilateral lenders, including the World Bank, the Asian Development Bank and the Asian Infrastructure Investment Bank. By this time reportedly, Bangladesh is seeking $700 million in financial backing from the International Monetary Fund after rolling out its biggest-ever stimulus package. FIs are not in fear of increase of default at the economic condition of the country. Government may consider to introduce risk/credit guarantee schemes, where governments share potential losses in case of default, are proven tools globally to address this challenge. The current package does not include any such support. Some experts are stating that BB can go for risk sharing method. It means if the money will not come back then BB will subsidized by sharing principal as like interest subsidy. Recently, the World Bank has proposed $300 million to the Bangladesh Bank as support for forming a credit guarantee scheme to speed up lending by banks in high-risk sectors, especially to SMEs, during the pandemic. Finally, the policy makers should consider developing appropriate monitoring mechanism to constantly assess, and if necessary, adjust the design and implementation mechanics of the stimulus package. This is important as the pandemic scenario is still evolving in many other countries and so will have the economic impact. The writer is a legal economist. Email: mssiddiqui2035@gmail.com