LightCastle Covid-19 Series 2020

LightCastleCovid-19 Series2020Volume 1, Issue 1

At LightCastle, we create data-driven opportunities for growth and lasting impact. Till date, we have consulted for 130+ corporations & development partners, collaborated with 400+ SMEs & startups and supported 25+ accelerator programs across Bangladesh.

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The Covid-19 pandemic is having a major impact on the world we live in. The virus has not only wreaked havoc on our healthcare system, but has devastated the global economy. Amid the economic maelstrom, the Bangladesh economy finds itself in a precarious state, especially due to sagging apparel sales, declining remittances, soaring job losses, and falling domestic demand.

The compilation of articles provide unique vantage points for assessing the immediate impact of the pandemic, with specific strategic and policy level suggestions for averting the immediate fallout of the pandemic.

Foreword

Bangladesh Economy at the Confluence of the Global Pandemic

TABLE OF CONTENTSEconomy

Industry Thematics

Cross-cutting Thematics

01

Can Bangladesh’s Stimulus Package Stand against the impending Covid-19 Tsunami?02

Tackling Covid-19: Lessons from the Development and Public SectorInterventions

05

Development Funding in Bangladesh: Understanding and Mobilizing Foreign Aid

03

The Stimulus Package: Can it help our SMEs tackle the unprecedented crisis?13

Mobilizing CSR Funding to Tackle Covid Fallout14

Disruption in Chinese Industrial Production: A Boon or Bane for DevelopingCountries?04

Oil & Gold Price: Global Market Turned Upside Down Amidst Covid-1906

The Effect of Covid-19 on Bangladesh’s Apparel Industry07

Covid-19 Pandemic: Choppy Waters ahead for the Golden Fiber08

Withstanding the Outbreak of Covid-19 in the Footwear Industry09

Bangladesh Pharmaceutical Sector Wading through the Pandemic10

Covid-19 Pandemic: How Can Bangladeshi Startups Weather The Storm?11

Bangladesh IT and Digital Sector Tackling Covid-19 Implications12

Leveraging Innovation for Bangladesh’s Growth15

2

4

19

8

62

68

13

26

31

36

42

47

49

56

73

Impact Investing: New Frontier for Bangladesh?16 79

Covid-19: Impact on Bangladesh’s SME Landscape17 84

EconomyEconomy


The Corona Virus pandemic has been a ‘black swan’ event, particularly due to the extent and breadth of its impact. Starting in Wuhan, China, almost three months back, the virus has rapidly spread across the world in 180 plus countries infecting 351,198 and causing 13,361 deaths (as of 23rd March). The contagion effect of Covid-19 epidemic might not only bring about a health crisis, but will cause a full blown global economic crisis.

Bangladesh, till date, has remained immune from the onslaught of the Covid-19 epidemic. But reported cases are increasing steady (three deaths), mostly infected by inbound migrants. In the upcoming weeks, community level transmission might lead to manifold increase in the number of the infected. Government is trying to curtain the movement of people across the country, fearing that the pandemic might spread in remote regions with inadequate health facilities.

As an export driven economy, spearheaded by apparel export and remittances, the country has already started feeling the heat. The domestic demand is stuttering, and local companies are experiencing supply chain disruptions, as most industries are dependent on Chinese raw materials. ADB has predicted Bangladesh to lose

1.1% of GDP (USD 3 billion) in 2020 due to the fallout of the coronavirus.

The RMG sector has been suffering for the last couple of months due to supply chain disruptions. This coupled with the spread of Covid-19 pandemic in Europe and US, two major apparel markets contributing to 65% of Bangladesh’s apparel export, has further compounded the problem. The BGMEA President has claimed that global brands have already cancelled USD 1.1 billion worth of orders, till date, and the association is fearing that this trend might proliferate in the coming days. In the event of large scale order cancellation, significant number of apparel workers might become redundant, while apparel companies might fail to payback bank loans. In the worst case scenario, the value of cancelled orders might quadruple to USD 4 billion.

Majority of the migrant workers in the Middle-East and Europe are engaged in the informal sector and are usually fall under the un-skilled category. Many of these workers might experience a prolonged period of loss in wages, while some might even lose their jobs. This would result in a steep decline in incoming remittances in 2020 and beyond. Declining oil

2

Zahedul AminCo-founder and Director

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price might also dampen the economies of the GCC countries, where more than 70% of Bangladeshi migrant workers are currently employed. Global recession coupled with the tussle between Saudi Arabia and Russia on oil production might further depress oil prices and lower future remittances.

A partial lockdown of the country and declining exports might result in job losses in the formal and informal sectors. According to BBS statistics, almost 80% of the working population is engaged in the informal sector. Many can’t afford to stay at home due to inadequate financial cushion. There might be large scale redundancies in the manufacturing and service sectors in the coming days, especially in apparel, leather and the jute sectors, which are mostly export dependent.

The financial system might suffer a major jolt due to the impending financial crisis. Many companies would fail to repay their loans, which would result in higher NPLs and would contribute to a liquidity crisis. SMEs would be the hardest hit as they would be suffering from declining sales and cash flow mismatch. It would be imperative to maintain the credit line for SMEs, which would help preserve jobs across the economy.

Government’s primary goal would be to ensure the survival of the low income population, while propping up major export earners like the apparel and leather sectors. Given the already heavy budget deficit (close to 5% of GDP) and revenue shortfalls, Government might be unable to undertake a massive spending spree. However, policymakers need to take into cognizance the enormity of the upcoming challenge by instituting direct or indirect cash transfer

schemes for the low income population. Alongside, GOB would have to engage in government to government dialogues with apparel exporting countries, in an effort to protect the interest of the apparel sector. In the medium term, policy makers have to undertake a stimulus package by increasing fiscal spending and undertaking an expansionary monetary policies. Policy makers should also consider depreciating the domestic currency to help regain some lost cost competitiveness for the exporters.

This article was originally published on March 24, 2020.

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Can Bangladesh’s Stimulus Package stand against the Impending Covid-19 Tsunami?

Bangladesh PM’s speech on the 25th was widely anticipated, owing to the onslaught of the Covid-19 induced health crisis and the resulting economic maelstrom. Citizens were keen on gauging the nature of the stimulus plan, expected to be unveiled during her speech. As a resource strapped emerging economy, the government has its fiscal limitations in implementing major interventions, but the unprecedented nature of the crisis requires sweeping responses. Unfortunately, the government announced measures, to some extent, have fallen short of expectations, and implementation of some of these policies remain a practical challenge.

Before delving further into Bangladesh’s stimulus plan, it’s imperative to look into the policies announced by some other countries in the context of the global pandemic.

India

The Indian government has earmarked USD 19.6 billion as stimulus package for supporting those affected by the pandemic. The primary focus has been to back workers in the informal sectors who have experienced a steep decline in income or have lost jobs. The government plans on providing cash stipend directly to 100 million people from the low income strata, amid the

21-day lock-down initiated from this week. Alongside, the central bank is buying back treasury bills for increasing overall liquidity, popularly known as quantitative easing. The main goal remains to contain interest rates and maintain access to credit for SMEs and large corporates. India’s FM, Nirmala Sitharam, will formally announce the details of the stimulus package on 31st March.

Italy

Guiseppe Conte, Italian Prime Minister, has initiated a EUR 25 billion (USD 28 billion) stimulus package for supporting those severely impacted by the spread of the pandemic and resulting lock-down. Following measures have been undertaken:

In order to prevent the self-employed and seasonal workers such as tour guides from struggling financially, the government will be allocating each of them a payment of EUR 600 for the month of March.

For the next two months, companies are prohibited from laying off workers without “justified objective reasons”

For lower paid employees, the government

4

Dipa SultanaBusiness Analyst


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will cover 100 Euro bonuses which are to be paid by the employers directly along with their regular wages in April.

Self-employed and freelancers who have mortgages can ask to have their payments suspended considering they can prove that their incomes dropped by a third from what it was before.

In order to compensate shop owners for forced closures, the government is offering tax credits to cover 60 percent of their rent payment for the month of March.

Canada

As a response to the Covid-19 pandemic, the federal government of Canada has announced several economic measures in order to support employers and their employees. A total of CAD 82 billion in financial aid was announced including CAD 27 billion in direct payments to Canadians who require support and CAD 55 billion in tax deferrals available to all taxpayers. Some other benefits include:

The government will cover up to 10 percent of an employers’ remuneration costs for three months

For people who do not qualify for EI sickness and also do not have access to paid sick leave, the emergency care benefit will provide up to 900 CAD for up to 15 weeks.

Emergency support benefit will provide support for up to 14 weeks for people who do not qualify for EI and are unemployed.

The government is providing a GST credit top

-up, a one-time payment to be made in early May: CAD 400 for single individuals and CAD 600 for couples.

Canada Child Benefit top-up is allocating CAD 300 per child, which is also a one-time payment.

A six-month moratorium is provided on student loan payments which is also interest free.

The British Columbia is providing a one-time CAD 1000 payment to people who have lost their income due to the outbreak.

USA

In response to the Covid-19 outbreak, the US federal government has recently passed (26th March) a slew of legislation and executive orders. A few of them are mentioned below:

The president announced a waiver on interest payments on student loans during the crisis.

The government is initiating a payroll tax cut. However, this tax cut will only help people who are still receiving a pay check.

The Families First Coronavirus Response Act provides USD 500 million in food assistance for low-income pregnant women and mothers with young children.

The Families First Coronavirus Response Act is putting USD 400 million into food banks and USD 250 million into a senior nutrition program in order to address some food insecurity issues.

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Can Bangladesh’s Stimulus Package Stand against the impending Covid-19 Tsunami?

The Families First Coronavirus Response Act is suspending work requirements for the Supplemental Nutrition Assistance Program (SNAP) for the duration of the crisis.

The U.S. Department of Labor announced that they can provide unemployment benefits for temporary unemployment situations, however, the individual needs to qualify for this benefit after the verification of the cause of unemployment by the state.

Thailand

Thailand’s Deputy Prime Minister, Somkid Jatusripitak approved financial aid to help businesses and individuals affected by the virus. Some of the new measures are:

Monthly allowances of 5,000 THB (USD 153) for three months for workers who are not covered by the social security system.

For small and medium enterprises, especially tourism-related businesses, allowances worth 10 billion THB (USD 305 million) is approved.

Thailand introduces measures including support fund worth 70 billion to 100 billion THB in order to reduce risk in the debt market due to the coronavirus outbreak.

For six months (April to September), Thailand’s cabinet approved cutting the income withholding tax from 3 percent to 1.5 percent.

Philippines

The central bank of Philippines cut interest rates by 50 basis points in order to mitigate the damage to their economy caused by the

lockdown of Luzon due to the pandemic outbreak.

The government is crafting a 173-billion-peso stimulus bill with an estimation that about 65 billion pesos is needed to assist Luzon’s 7 million “no-work no-pay” workers who are out of any livelihood due to the lockdown.

How has bangladesh’s stimulus package fared?

Government’s announcement of supporting the export driven sectors, to the tune of BDT 5000 crore, is a timely move. However, the modality of disbursement has to be defined, since the primary goal for the stimulus plan is to protect jobs for the workers and not to serve the interest of the owners. Government can initiate a Government to people (G2P) process using MFS providers for directly disbursing wages to the impacted workers. Alongside, a mechanism has to be in place for selecting factories eligible for government support. Commercial banks, which are closely engaged in serving exporters, and NBR can provide necessary information pertaining to the financial health of individual companies.

Informal sector workers are the hardest hit due to the pandemic. The government has rightly identified this challenge, and the PM has pledged to distribute food supplies for up to six months for the economically vulnerable. The government will also initiate selling rice at BDT 10/kg through the VGF schemes. The government claims to have adequate food stock (17 lac MT food grain) available for distribution and market stabilization. While this might sound fantastic in theory, implementation

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of this plan remains a genuine challenge, especially given the ‘social distancing’ rule being enforced countrywide for stemming the spread of the virus. Finding the right target audience might prove to be a bottleneck and there might be instances of corruption or system loss while disbursing food items to the affected population. Government can consider engaging reliable development agencies (e.g. BRAC) for making nation-wide distribution of food items to the low income population.

Bangladeshi SMEs play a pivotal role in contributing to economic growth and employment generation. While large export driven sectors have received commitment of support from the government, SMEs are yet to receive any firm policy backing. Access to cheap credit, direct cash support for making payroll might be critical for the survival of SMEs. The central bank can also aid the financial system by increasing SME loan refinancing and instructing commercial banks to increase allocation for SME working capital loans on an urgent basis.

The healthcare allocation in our latest budget (FY2019-20) is worth BDT 294 billion, which constitutes 1.02% of GDP and 5.63% of total budget allocations. The Covid-19 scenario should ideally cause a paradigm shift in the thought process of policymakers pertaining to healthcare investments. The government should take into account the inadequacy of the current health infrastructure and resources and make hurried investments in hospitals equipped for treating coronavirus patients and other necessary resources like PPEs and ventilators.

Lastly, the government needs to chalk out a firm strategy for financing the stimulus package without causing too much disruption to the

economy. The Indian government is planning to increase excise duties on petrol and diesel, as well as imposing incomes taxes on a section of non-resident Indians for financing the stimulus plan. Our government must also find avenues for raising revenues without depending too much on our banking system. CSR funding from the private sector and soft loans from multi-lateral agencies can also be harnessed for partially financing the plan.

At end of the day, all strategies are as good as how these are getting implemented. Government should collectively engage as many stakeholders as possible, including development agencies and private sector organizations, for tackling the ramifications of this healthcare and economic tsunami that we’re currently facing.


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It has been a long time since Bangladesh has settled into the moniker of Development Surprise thanks to its high, and consistent rate of GDP growth.

Bangladesh’s commendable performance in terms of development indicators is due, in no small part to the annual fiscal spending packages and development budgets which have harbored such desirable performance.

Beginning July 1 of 2019, The government approved a BDT 2.03 trillion development budget for the same fiscal year.¹

The Annual Development Programme (ADP), which is the operational document of the Government of Bangladesh’s 5-Year Plan, includes all types of government-funded and Foreign-Aided Projects.

As part of the ADP for the fiscal year, certain allocations made by the government towards development and welfare, showed their firm stance. Rural development and institutions received BDT 151.57 billion or 7.48% ; Health, Population & Family Welfare received BDT 130.55 billion or 6.44%; Agriculture BDT 76.16 billion or 3.67%; Water Resources BDT 56.53 billion or 2.79% and Public Administration BDT 50.24 billion.¹

The foreign aid trend in Bangladesh

Net official development assistance (ODA) consists of disbursements of loans made on concessional terms (net of repayments of principal) and grants by international organisations or countries to promote economic development and growth. This includes both BIlateral and Multilateral Aid. In the past, Bangladesh was far more reliant on foreign aid than it is today.

1. Bangladesh approves over BDT 2 trillion development budget – BDNews24

FIGURE : Bangladesh – Net ODA Received as % Of Gross Capital FormationSource: Trading Economics

2006 2008 2010 2012 2014 2016 2018

%

3

4

5

6

7

8

9

Sartaz ZahirContent Writer

03

8

This apparent decline in reliance has largely been due to Bangladesh’s own proliferating industries such as RMG, Pharmaceuticals etc. that have propelled its economic growth and development. Alongside this, the increase of the size of the government’s own public expenditure has played an important explanatory role.

Bangladesh’s share of ODA as a percentage of

GDP was 3.07 percent in FY1996-97 according to the Centre for Policy Dialogue², but it is now at 1.1 percent of GNI as of World Bank data in 2018.³

Regardless of that fact, there is a significant role of ODA in how Bangladesh is tackling the achievement of Sustainable Development Goals moving forward.

A picture of multilateral and bilateral aid

Multilateral Institutions form the bulk of foreign aid that Bangladesh receives and these most often materialize in the forms of developmental projects.

The Asian Development Bank (ADB) is one of the leading institutions supporting development in Bangladesh. An overview of their financing activities is presented below

FIGURE : Comparing ADP with Net ODA / Source : Bangladesh Economic Review (2017)4

2. Role of Foreign Aid in Funding the SDGs in Bangladesh: A Governance Perspective1 – Center for Policy Dialogue

3. Net ODA received (% of GNI) – The World Bank

4. Role of foreign aid in Bangladesh – The Daily Star


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The UNDP has around 37 projects dedicated to aiding development in Bangladesh and achieving SDGs. An overview of their areas of focus and budgetary allocation is given below

The International Finance Corporation (IFC) has a dedicated portfolio of about USD 1.52 billion5 for promoting and facilitating development in Bangladesh through investing in its critical infrastructure; boosting financial inclusion; enhancing textiles competitiveness and inclusion in terms of energy access.

The World Bank Group has also contributed significantly in the development of Human Resources, Labor participation, Food security and other major areas. An overview of their lending commitments is given below

FIGURE : Cumulative Lending, Grant, and Technical Assistance Commitments / Source : ADB

FIGURE : UNDP Development Finance Delivery in Bangladesh / Source : UNDP

5. Bangladesh (IFC) – International Finance Corporation

Bangladesh: Cumulative lending, Grant, and TechnicalAssistance commitments

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36.9% $16.06M

$15.06M

% of Budget Budget - Expense Budget Expense

$14.27M

$12.44M

$12.53M

$11.99M

$690.72K

$452.85K

Eradicate poverty in all its forms and dimensions

32.8% Build resilience to shocksand crisis

28.8% Accelerate structuraltransformations

1.6% Others


Bilateral Aid has been on a steady downward decline since FY04. A likely reason behind this may be due to a lack of established trade deals between Bangladesh and other potential bilateral partners.

Additionally, the post-Rana Plaza tragedy backlash has made aid stringent and more conditional.

Graduation from Least Developed Country status in the near future and possible revocation of Generalized Scheme of Preferences(GSP) facilities may cause this trend to continue unless such deals are secured.

FIGURE : The World Bank Group’s Lending Commitments for Development Source : The World Bank

FIGURE : Bilateral & Multilateral Aid Disbursement / Source : Economic Relations Division (ERD)

Bangladesh: Commitments by Fiscal Year (in millions of dollars)*

Bilateral and Multilateral Aid Disbursement (USD Million)

0

1000

2016 2017 2018 2019 2020

2000

30002,991

1,560

1,152

720

2,236

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Mobilizing Development Funding: Challenges and Way Forward

The proper utilization of Foreign aid is crucial to not only paving the way for sustainable development for Bangladesh, but also in combating unforeseen challenges such as The Coronavirus pandemic crisis.

There has been a recent request by the Government of Bangladesh to The World Bank for USD 500 million budgetary support to help aid public expenditure and provide relief during the mandated country-wide q uarantine which has staggered business activity.6

Additionally, USD 750 million has been requested from the International Monetary Fund (IMF), USD 600 million from ADB, USD 250 million from the Asian Infrastructure Investment Bank (AIIB) and USD 150 million from the Islamic Development Bank (IDB).7

While the acquisition of these funds would be directly used as Public Expenditure for relief, general utilization of foreign ODA is constrained because of a number of reasons.

Difficulties in land acquisition slows down project implementation timeline and leads to under-utilization of foreign aid.

The existence of bureaucracy slows down project implementation because of the stakes in the project by both the GoB and the donor agency/country. This usually means that unless amenable specifications of fund usage is agreed upon, the project becomes delayed or scrapped.

Infrastructural shortcomings and slow

absorptive capacity in Bangladesh raises costs of project implementation.

According to CPD, “There is a lack of aid utilisation within the government. Those who develop expertise through experience are often transferred to other ministries. Only those officials who are in the economic cadre have remained more or less within the designated ministries.”²

Monitoring, evaluation, and auditing of projects are necessary to ensure transparency and preventing misuse or misallocation of funds.

The upskilling of local labor involved in projects is essential to completing projects on time and reaping maximum benefits.

With the emergence of modern challenges such as Covid-19, the way forward on the path to recovery will undoubtedly be paved at least partially with foreign aid. It will remain crucial that net incoming funds are therefore used efficiently, and that the environment to facilitate timely projects can securely be in place when the time comes.

This article was originally published on May 12, 2020.

6. Pandemic impact: Govt seeks USD 500m budget aid from World Bank – The Financial Express

7. Bangladesh seeks USD 2.6 billion coronavirus funds from foreign donors – BDNews24

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Disruptions in Chinese Industrial Production: A Boon or Bane for Developing Countries?

The First Industrial Revolution is known to be the point in history when economies started shifting from agriculture to industry, and it began in countries like the United Kingdom, France, and Germany. The prominent names like Bangladesh, India, Vietnam that we see today in the manufacturing map came about over the last fifty years, when most of the developing countries then had begun shifting away from the manufacturing sector to service sectors because of factors like rising costs, changing customer demands and increasing use of technology. The service sector now contributes over 70% to the GDP of those advanced economies, while the manufacturing sector is dominated by nations such as China.¹

China is considered to be a global

manufacturing powerhouse, due to its undeniable presence in all industries of the manufacturing sector. In fact, the country ranks first in output of more than 220 of approximately 500 global industrial products.² In 2018, the exports and imports of China alone accounted for 12.4% of the global trade.³ The United States, Germany, Singapore, EU are all overly dependent on imports from China.4 The first steps for the dominance that China enjoys now were taken in 1979 through major economic reforms to empower the grass-root producers, encourage FDIs and decentralize economic policymaking activities primarily.5 The reforms prompted large-scale capital investments and expeditious growth in productivity in the country, that eventually led the country to become the “factory of the world”.

Figure: Import & Export Values of the World’s Top Traders in 2018/ Source: China Power

1. Is Manufacturing Still the Main Engine of Growth in Developing Countries? – UNU WIDER

2. China becomes world leader in industrial economy scale – China Daily

3. Is China the world’s top trader? – article on the platform “China Power”; data sourced from UN Comtrade Database

4. Mapping China’s Biggest Trading Partners – Is Your Country One of Them?

5. China’s Economic Rise: History, Trends, Challenges, and Implications for the United States – A report on EveryCRSReport.com

The World’s Top Traders (2018)

Countries Import (Millions $) Export (Millions $)% of GlobalImports

% of GlobalExports

China

US

Germany

2,134,982

2,611,432

1,292,726

11.37

13.92

6.69

2,494,230

1,665,302

1,562,418

13.45

8.98

8.43

13

Mashiath KhurshidTrainee Consultant

04

Changes in factors affecting the production in China such as geopolitical crises, rising costs or necessity for skills and expertise are highly likely

to have spillover effects on other countries, creating both opportunities and threats.

Rising costs deter buyer

China gained popularity among international manufacturers by being one of the lowest labor cost countries. In recent years, China has turned its focus towards creating more value-added products rather than apparel manufacturing. This, together with the increasing living standards of the people of China and the significant brain drain that the country suffered, has raised the labor costs in the country, breaking down one of its competitive advantages. Markets in countries like Bangladesh, Vietnam, and India developed by ensuring cheaper labor. In 2018, the minimum

monthly wage in China was USD 160, while those in Indonesia, Vietnam, and Bangladesh were USD 75, USD 154 and USD 69 respectively.6 Despite being the second-largest exporter of RMG products, Bangladesh’s productivity in the garment exporting industry is approximately one-third of that of China.7 Nonetheless, China’s rising wages and lack of skilled labor due to its shift from the textile industry to more high value-added manufacturing like consumer durable and electronic items and the service-driven sectors are set to create more opportunities for low cost serving South-Asian and African countries.

Figure: Total Value of China’s Exports by Country / Source: International Monetary Fund

6. CPD Working Paper 122: Livelihood Challenges of RMG Workers – CPD

7. RMG hourly productivity still lower in BD – The Financial Express

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The Geopolitics of trade

While the impacts of geopolitics on the production in China pose a threat to some nations, it presents an opportunity to others. The US-China trade war decreased bilateral trades between the two countries while increasing product prices thus ultimately harming the consumers. China suffered USD 35 billion of export losses, which were absorbed mostly by developing countries such as Taiwan, China, and Vietnam.8 70% of the shoes sold in the US were manufactured in China and faced duties above 67%.9 These duties were taken a notch higher due to the trade war which meant that the footwear industry took a hard hit. Brands like Nike suffered negligibly compared to others, as they had already been moving their production to Vietnam.¹0 Due to the impacts of the war, more brands began to diversify their production focusing primarily on Vietnam and India. Even though opportunities for making higher-value products were guaranteed to increase for the countries, there could be new competition from China. India and Vietnam feared competing with Chinese products in other markets given the excess in supply, or worse, suffering through the dumping of cheaper Chinese products into their local markets.

Skills shifts creating new opportunities

Even though China became the first choice for buyers by providing low costs, it eventually strengthened itself in technical skills and expertise. In 2015, highly skilled technicians and workers were officially given the same value as scientists or entrepreneurs in China.¹¹ However, in recent years, companies have started to diversify their production into different countries. India has been making its name as a global manufacturer in electronics manufacturing, due to continued government initiatives and policies in this regard like the Modified Incentive Special Package Scheme (M-SIPS) or the “Digital India” initiative.¹² While Xiaomi set up its 7th manufacturing plant in India, Samsung opened the world’s largest mobile factory in the country.¹³ Other global manufacturers like Oppo and HMD Global also plan on commencing manufacturing in India due to the cheap labor and skills it has to offer. Government and private initiatives such as the “Learn and Earn” scheme by Lava, the Indian handset maker, are focusing on building the right skills and expertise in India to compete with China in this industry and garner a bigger global market share.¹4 However, China continues to invest in building and maintaining

Minimum wages of the main competitors of China in the Apparel & Textile Industry / Source: CPD

8. Trade war leaves both US and China worse off – United Nations Conference on Trade and Development

9. 70% of shoes sold in the US come from China. With new tariffs, the industry braces for a hit – CNBC

10. How Nike is Winning the U.S.–China Trade War – Investopedia

11. Producing China’s manufacturers of tomorrow – The Telegraph

12. India to be the next big Electronics Manufacturing Hub

13. Can Vietnam or India challenge China’s manufacturing leadership in global electronics industry? – techradar.com

China India Vietnam Bangladesh

$50.00

$100.00

$150.00

$200.00

$0.00

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its competitive edge through workshops and vocational training.

But what happens to industrial production when all the factors are triggered together? What spillover effect do countries like Bangladesh face when both the demand and supply connected to China dry up? The coronavirus (Covid 19) outbreak, which was first detected in Wuhan, in the Hubei Province of China on 31st December 2019, has recently been declared a pandemic. The virus has spread over 210 countries and territories and has claimed 165,174 lives already. [15] With 2,414,595 detected cases, China has been hit the hardest by the pandemic, but the health of the people isn’t the only concern for the country. It is feared that the Chinese economy could contract for the first time after 44 years of constant growth. With most of the major importers of China going into lockdown and factories in China shutting down, the industrial production of the country has taken a hit. The China Caixin Manufacturing PMI dropped from 51.1 to 40.3 by the end of February.¹6

Bangladesh’s predicament in times of the Covid-19

Bangladesh, like most developing countries dependent on the Chinese economy, has been negatively affected. In the worst-case scenario, the pandemic has the potential to wipe off USD 3.02 billion and 894,930 jobs from the economy of Bangladesh.¹7 Bangladesh has become handicapped due to shortage of supplies, travel restrictions and, slip in lead time and quality of the products reduced. Furthermore, the Chinese experts who were employed in the different industries of Bangladesh have not yet been able to return after the Lunar holidays.

Thirteen possible sectors including the leather, plastics, pharmaceuticals, and jute sectors are likely to be negatively affected the most according to a report by the Tariff Commission.¹8 The leather industry is likely to be damaged the most taking a potential loss of about BDT 30 billion, followed by the apparel and textile industry.

The RMG industry, the main driver of the economy of Bangladesh, faces a potential halt as well. China alone comprises 26.1% of the total imports of Bangladesh which includes over 40% of textile and related goods and 30% of capital machinery and spare parts for the textile and garment industry imported into the country.¹9 As a result, the prices of many accessories increased by around 50%.²0 The factory owners are also facing financial constraints as buyers continue to request payment rescheduling and hindrance in supplies push towards defaulting on L/Cs opened. Till April 13th, the total value of RMG orders lost summed approximately to around USD 3.15 billion.²¹

Companies all over the world were already diversifying out of China, especially US companies after the trade war. The recent pandemic underscored the necessity for supply diversification, and it is opined that Mexico and South Asia have the most to gain. According to a recent survey by QIMA, a popular name for countries looking to diversify away from China, is Bangladesh.²²

14. Skill India: How Lava is boosting mobile manufacturing

15. Worldometer- Coronavirus accessed on 20th April, 2020

16. China’s factory activity slumps in February to weakest reading on record, private survey shows – CNBC

17. Coronavirus stands to wipe USD 3b off Bangladesh economy – The Daily Star

18. Bangladesh export-import may be affected by coronavirus: Commercial counsellor – Prothom Alo

19. Bangladesh’s economy braces for coronavirus fallout – Dhaka Tribune

20. RMG sector faces the heat – The Daily Sun

21. Pins and needles at the time of a pandemic – The Daily Star

22. Bangladesh to benefit from coronavirus fallout: survey – The Daily Star16


Summing up and way forward

Is Bangladesh ready to handle the influx of orders? The factories of Bangladesh are already facing cancelled orders worth millions of dollars and matters are expected to become worse in the short-term. Factories have also shut down because of preventive measures or shortage of supplies. Bangladeshi factory owners are hence facing numerous obstacles of which working capital management, supply sourcing and lack of expertise rank the highest. In the long run however, because of the newfound direction of global companies towards diversifying away from China, Bangladesh is highly likely to get increased orders in different industries.

Policies and structural changes need to be made to prepare for this shift. The garment factories have been kept closed for almost a month now while competitors like Vietnam, Cambodia and Indonesia are still partially, if not fully, open. The GoB also instructed factory owners to pay off the wages of its employees by April 16th. However, 609 BGMEA factories failed to meet the deadline. Furthemore, Bangladesh continues to lose orders but some have been reinstated due to the efforts of BGMEA and GoB. Bangladesh needs to meet these orders by June and commence production for winter orders in the short run to retain its buyers. In the short term, controlled opening of the factories is necessary through strict protocols and policies.

Special interest-free funds have already been introduced to manage short-term expenses like employee wages. The government has initiated multiple stimulus packages for supporting working capital requirements, pre-shipment credit and paying salaries and wages of export-oriented industry workers. The interest

rates for borrowings from the Export Development Board have also been capped. However, the apparel industry makes up about 80% of the total exports of the country, and thus requires special attention.

The factories in Bangladesh are already over-dependent on China for fabric, chemicals, and accessories, and the huge amount imported from China cannot easily be substituted. Even though the task may not be easy in the short term, strategic alliances and trading partners need to be made to avoid such setbacks in the long run. Bangladesh also needs to incorporate lean manufacturing methods in its production as early as possible, especially to cope with the aftermath of the Covid-19. The skill and expertise of the people need to be developed further to not only reduce foreign dependence but also prepare for the advancement of technology in the manufacturing production. Finally, In the long run, Bangladesh needs to build brands of its own to ensure demands even in trying times in the future.

This article was originally published on April 21, 2020.

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Industry ThematicsIndustry Thematics

Tackling Covid-19: Lessons from the Development and Public Sector Interventions

The country’s working population in jeopardy

Covid-19 has in more than one way impacted the lives of millions in Bangladesh. The country recorded an impressive annual GDP growth rate of 7.9% in 2018; the highest in the country’s history and in South Asia for 2018 and has been delivering continuous growth over the last

decade propelled by a growing middle-income population and a steady rise in per capita income. However, the vast majority of the population is still employed in the informal sector. As per Bangladesh Bureau of Statistics’ Labor Force Survey 2016, 86.2% of employees aged 15 or older belong to the informal sector, which also includes the farming sector.

Due to the pandemic, Bangladesh is predicted to lose 894,930 jobs along with USD 3.021 Billion of GDP growth. [1]

Source: Bangladesh Labor Force Survey 2016, BBS

Share of Employed Population aged 15 or older, by occupation,sex and area

1. ADB. (2020). The Economic Impact of the Covid-19 Outbreak on Developing Asia

Rageeb KibriaPrincipal Business Consultant


05

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Metro cities such as Dhaka and Chittagong host the largest number of inward migrant workers and the country is yet to decentralize its economic activities beyond its major cities. Given the quarantine and lockdown in these cities, the working class has been hit the hardest with loss of jobs and earnings. In the first week of the quarantine alone, based on cellphone movement data by National Telecom Monitoring Centre (NTMC), it is estimated that 10 million people have left Dhaka city to return to their districts and majority of these people are from the working-class population.

Global guidelines on tackling Covid-19 have been highly thorough

According to ILO, globally about 25 million could become unemployed, along with a loss of workers’ income as much as USD 3.4 trillion as a consequence of Covid-19 pandemic.² The outbreak will be affecting economic, social and developmental aspects of mankind along with forming grave health conditions globally. As the countries are being locked down, the entire world economy is coming to a halt. With the outbreak, the questionable policies of the labor market have been brought under the spotlight. Majority of the piece rate workers, day laborers and informal traders are usually not subject to unemployment benefits, or paid sick leaves.³

In order to prevent the ongoing economic downturn from becoming a continued global recession, formative fiscal and monetary policies are essential. As the governments are unitedly working to flatten the curve of people infected by the Covid-19, crucial measures such as income support, wage subsidies and temporary layoff

grants are needed to be implemented for piece workers, self-employed people and part-time or temporary workers who may not qualify for unemployment benefits or health insurance, which are being provided by developed nations across the world. In Bangladesh, the situation is not as easy as there’s rarely any unemployment benefits for the labor market.

During previous crises such as the floods of 1988,1998 and 2007, the government took several initiatives to support the bottom of the pyramid population and similar measures in supporting the working class should be taken in a post pandemic economy. The International labour organization has set some standards for policy formation to be adopted by representatives of governments, workers’ and employers’ organizations in order to achieve a sustained and equitable recovery.

Policy responses should focus on two immediate goals – health protection measures and economic support on both the demand and supply-side. For Bangladesh this means supporting the medical industry with proper equipment, infrastructure and sufficient funding to prop up the healthcare system. Within the government, the Ministry of Health and Family Welfare (MOHFW) is responsible for health and population policies. It implements health service programs through the Directorate General of Health Services (DGHS) and the Directorate General of Family Planning (DGFP).

Building confidence through trust and dialogue is crucial in making policy measures effective. Creating transparency and leveraging industry forums would be key to ensuring industry support needs are met. Currently, the

2. ILO. (2020). Covid-19 has exposed the fragility of our economies

3. ILO. (2020). How will Covid-19 affect the world of work?


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government is working with the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) to ensure RMG industry receives facilitative support as the livelihood of 3.5 million workers depend on the industry growth being stagnant.

Protect workers in the workplace to minimize the direct effects of the coronavirus, in line with WHO recommendations and guidance. The government is yet to give directives to the major manufacturing industries about stopping work in fear of an economic recession, but have guided them to follow proper medical and safety standards in order to remain functional. However, no monitoring plan has been initiated as of yet.

Building confidence through trust and dialogue is crucial in making policy measures effective. Creating transparency and leveraging industry forums would be key to ensuring industry support needs are met. Currently, the government is working with the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) to ensure RMG industry receives facilitative support as the livelihood of 3.5 million workers depend on the industry growth being stagnant.

Protect workers in the workplace to minimize the direct effects of the coronavirus, in line with WHO recommendations and guidance. The government is yet to give directives to the major manufacturing industries about stopping work in fear of an economic recession, but have guided them to follow proper medical and safety standards in order to remain functional. However, no monitoring plan has been initiated as of yet.

Lessons on policy response from peer economies

India’s Ayushman Bharat is being poised to help the working class

India’s flagship insurance/assurance scheme, Ayushman Bharat has been launched by the government with the vision of universal healthcare, which is to include the 40 percent “missing middle” who are neither covered by private insurance nor by the government in order to cover expenses related to Covid-19.4 The government currently has over 430 schemes that use direct benefits transfer (DBT), which is designed to target groups such as pensioners, bereaved and unemployed people.

The government of Bangladesh with the World Food Programme (WFP) had previously provided cash support as a precautionary measure with the UN, which had yielded favorable results. In 2015, the government provided BDT 4,500 taka (USD 53.42) to 25,000 people in Kurigram district via their mobile phones, under the WFP “forecast-based financing” project.5 Those than received funding bought food, rented a boat, and took their belongings to a government shelter on a nearby island before the flood hit dangerous levels. Similar support systems can be developed in response to Covid-19 as cash given support would allow low-income workers to sustain through the lockdown.

Vietnam’s preparedness should be an example to follow

Vietnam’s Ministry of Health confirmed a total case of 194 of Covid-19, as of March 30. Furthermore, the Ministry of labor, War Invalids

4. World Economic Forum. (2020). Covid-19: How India’s government and businesses can lead

5. World Economic Forum. (2019). Bangladesh tries new way to aid flood-hit families: cash up front


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and Social Affairs (MOLISA) has proposed the government to issue a USD 854 million bailout package in order to alleviate the impact of Covid-19. Subsequently, more than 10 Vietnamese are set to launch an initial package worth 285 trillion VND (USD 12.3 billion) to support Vietnamese enterprises during the current coronavirus pandemic.6 Additionally, Vietnam’s military is expanding quarantine facilities for up to 60,000 people as thousands of Vietnamese return home from virus hit countries. After a successful pilot and approval from the World Health Organization (WHO), Vietnam will be producing 10,000 Covid-19 test kits daily. Moreover, the country set to officially export 7,500 Covid-19 test kits to Ukraine and Finland.7

The Bangladeshi government needs to highlight the working class as the primary beneficiary of any reformative fiscal or monetary policies it proposes in the coming months. This can be done through supporting the employment generating industries or providing basic amenities needs of this working class.

West Africa’s Ebola outbreak shows stark similarities with Covid-19

The Ebola outbreak in West Africa in between 2013-2016 has left a resource-poor country with a large low-income population similar to Bangladesh, Guinea, Liberia and Sierra Leone were the three major hotspots of contamination and resulted in thousands of death. Due to this, Sierra Leone is in a well-experienced position to deal Covid-19 pandemic. The country’s eastern region was the first to be affected by Ebola in 2014 causing more than 4,000 deaths in the country. According to the Disaster Emergency Committee, food shortages in a time of aggressive quarantines were affecting social

order and 4 November 2014, media reported that thousands had violated quarantine in search of food in the town of Kenema.

During the Ebola outbreak, Sierra Leone implemented a “less touching” policy,8 which limited the frequency of physical contact between people.9 The policy was implemented through ensuring community wide sign posting and PSAs (public service announcements). At present, the health officials are applying this policy in order to prevent the Covid-19 pandemic. They are also adapting targeted quarantining by selecting and subsequently quarantining individuals who are at high risk for an infection without testing the person for the presence of the virus. Back in 2014, there was a massive effort to train volunteers and health workers, sponsored by United States Agency for International Development (USAID) to implement contact tracking and surveillance. According to WHO reports, 25,926 contacts from Guinea, 35,183 from Liberia and 104,454 from Sierra Leone were listed as of 23 November 2014.¹0 As the epidemic worsened, most schools were shut down and UNICEF and other NGO partners build strict hygiene protocols, that were implemented post quarantine. They taught thousands of teachers and administrators to work out hygiene guidelines. Installing hand-washing stations and distributing millions of bars of soap and chlorine and plans for taking the temperature of children and staff at the school gate were established in order to stop the spread to children. Local health workers were one of the group than was most affected during the outbreak due to lack of protective gear and awareness of this new disease.

In Bangladesh, reducing spread of misinformation and calming social tension

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6. The Asset. (2020). Vietnam banks to offer USD 12.3 billion coronavirus support package

7. Vietnam Briefing. (2020). Vietnam Business Operations and the Coronavirus: Updates

8. World Economic Forum. (2020). This is how Sierra Leone is preparing for a potential coronavirus outbreak

9. (UNICEF). (2014). Ebola in Sierra Leone – the ‘don’t touch!’ rule

10. (WHO). (2014). Ebola Response Roadmap Situation Report


through proper advocacy would be crucial in ensuring quarantine and social distancing is maintained strictly. The first case of Ebola in Sierra Leone resulted from a ‘tribal healer’ who was treating Ebola patients and ignoring precautions, subsequently contracting the virus herself. Bangladesh needs to prioritize rural families as the main starting point of messaging interventions before moving on to urban areas. Training health workers and ensuring their protection should also given the utmost precedence to prevent the spread of the virus.

Bangladesh has instituted helpful initiatives through calamities over the last few decades

In response to floods of unprecedented nature, Bangladesh government placed a request to the Asian Development Bank (ADB) for rehabilitation assistance and formulated a project named ‘The Flood Damage Rehabilitation Project’ in the year 1998. The total cost of the project was estimated to be at USD 130 million, of which, USD 104 million was to be financed by ADB and the rest USD 26 million equivalent of the Government’s counterpart funds.¹¹ Majority of this funding was directed towards building infrastructure and creating employment for those in need. Similarly, the rehabilitation plans and budgeting post coronavirus economy will need to be directed towards the development and employment generation activities.

In 2002, aiming at ensuring poverty reduction exclusively targeting the country’s ultra-poor women, the government of Bangladesh undertook Vulnerable Group Development (VGD) Programme with the assistance of the World Food Programmed (WFP). Since the food price crisis in 2008, Bangladesh government has

sharpened up its food distribution mechanisms. A system is in place set by the government where they would be storing procured gains and would release staples in a calculated manner in order to bring prices down, and ensure the accessibility to the poor.¹² Access to food would become an increasing challenge with the spread of the virus and post quarantine, industries will require transformative policies to bring them up again

Following the 2015 Earthquake in Nepal, the government of Bangladesh established a National Emergency Operation Centre (NEOC) in order to effectively respond to disastrous situations, of the unanticipated events. In 2017, 22 districts of Bangladesh were affected by flooding because of monsoon rains and rain waters from the Indian states in the north of the country. In response, Bangladesh Government had allocated USD 0.15 million and 3,607 MT of rice to the flood affected area.¹³

As of 2017, Bangladesh has not experienced any “monga” (cyclical phenomenon of poverty and hunger) since 2008 owing to the successful implementation of massive social safety-net programmes (SSNPs) including Test Relief (TR), Food for Work (FFW), Works for Taka (Kabita), Vulnerable Group Development (VGD), Vulnerable Group Feeding (VGF), employment generations, providing shelters among other various assistance and allowances. These initiatives serve as a strong blueprint for developing a post Covid-19 support system for the working class and given that Bangladesh is in a much better economic situation compared to a couple of years ago, the country is much more equipped to tackle hunger and poverty challenges.

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11. ADB. (2003). Flood Damage Rehabilitation Project in Bangladesh

12. Dhaka Tribune. (2013). The long shadow of famine

13. Relief Web. (2019). Bangladesh Flood Response 2019: Situation Update, as of 24 July 2019 – Bangladesh


Two basic amenities for surviving -food and money – will be the most challenging needs to address and should be the main priority when formulating policies and interventions in a post Covid-19 economy. In order to tackle potential challenges involving the crucial population segment it is imperative for the government and relevant stakeholder bodies to follow a few major directives:

It is important for the government to mobilize the existing civil society and development organizations, along with its funding commitments, to tackle the basic challenges of food and healthcare commodities shortage. Supporting the medical infrastructure will also be crucial to ensure the country evades recurring cases that may inevitably result in further economic losses. A few great examples through the fray have already emerged with community driven initiatives such as Bidyanonodo and Feed a Family among others that can be used as base examples of community initiatives. Similarly, BRAC pro-poor urban development project is working in partnership with the government, private sector, professional and other non-government organizations in developing and effectively implementing pro-poor policies, which aims to help the ultra-poor. Through this project, 12 community information resource centers were established, 1,926 people received livelihood support and 2,277 people received education grants. Furthermore, 300 children living on the streets of Dhaka received services at their drop-in centers. Additionally, USD 0.4 million was leveraged through partnerships and collaboration and 5,500 houses were rebuilt and relief coordination and supports were provided in slums with the help of local community organizations.¹4 These initiatives provide an

excellent blue-print for the government to utilize in the coming months to tackle the Covid-19 fallout.

The government and relevant stakeholders will need to prioritize the sectors that create the most employment for the working class through the informal sector. Although bailout monetary packages are necessary for some large industries, it’s important to prioritize systematic challenges before using financial easing as the first solution. i.e. ensuring proper wage rates in manufacturing industries, breaking up and strictly controlling syndication of commodities to protect agriculture sector, ensuring the first value chain players within the farming sector receives sufficient support and guaranteed pricing are some of the basic examples to follow.

Lastly, any monetary and fiscal policies such as regulating interest rates or quantitative easing to be implemented in the post pandemic economy has to focus on ensuring the financial sector, including micro-finance institutions and digital financial services – which the working class uses heavily – are able to support the needs of the working class. Whether through ensuring a new work-for-cash model or through zero-interest lending, the government needs to ensure the poverty metrices are maintained and at the end of the day all low-income families are able to sustain.

In the end, given the widespread historic evidence from similar pandemics, what is only easy to predict is the uncertainty of the situations to come. In times such as this, it is imperative that the government and development sector are taking proactive

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14. BRAC. (2018). Pro-poor urban development – BRAC Annual Report 2018


measures instead of reactive ones in order to tackle the challenges head-on. Economic implications of a post Covid-19 world are currently hard to gauge according to most reporting bodies. However, from a health perspective, it is indubitably necessary to prioritize health and awareness of low income communities in order to stop the spread and ensure social stability in the coming months.


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Oil & Gold Price: Global Market turned Upside Down Amidst Covid-19

While most countries have enforced economic lockdowns as an effective measure to slow Covid-19 spread, the global oil economy has been hit hard as demands dried up. The price of crude oil was already volatile since the begin-ning of 2020 due to the price war between Saudi Arabia and Russia and then the Covid-19 pandemic emerged as the final nail in the coffin.

In the pre-Covid-19 world, the global oil demand was nearly 100 million barrels per day which have significantly dropped during the outbreak.¹ According to the International Energy Agency, the global oil demand is projected to fall by 9.3 million barrels per day year-on-year in 2020, erasing a decade’s worth of growth.²

Transportation, petrochemicals, and aviation sectors account for the major portion of crude oil demands but all of these sectors are currently shut down. With people maintaining self-isolation, shuttered factories, and restricted

flights, oil demands are likely to remain depressed in the near future. Subsequently, this opens a window of opportunity for the countries dependent on imported oil.

FIGURE: Distribution of oil demand by sector / Source: Statista

1. World Oil Review 2019 – Eni

2. Oil Market Report – April 2020 – International Energy Agency

Distribution of Oil Demand in OECD Countries by Sector(Percentage)

Road transportation

Other industry

Petrochemicals

Residential &agricultural use

Aviation

Marine bunkers

Electricity generation

Rail & domesticwaterways

50.11

11.21

14.38

9.09

7.82

3.38

2.33

1.69

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Ishrat Jahan HolyContent Writer

06

The benchmark of Europe and the rest of the world Brent Crude fell significantly. In the circumstances, oil producers have agreed to cut production by 9.7 million barrels per day but it will still leave the market with a huge surplus of oil and depressed demands.³

Asia to benefit from plummeting oil prices

Due to Asia’s industrial transformation backed

by developed countries such as China, South Korea, Japan, Taiwan, etc., the region has been the frontrunner surpassing America since 2015 in terms of oil consumption. Most of these countries are highly import-reliant on the oil exporting countries including Saudi Arabia, Russia, Kuwait, Iraq etc. to cover local demands. According to the World Oil Review 2019, Asia-Pacific countries consume 35 percent of the total global oil demand.¹

Deepening Oil-Price crisis in global market

Oil prices started plunging since 8th March due to Russia-Saudi Arabia oil price war and had significantly dropped throughout April, making it the darkest month for the global oil market.

Making history, the price of a barrel of West Texas Intermediate (WTI), the benchmark of US oil dipped into negative territory. Meanwhile, the international oil price has drastically fallen by 40 percent to USD 20 per barrel of crude oil in April.²

FIGURE: Crude oil price trend in 2020 (USD per barrel) / Statista

3. Oil crash explained: How are negative oil prices even possible? – World Economic Forum

Crude Oil Price Trend in 2020 (USD per Barrel)

27


Falling oil prices have prompted many countries including in Asia-Pacific such as China, Japan, South Korea and India to take advantage by buying large amounts of crude oil to refill the Strategic Petroleum Reserve. However, as a middle-income country with a shortage of storage, Bangladesh remains in an unfavorable position to enjoy the benefits of decreasing oil prices.

Impact on Bangladesh oil market

As of 2018, Bangladesh consumes 125,000 barrels per day of oil, accounting for around 0.1 percent of the world’s total consumption.¹ The transport sector is the largest consumer of imported oil, followed by electricity production, agriculture, and the industrial sector. Owing to a stable economic growth, the number of factories and vehicles have increased in Bangladesh over the years. Consequently, the oil consumption in Bangladesh has increased gradually over the last decade showing an increasing demand trend.

FIGURE: World oil consumption by region (percentage) / Source: World Oil Review 2019

World Oil Consumption by Region (Percentage)

FIGURE: Oil consumption in Bangladesh (thousand barrels/day) / Source: World Oil Review 2019

80

113 114 118 125

Oil consumption trends in Bangladesh(Thousand Barrels/day)

2010 2015 2016 2017 2018

Asia-Pacific

North America

Europe

Central South America

Middle East

Africa

Russia & Central Asia

35%

23%

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According to Bangladesh Petroleum Corporation (BPC), the usual import price of diesel was around USD 73 per barrel which has dropped to USD 38.5 per barrel in April.4 Meanwhile, the demand for petroleum products has also dropped by 33 percent in Bangladesh due to transport shutdowns. Bangladesh has only one way to take advantage of the price crash: by purchasing and storing extra oil for future usage.

BPC has a storage capacity of around 1.3 million metric tonnes of oil.4 The lack of a large storage system is obstructing the way of reaping benefits from the global oil market collapse. The oil storage capacity of Bangladesh is inadequate in comparison to regional contemporaries.

Sharp rise in gold prices amidst pandemic

While the oil prices are falling to a new low, gold prices are soaring up to new heights amidst the Covid-19 outbreak. The rising gold prices will be favoring the countries with strong bullion

markets as there will be an increase in borrow against gold. India has projected its gold loans to grow 10-15 percent in 2020.5

Such impact was not observed in Bangladesh as the gold loan bank culture is not so popular in the country. However, the higher gold prices

FIGURE: Oil storage capacity of regional contemporaries of Bangladesh

FIGURE: Gold prices in Bangladesh (BDT per ounce) / Source: Bullion Rates

4. Bangladesh failing to cash in on cheap oil price due to lack of storage – The Business Standard

5. Indians may borrow more against gold to tide over financial crisis – Livemint

6. Forex reserve reaches USD 33b on lower import – The Financial Express

39,000 36,000

9,500

1806,000

5 year gold prices in Bangladeshi takas (price per ounce)

Oil storage capacity of regional contemporaries of Bangladesh(Thousand barrels)

India Philippines Bangladesh Pakistan Nepal

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in the global market have influenced the country’s Foreign Exchange (Forex) reserves to reach USD 33 billion in April from USD 32.5 billion in March.6 Alongside this, Bangladesh has also witnessed historic gold price hikes during the pandemic.

Reaching a new high, the price of gold in Bangladesh was BDT 146,951 (USD 1,730) per ounce in April.7 According to the Bangladesh Jewellers Association, the bullion market in Bangladesh has remained unaffected from the Covid-19 outbreak.

Refining the future: Possible approaches to stockpile oil

Bangladesh has a once-in-a-lifetime opportunity to cash in on cheap oil prices but it might struggle to make the best use of it as the country lacks adequate reservoirs. The Bangladesh Petroleum Corporation (BPC) has already reached out to a few private companies to use their storage facilities. To take a further edge, Bangladesh can pursue several steps.

There are several wells in the Sangu platform, built in Chattogram for gas supply from offshore facilities. BPC and Bangladesh Petroleum Exploration & Production Company Limited (BAPEX) should collaboratively evaluate the feasibility of using these and other abandoned wells for oil storage.

BPC should propose incentives for the private sector to co-operate by allowing their storage facilities to help the country benefit from plummeting oil prices.

Additionally, Bangladesh can also follow India and boost their oil storage by using floating

ships, refinery pipelines, and petrol pumps to hoard extra fuel for future usage. These initiatives should be quick and effective, taken with great precaution to avoid spillage and ensuring safe and secure uptake of oil for future usage.

When the pandemic is over and Bangladesh recovers its economic stability, the country should invest in building a Strategic Petroleum Reserve with a larger storage facility to tackle unexpected disruptions to energy supplies in the long-term future.


7. Bullion Rates in Bangladesh – Bullion Rates

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The Effect of Covid-19 on Bangladesh’s Apparel Industry

The Covid-19 pandemic has had a profound impact on the supply chain and demand for the apparel sector. Top exporters like Bangladesh have started feeling the heat due to raw material sourcing challenges and cancelled orders.

The performance of the RMG sector is more critical for an economy like Bangladesh, since apparel contributes 84% of the country’s export, employing close to 3.5 million people. While gauging the possible impact of the pandemic on the apparel sector, it is imperative to look into the demand side scenario by analyzing the European, US and the emerging markets for apparel export.

Global brands in flattening the curve

Major global fashion brands have taken prompt responses to help flatten the Coronavirus curve and this had great impacts on worker employment, revenues and overall operations.

Nike has released a statement which outlines their halt in operations and closure of stores in the United States, Canada, Western Europe, Australia and, New Zealand to limit the spread of the Coronavirus (Covid-19). However, Nike-owned stores in South Korea, Japan, most of China and in many other countries remain open as per the current stage of the outbreak.¹

UNIQLO had initially shut-down nearly 350 stores in China in late February. In the current stage of the pandemic, about 30 still remain closed, while most of its shops outside Hubei province, the epicenter of the coronavirus outbreak, have reopened. Globally, Uniqlo outlet closures have exceeded 100, with 27 in Europe. All 50 outlets in the United States have closed, following in the footsteps of other major fashion brands.²

1. Nike Coronavirus Statement – Nike

2. Fast Retailing closing all Uniqlo stores in U.S. amid virus spread – The Japan Times

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Sartaz ZahirContent Writer

07

The above figure, generated by UBS, is based on the company’s share of sales from China, the total value of products it manufactures in the country, and how quickly inventory turns over.³

The highest risk is observed for H&M which sources about 50% of its materials from China. Inditex, and its largest brand Zara, is also at high risk due to its highest rate of inventory turnover despite sourcing only 10% of materials from China.

Due to large scale closure of stores owing to the lock-down enforced by different governments, apparel sales for Bangladesh have plummeted, leading to brands postponing or cancelling

orders. Bangladesh Garments Manufacturers and Exporters’ Association (BGMEA) have claimed that USD 1.5 billion worth of orders have already been cancelled or put on hold by the buyers.

Global cotton and yarn supply chain dynamics

Global production of Cotton is largely dominated by India, China, the US, Pakistan, and Brazil.

FIGURE: UBS’s index of which European retailers are most at risk from Covid-19 / Source : UBS

3. Are H&M, Zara more vulnerable to coronavirus? – Quartz

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The fall in cotton demand from China has led to demand-supply mismatch. Along with this, decrease in yarn exports for India to China will mean an even greater excess supply of yarn and lower prices in the international market. Raw (unginned) cotton in the Gondal (Gujarat) market shed almost 10 per cent to trade at INR

4,280 a quintal in the first week of March from a level of INR 4,755 a month ago. Cotton yarn lost 2-3 per cent over the last one month, while synthetic yarn declined by 4-5 percent during the past one month, following a fall in crude prices.4

Although Bangladesh had been a victim of yarn-dumping from India, with import prices quoted to be up to 30% lower than local production costs by India, before the Coronavirus

outbreak5, domestic prices have since rebounded. Bangladesh Garment Buying House Association (BGHA) has complained that spinners are now charging 15% higher compared

FIGURE: World Cotton Production / Source: FAO/OECD

FIGURE: Partner Country’s Share of Cotton Import by Quantity / Source: Bangladesh Bank

4. Cotton, yarn prices fall as coronavirus brings exports to China to a halt –The Business Standard

5. Yarn Fabric Dumping Pushing Local Millers to the Brink of the Cliff – Textile Today

6. Yarn prices soar as virus fear triggers panic buying – RMGBD.net

Bangladesh: Partner country’s share of cotton import by quantity

Indian

USA

Australia

MaliBurkina Faso

Benin

Brazil

Uzbek

Turkmen

Cameroon25%

Others7%

10%

9%

9%8%

8%

7%

6%

4%

3%

Ivory Coast

Chad

2%

2%

33


to last month due to yarn import disruption from India. Supply chain disruption due to the Chinese lockdown has had negative repercussions across Bangladesh’s textile and Garments value chain, as Chinese imports accounts for a significant portion of the sector’s total import (46% of USD 34 billion as of FY 2018-19).6

The possible responses

While short term sourcing destinations have not undergone dramatic changes as of yet, employment layoffs as a result of government mandated shutdowns and quarantines are inevitable.

While countries that have incorporated some form of automation in their apparel industries are slightly cushioned from this impact, countries such as Bangladesh will suffer greatly given the large number of people employed in its apparel and textiles sector.

With China’s situation being on the road to recovery, it will require at least the first half of 2020 to bring itself back to pre-outbreak capacity levels.

The question then remains of how long global buyers are willing to wait before looking to other sourcing markets or opting to near-shore supply.

As can be judged by the fast-fashion cycle, Covid-19 since being declared a pandemic, has not yet spanned the cumulative of the Sell-in and Production Delivery Phases for the average global brand. Thus a hypothetical cut-off point for these companies has likely not been reached as to when they will switch supply sources.

It is expected with the progress of healthcare responses globally that the road to recovery may

begin as soon as mid-April. However, there will likely be a price hike for global apparel products which will persist until equilibrium can be re-established over the coming months.

Bangladesh apparel quagmire

Bangladesh’s overdependence on apparel export might prove to be its achilles heel. Large scale order cancellation and deferment is causing a

FIGURE: Fashion cycle duration / Source : McKinsey&Company

34


liquidity crisis across the sector, prompting the BGMEA President to appeal for support, both from international buyers and the government. The government has responded by announcing a stimulus plan of BDT 5,000 crore, explicitly geared towards the export led sectors. The primary goal of the stimulus package is to protect jobs, facilitate regular salary payment and ensure survival of the financially weak apparel factories. Details of the plan are still being worked out and timely deployment of the fund would be imperative to stabilize the sector.

The current lock-down would come to an end on 4th April and the government’s next directive on further extension of the closure will be dependent on the extent of contagion of Covid-19. By looking at the trajectory of the infected numbers in comparable countries, it’s likely that the number of infected patients in Bangladesh might increase sharply over the coming weeks. This would likely disrupt the production process further in apparel factories. Alongside, continued spread of Covid-19 in EU and US, the new epicentres of the disease, would further dampen demand for apparel and lead to another round of order cancellations.


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Covid-19 Pandemic: Choppy Waters ahead for the Golden Fiber

Once dubbed the “golden fiber” of Bengal¹, jute now occupies a less alluring position as a source of foreign currency. Declining export receipts, which are widely outshined by that of the RMG sector, are largely a result of lack of innovation in the jute industry. The dearth of dynamism in the industry has resulted in a stagnant and mundane jute export basket, which not only fails to lever-age the growing demand for sustainable and affordable jute products, but is also highly likely to be distressed by the recent Covid-19 pandem-ic. Rescuing Bangladesh’s jute industry from the perils of a pandemic-triggered recession will require swift and deliberate policy action.

It is imperative that any policy implementation, aimed at bolstering the jute sector, consider the

current status and possible bottlenecks in different parts of the jute value chain such as backward linkages, forward linkages, etc. Despite boasting agro-ecological advantages for jute production², trends in recent production data for Bangladesh signal strong need for a system of incentives to jute farmers. Evaluation of production data shows consistent gains in jute production in 2014-2018, going as far as a 10% leap in 2017-18, compared to the previous year. However, production tumbled by 4% in 2018-19, falling to 8.5 million bales.³ Interviews with farmers during that time period revealed production cuts due to high production costs, low market prices for raw jute and subsequently the absence of technology that could reduce production costs.³

Fig. 1: Jute Production in Bangladesh, 2014-2019, Source: Bangladesh Bureau of Statistics (BBS)4

1. Industry Watch: Jute Diversified Product (JDP) – LightCastle Partners

2. Industrial Research Advances of Jute in Bangladesh – Islam, Md Mahbubul, and Md Saheb Ali, International Journal of Agricultural and Biosystems Engineering 3.1 (2018): 1-9

3. Jute Production falls due to low price demand in Nilphamari – The Dhaka Tribune

4. Agriculture Data – Bangladesh Bureau of Statistics (BBS)

7,501,011 7,558,9348,246,801

2000000

2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

6000000

10000000 8,894,683 8,576,087

Jute production (Bales)

36

Farah Hamud KhanSenior Business Consultant & Project Manager

08

With the absence of technological innovations and a system of incentives for jute farmers, a fall in jute production will trigger a negative domino effect that will be reflected on all parts of the value chain. This situation will be especially hazardous given the current frustrations in the jute export market. Jute export earnings have been on a downward trend since 2016, reporting the heaviest decline of 15% in 2018-19 compared to the previous year. It is interesting to note that 2018-2019 was a particularly abysmal year for the sector as negative losses were posted in both production and export earnings.

However, a downslide in export earnings cannot be solely blamed on the production pitfalls. The lack of innovation required to diversify the

basket is significantly at fault. For example, export receipts from jute manufacturers accounted for 85% of total jute export receipts in 2018-2019, while those from raw jute only accounted for only 15% in in the same time period.6 The dominance of the export basket by jute goods could have been a strength if innovative goods such as Jute Diversified Products (JDPs) had been one of the key exports. Unfortunately, the real-life scenario is quite the opposite; semi-processed jute goods continue to dictate the jute goods export basket. Analyses of the end-use of and export partners for semi-processed jute goods, as well as raw jute, offers critical insight into past and potential drop(s) in export earnings.

Fig 2: Jute Exports and Consumption, Source: Statistical Yearbook Bangladesh 20185

Fig. 3: Jute Export Earnings, Source: Bangladesh Bank

5. Statistical Yearbook of Bangladesh 2018

6. Export Data – Bangladesh Bank (BB)

Jute exports and consumption (Thousand M. Ton)

Bangladesh Jute Export Earnings (Million USD)

2016-2017 2017-2018 2018-2019

Jute Manufactures

773 765

175 141

651

115

948 906766

Raw Jute

37


2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

37

26

85

118

85 89 87

2524

47

Internal consumption

Export overseas

The jute goods export basket is dominated by items such as hessian, sacking and carpet backing cloth (CBC).7 The stagnant product mixes of the jute goods export basket poses a serious conundrum as jute export earnings, and survival of the jute sector, is heavily dependent on semi-processed products that are exported to partner countries to be later used in the production of mostly luxury goods that are exported to the West. Analyses of export data

shows the top destinations for export of jute goods from Bangladesh are Turkey, India, China, United Arab Emirates (UAE), Netherlands, Egypt, and Iran.9 Countries such as Turkey, Iran and Egypt primarily utilize the jute imports such as yarn, CBC, etc. for its carpet industry.8 Some of the top importers for Turkey’s carpets are USA, Saudi Arabia, Iraq, Germany, United Kingdom and UAE.9

Raw jute, which accounts for less than 20% of jute export earnings, is exported to nearby countries such as India, China, Pakistan, etc., and processed into other jute products. In case of raw jute, the local industries within top export partners pose serious competition for Bangladeshi exports. India is the largest producer of jute trailed by China.¹¹ Bangladesh

is, therefore, likely to face stiff competition from local Indian and Chinese producers of raw jute unless there are cost-cutting technological innovations on the production-end. Similar to jute goods exports, raw jute exports to India and China are developed into finished goods and sold to countries such as the United States, Netherlands, United Kingdom, Germany, etc.9

Fig 4: Export Destination of Jute Goods, Source: Export Promotion Bureau (EPB)10

Fig 5: Export Destinations of Raw Jute, Source: Export Promotion Bureau (EPB)10

7. Bullion Rates in Bangladesh – Bullion Rates

8. Golden Fibre in Troubled Waters – The Daily Star

9. UN Comtrade Database

10. Export Promotion Bureau (EPB)

11. Top jute Producing Countries in the Word – World Atlas

Export destination of jute goods (2019-20)

Export destination of raw jute (2019-20)

Turkey31%

India

China

United Arab Emirates

Others

17%

India

China

Nepal

Others

41%

Pakistan21%

12%

8%

18%

9%

4%

39%

38


Impact of Covid-19 pandemic

Export data of both raw jute and jute goods reveal a high dependency on the exports of finished jute products, especially luxury products such as carpets, from export partners to the developed countries in the West. In the event of a recession, triggered by Covid-19 pandemic, the demand for such luxury items will significantly decline, and the export of jute goods and raw jute in Bangladesh will face a downfall. This will be analogous to the decline in jute exports in early 2018 and during the financial crisis of 2008-2019. An economic slowdown in Europe¹² lead to a decline in jute exports and export earnings in 2018, since European countries are some of the top consumers of jute items that are produced using jute from Bangladesh. Similarly, exports of jute goods fell by a 15.4% after the global financial crises in 2008-2009.

A drop in export of jute goods in the current crisis will have catastrophic short-term and long-term impacts for the industry. In the short run, a fall in export of jute goods would only worsen the woes of mass layoffs and decline in export earnings. The consequences in the long run are more dire; a decline in demand for jute products will continue to drive the flow of labor out of the industry. Farmers, for example, will not be incentivized to grow jute due to low demand, and consequently low prices, of raw jute. Work-ers willing to specialize in production and design of jute products will be heavily disincentivized from entering or remaining in the industry. The lack of skilled workforce will continue to hamper Bangladesh’s efforts in leveraging the growing popularity of jute and reviving the heritage of the once-cash crop of Bengal.

Policy imperatives

The prevention of effects of a recession will require rigorous and prompt policy implementations. Policy implementations should target the different components of the jute value chain, starting with production. Introduction of advanced and cost-cutting production technologies could significantly reduce costs for farmers, raising profits and incentivizing expansion of jute production. Technological innovation in jute production will be a multi-dimensional process-one that will require both investments in technology and robust research support from scientists, agriculturists and educational institutes. The advances from technological innovation must be compounded by training for jute farmers in methods of effective cultivation. Applications of such strategies will allow Bangladesh to harness its eco-agricultural comparative advantages in jute production.

The export basket should be also be a central area of policy reform. Bangladesh could diversify the export basket to have a jute export mix like that of China. China, which is one of the top importers of raw jute from Bangladesh, boasts an export basket dominated by sacks and bags. China’s jute export basket not only leverages the global demand for sustainability but will also weather the effects of an economic downturn better, given the necessity and affordability of dominant items in the basket. Instead of exporting the raw jute to China, Bangladesh could easily utilize it in the production of items such as JDPs. JDPs such as shopping bags, storage items, etc. are cheaper to purchase and transport. Above all else, unlike that of luxury items such as carpets, the demand for JDPs is less likely to be

12. Understanding the slowdown in growth in 2018 – Prepared by Maarten Dossche and Jaime Martinez-Martin, August 2018, European Central Bank (ECB)

39


Fig 5: China’s Jute Goods Export Basket, Source: UN Comtrade

Diversification of the export basket must also be complemented by innovation and research in the processing sector of the jute value chain. Countless JDPs are manufactured from a combination of jute and other materials, e.g., cotton, resin, etc. Universities and agricultural researchers should also be involved in the processing segment for the continuous innovation of jute-oriented compounds that can be used in the manufacture of JDPs.¹³

SMEs that specialize in producing JDPs will play a critical role in revamping the jute industry. Policy implementations, such as subsidized training programs for current and potential workers, expansion of credit facilities to SMEs specializing in JDP production, etc., could spur production of JDPs, diversifying the jute export basket and mitigating a potential decline in jute export earnings. This strategy will have the added advantage of providing employment to

marginalized groups, e.g., rural female artisans, who are likely to be most adversely affected during an economic downturn.

Significant marketing efforts will be required to make Bangladesh’s jute products mainstream, locally and globally. Involvement of local and global fashion brands will be critical in such efforts. Fashion- and lifestyle-oriented JDPs must be given priority at global events such as fashion shows, international trade fairs and trade fairs conducted by Bangladesh Embassies abroad. Marketing campaigns, targeted to increase global and local JDP consumption, will require strong partnerships between multiple players; local fashion and lifestyle brands, SMEs, relevant public stakeholders, and the diplomatic community.

The jute industry stands at a crossroads in the face of the pandemic-induced economic

adversely affected during a recession, given the necessity of many of these items in households. It will be pertinent, therefore, to integrate products such as JDPs into the export basket in order to leverage the growing demand for

sustainability and shield the jute industry from the calamities of the pandemic-triggered recession.

13. List of Jute Diversified Products (JDP) – Jute Diversification Promotion Center (JDPC)

China’s export of jute goods by value (2018)

Sacks and Bags

Woven JuteFabrics

Jute Yarn

84%

11%

5%

40


downfall. Without the presence of any swift and corrective strategy, export earnings from the industry’s dominant export products will tumble, exacerbating the growing economic distress. On the other hand, policymakers may be able to turn this situation around with rapid diversification of the export basket and strong incentives for innovation in the jute industry. Semi-processed jute goods such as CBC, which continue to dictate the export basket, must be significantly supplanted by JDPs. The goal can be obtained with strategic reforms in both the backward and forward linkages of the jute industry’s value chain. This best case scenario comes with multiple and much-needed advantages-a boost in export earnings to alleviate the losses from other sectors such as RMG, renewed employment opportunities for at-risk groups, revival of the glory of the “golden fiber” and the chance for Bangladesh to build a reputation as a leader in sustainable production.


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Withstanding the Outbreak of Covid-19 in the Footwear Industry

Bangladesh leather industry complementing the footwear industry at its fullest

From 2009 to 2018, the economy of Bangladesh grew at an average rate of 6.5 percent, having exports and remittances as the key drivers behind this growth. Over the years, the ready-made garment (RMG) sector has had a strong dominance over the total export of the country. To sustain high economic growth, and impede the Dutch disease, diversification of major economic drivers is essential. Aside from RMG exports, which account for almost 85 percent of the country’s export basket,¹ leather and footwear combinedly accounts for 3.3 percent of the overall export basket.7

Utilizing Bangladesh’s abundant supply of raw materials and labor intensiveness, the country’s leather sector has been meeting the domestic demand, and actively participating in global value chains. According to rawhide industry insights, in Bangladesh, 50 percent of the rawhides are collected during Eid-Ul-Adha.² In 2019, ahead of Eid-Ul-Adha, the government of Bangladesh settled the price of rawhide of cows to be BDT 45-50 per square feet inside the Dhaka region and BDT 35-40 for the other parts of the country. Additionally, the price of rawhides of goats was

set to be BDT 18-20. Despite the fair price set by the government, the year 2019 was not in the favor of the industry for a price shock caused by a decline in global demand, delay in building the industrial park for tanneries in Savar, being stretched of Leather Working Group (LWG) certification, and the dearth of financing available to tannery owners, resulted to a waste of close to 100,000 pieces of rawhides.²

Nevertheless, one of the main reasons for being slower than her neighboring countries is, because of not having the LWG certification. In 2019, the government of Bangladesh mentioned the continuation of incentivization during the Bangladesh Leather Footwear and Leather Goods International Sourcing Show (BLISS).³ The leather industry of Bangladesh was established in the 1970s, and now according to Leather Goods and Footwear Manufacturers’ and Exporters’ Association of Bangladesh (LFMEAB), one of the major products of the industry is footwear. Considering the vast scope of earning foreign currency, and opening up to more markets, the Seventh Five-Year Plan of the government, showed a forecast of at least USD 5 billion of export revenues from the the sector comprising leather, leather goods and leather footwear by 2021.

1. BGMEA. COMPARATIVE STATEMENT ON EXPORT OF RMG AND TOTAL EXPORT OF BANGLADESH

2. Dhaka Tribune. (2019). Government, tanners blamed for sharp fall in rawhide prices

3. World Footwear. (2019). Bangladesh: support to exports will continue

42

Nahian HasninBusiness Analyst


09

China, meeting most of the global footwear demand having Vietnam on its tail

According to 2018 data, the global footwear market was worth USD 227.1 billion.4 The overall global footwear industry is dominated by the United States of America (USA) as 24.7 percent of the leather footwear is imported merely by them. To meet the demand, the USA

heavily depends on China.5 In 2018, the USA imported a total of USD 2.44 billion pairs of shoes, and 69.3 percent of these shoes were imported from China, 18.9 percent from Vietnam, 4.1 percent from Indonesia, and only a meager amount from Bangladesh, which is 0.2 percent.¹0

Additionally, with China withdrawing from the global leather goods market, Bangladesh is presented with a huge potential to attract foreign investment into the country through this sector. On top of that, the increased labor cost in the leather industry, and the imposition of a 17 percent import tax in the leather footwear industry have made both the Chinese players and global buyers less interested to focus on the Chinese footwear market.6

On the other hand, with the developing Vietnam-ese economy and increasing consumer aware-ness of branded products, Vietnamese footwear sector has recorded a strong performance growth. Vietnam stands to be the second-largest footwear exporter in the market. Free trade agreements with the Republic of Korea, Russia,

Kazakhstan and Belarus along with an agree-ment with the EU has boosted Vietnam’s footwear sector. Vietnam acts more like an outsourcing hub for the global supply chains of giant manufacturers, such as Nike and Adidas, which amplifies its export revenues, with this strategy Vietnam’s footwear industry is targeting to reach USD 24 billion in exports in the year 2020.7 Besides Vietnam, the Cambodian footwear industry is growing stronger in this sector. Most raw materials for footwear, includ-ing leather, are sourced from within ASEAN region, and with Cambodia having duty-free access to the EU, it is becoming an investment destination for countries such as South Korea, and Vietnam. Thus, to outstand and compete in the global footwear market, Bangladesh has to keep up its pace and act strategically.

Source: US commerce department’s Office of Textiles and Apparel (OTEXA)

4. PR Newswire. (2019). USD 266.5 billion Footwear Market – Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2019-2024

5. Asian Development Bank (ADB). (2018). Developing the Leather Industry of Bangladesh

6. Textile Today. (2018). An overview of Bangladesh leather industry

7. Just-Style. (2020). Vietnam’s footwear sector set to hit 2020 export targets

USA shoe imports for the year 2018

China Vietnam Indonesia Bangladesh

69.3%

18.9%

4.1% 0.2%

43


Although the financial year, 2018-19 was not satisfactory for the overall leather industry of Bangladesh, the performance of the footwear industry was ample compared to the previous year, where the leather footwear exports increased its value by 7.48 percent generating USD 607.88 million, and the non-leather footwear exports increased by 11.24 percent generating USD 271.53 million.9 The export performances for July to February of the current fiscal year for leather and non-leather footwear are respectively USD 376.60 million and USD 219.47 million, which is cumulatively 0.5 percent greater than the total footwear export revenue for July to February in fiscal year 18-19. These export revenues generally come from the EU (60-65 percent), USA (17-18 percent), and Japan (6-7 percent), and more than 100 Bangladeshi companies including Apex, Bay and Leatherex Footwear, export shoes.¹0

The global footwear market being demolished by Covid-19 pandemic

The recent Covid-19 outbreak has put the industry at peril of great financial loss. The industry players have already started to feel the turmoil of the supply chain disruption. Like many other countries, Bangladesh will be directly affected by the Chinese slowdown through global value chains. It is predicted that Bangladesh will incur a loss of USD 16 million in total directly because of China’s slowdown, and out of USD 16 million, USD 15 million loss will be encountered in the leather industry only.¹¹ And 69.12% of the footwear export of Bangladesh depends on leather-footwear. Here the major defiance is the contraction of the demand for footwear by our major buyers (both domestic and international). These buyers have no choice

Bangladesh to secure its place in the global footwear value chain

Though the figure above shows downbeat participation of Bangladesh in the USA shoe market, historical data shows that Bangladesh’s

performance is quite praiseworthy as its export to the USA increased by triple digits.7 In fact, Footwear accounts for more than 2.2 percent of the export earnings of Bangladesh.8

Source: US commerce department’s Office of Textiles and Apparel (OTEXA)

8. World’s Top Exports. (2019). Bangladesh’s Top 10 Exports

9. World Footwear. (2019). Bangladesh: Leather Sector Closes the Year on the Red

10. Prothom Alo. (2019). Bangladesh – made shoes occupying US market

11. United Nations Conference on Trade and Development (UNCTAD). (2020). Global trade impact of the coronavirus (Covid-19) epidemic

Bangladesh shoe exports to the USA (USD in million)

2014 2018

61.4

133.2

44


here as well because they have to shut down their stores due to a decline in sales. For example, the global giant brand Adidas’s sales have declined by USD 1.1 billion only in greater China. Adidas reported a slump in sales in Japan and South Korea too, of USD 111 million.¹² With industry giants such as Adidas, Nike, and Puma experiencing such declines in sales, it has proven to be considerably harder for nascent companies to sustain in the industry under current market conditions. Specifically, nascent domestic and foreign companies are coming across a major liquidity crunch because of the huge slump in sales.

Footwear factories all over the world, including Bangladesh, are one of the casualties because first of all, manufacturing factories are folding up production in the prevention of the virus outbreak. Secondly, with the decline in sales in the forward market (both domestic and international), the buying orders in the local industry are coming to a halt leading to the entire backward market being hampered. As a consequence, the entire value chain is being disrupted, leaving stakeholders out of businesses, people losing their jobs, and this added obstruction of the footwear industry is adding up to the catastrophe of the global crisis.

Salvaging the footwear industry through strategic measures and taking the edge off the economic burden

Importers and suppliers are here in a battle together where it is a must for them to stand side by side. Many of the domestic and international brands/businesses are facing problems in supply chains because of disrupted cash flow. These

businesses need financial support to get through this crunch period and save their suppliers/factories. Because through saving the factories, jobs of many people can be saved as well.

As the entire supply chain has been disrupted, the local economy is bound to face a huge deficit for raw materials for leather footwear as soon as the pandemic ends. Subsequently, the focus should be shifted towards non-leather footwear for the major parts in order to overcome this obstacle and get back into the global value chain as it might take a considerable amount of time for the tanneries to start functioning again due to shortage of chemicals, rawhides, etc. Given the current situation of the global economy, the demand for footwear, in turn leather footwear, might not rise significantly in the near future. Thus, it will be quite difficult to get a fair price of the rawhides during Eid-Ul-Adha this year. The tannery owners should take preventive measures in their pricing strategy keeping in mind the demand-supply factors. Followed by the recovery from the crisis caused by the pandemic, Bangladesh government could support the tanneries administratively to prompt the process of LWG certification, which can help them in mitigating their financial losses over this period.

Many of the Bangladeshi large footwear companies procure from dexterous individual-owned businesses, SMEs to satisfy the domestic demand. Some of these companies serve the local market through their outlets in different communities. Considering the ongoing crisis, the government can support the SMEs by helping them get access to financial resources in order to keep their

12. HYPEBEAST. (2020). Adidas Predicts USD 1 Billion USD Chinese Sales Decline Due to Coronavirus Related

45


business running. For example, applications and all the paper works can be handled digitally easing the process. Additionally, by deferring the interest payment on their existing debt, these small companies will be able to sustain in this economy. Policy support from the government such as deferred lease payments, tax breaks will result as a lifeboat to these drowning entities.

The policymakers need to emphasize on this sector in order to minimize the outcome caused by the pandemic. As the industry is struggling, both national and international regulatory bodies should initiate incentives and take such measures which will ensure a Nash Equilibrium for all the stakeholders of the value chain.


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Bangladesh Pharmaceutical Sector Wading through the Pandemic

The Pharmaceutical sector has 257 licensed players, among which, 150 are functional. Bangladeshi manufacturers meet 98% of national demand for pharmaceutical products. According to IQVIA, the size of the sector as of 2018 stood at BDT 205.12 billion.¹ With a historical 5 years’ CAGR of 15.6%, the sector is predicted to grow to USD 5.11 billion by 2023. Currently, 98% of pharmaceutical demand is met locally, while only 2% are served via imports. Out of these, 80% are Generic drugs and 20% are Patented drugs. Bangladesh’s drug export is also growing at a healthy rate and contributed USD 120 million as of FY 2018-19.

Immediate term impact of the pandemic

On the demand side, the Covid-19 outbreak is expected to lead to higher demand of sanitizing chemicals, and other medications in the short-term, as healthcare professionals and patients alike seek prevention and basic treatment measures.

On the supply side, Active Pharmaceutical Ingredients (APIs), which are the raw materials for the pharmaceutical sector, are highly import-dependent. Bangladesh imports about 95 percent of all APIs worth BDT 5,000 crore

annually from abroad, the largest quantity from China, followed by South Korea and India.² Although the Covid-19 outbreak has thus far not had a large impact on the local pharmaceutical sector, the spread of the pandemic is expected to lead to a shortage of APIs in the near-term. The ban on API exports from India³ is a harbinger of hard times for the import-dependent industry.

In the forward market, the industry is not expected to suffer from any potential lockdown, as pharmacy counters are considered a part of essential services. However, a government enforced lock-down might disrupt production (factory closure), distribution and marketing.

Long-term ramifications

International drug prices have increased and If Covid-19 persists, the limited supply of APIs and formulations in the international market will drive up prices of raw materials further.4 On the other hand, if the Covid-19 outbreak leads to a recession, or even a reduction in the economic growth of the country, pharmaceutical companies will have less room for passing on the price increases to the customers, which will eat into their profit margins. DGDA regulations will also make a price increase difficult to

1. IQVIA Coverage

2. A new horizon opens for pharma ingredient makers – The Daily Star

3. Covid-19: Export curbs on imported API drugs under review – Economic Times India

4. India Inc in a cold sweat as lockdown in China continues – Economic Times India

47

Saif NazrulSenior Business Consultant & Project Manager

10

justify for the industry. The dependency on imports can also erode the sector’s international competitiveness and may lead to stunted growth in export.

Policy support and other means to mitigate the negative impacts of Covid-19

The government should encourage pharmaceutical players to invest in their R&D processes to increase their capacity to ramp up production of possible vaccines as soon as one has been proved effective after clinical trials. In this regard, the government can enable partnerships between the WHO and private sector pharmaceutical companies to bring these vaccines to market, making use of the TRIPS exemptions that the country enjoys.


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Bangladesh Pharmaceutical Sector Wading through the Pandemic

Covid-19 Pandemic: How can Bangladeshi Startups Weather the Storm?

Globally most of the startups are either shutting down, laying off staff or drastically changing their strategies in the wake of Covid-19. Many of the Bangladeshi startups which raised a lot of money on the promise of rapid growth are facing plummeting demand as consumer spending stalls and unemployment is set to surge. Even the buzzy sectors like fintech, healthtech, edutech and deep tech are not immune from the effects of the pandemic.

A quick survey of startup founders during these uncertain times shows that there has been a significant fall in their business activities : 32% reported a decline in business activities by more than half while another 24% reported a complete business closure.

Covid-19 impact on startups

24%

32%

22%

10%

7%

5%

(-100%) Business had to be shutdown completely

(50%) Significant decrease in business

(-20%) Small decrease in Business

(0%) No change in business

(+20%) Small increase in business

(+50%) Significant increase in business

Source: Bangladesh Starups Survivial Guide for Coronavirus, April 2020, LightCastle Analysis

49

Silvia RozarioSenior Business Consultant & Project Manager

11

In Bangladesh, the coronavirus pandemic has hit sectors like Apparel, e-Services and Tourism the hardest. Education (including edutech), finance (including fintech), healthcare (including healthtech) sectors have faced an initial blow but might recover partially, provided that consumers will need them more if the current situation persists. Although logistics sector players have reported a 20% loss in revenue, the sector can bounce back if they improve their operational plan by partnering with e-commerce companies, as some of the e-commerce players have reported a 50% increase in business.

According to Venture Capital and Private Equity Association of Bangladesh (VCPEAB), around 300 startups fear a loss of more than USD 53 M as sales of products and services have come to a halt. Also, startups having an export-oriented income have experienced an 80% fall in revenue recently. The jobs of almost 150K people– directly employed in these startups– are on the line now while about 700K service providers associated with these startups are currently not in a position to provide services either.

Upper and lower limit of change in revenue sector wise

Change in Revenue -100% -50% -20% 0% +20% +50%

Apparel

Education

Finance

Furniture & Living

Healthcare

Logistics

Real Estate

Services

Software

Sports & Leisure

Travel


e-commerce

50

Covid-19 Pandemic: How Can Bangladeshi Startups Weather The Storm?

Each startup is different and needs to customize its survival strategy based on its market offering and value proposition. For example, Edutech startups can promote their professional courses as “skills you need to develop to survive in a post-corona world” through digital media. Most of the people have been working from home and thus doing online courses sounds way realistic than buying apparels online. On another note, many areas inside Dhaka are going into complete lockdown recently. In the face of this challenge, healthtech, e-commerce and logistics companies can come up with rescue strategies.

As a global recession awaits us, Bangladesh startup founders will have to deal with difficult decisions ranging from executing operations for the next one to two months to strategically planning the next 12-18 months. Based on our exhaustive research on available survival guides and interviews with industry experts, we have come up with some measures that might help the startups to navigate through the rough waters.

Understanding your business as a first measure to deal with the crisis at hand

The first question every startup CEO should look to ask themselves now is what is their burn rate and runway. Before determining the runway, the founders need to assess their KPIs such as debt to income ratio, revenue to employee ratio and monthly gross expenses. Then they need to ask themselves how many months their companies can survive burning the current amount of cash. It is important to note that that the traditional demand and sales forecasting might not work in a recession-struck market. Therefore founders should emphasize on scenario planning to

capture the real picture, understand what is needed to further plan and allocate accordingly. A complete bird’s eye view of the entire company is crucial in these troubled times.

A model to map out potential strategies in regard with macro scenarios has been provided by Sequoia capital. Here the X axis represents the macro environment i.e the duration of the lockdown which is directly linked to revenue. The Y axis represents company actions i.e. curbing down the operational expenditures. Startups should implement actions from the left and gradually streamline their operations as the macro environment provides more brevity. Ideally the goal should be to be in the green zone but the yellow zone should be enough to survive the storm.

At the same time, the systematic risks should be minimized by closely monitoring both the macroeconomic indicators and business performance indicators like revenue/employee, debt/income among other metrics. The founders must check whether the sectors they operate in are getting affected and to what extent. Positive diversifying can play an instrumental role in helping startups to land on their feet. Bangladeshi ridesharing platform Pathao has recently relaunched its delivery service Pathao Tong and partnered with Shwapno to deliver goods to consumers’ doorstep, while online service marketplace Sheba.xyz has started a fund named “mission save Bangladesh” for the underprivileged and those who are deemed most at risk from the coronavirus in partnership with The Daily Star and Samakal.

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Do not let the deal flow dry up – look for alternative funding sources like Impact Investments

Our survey with startup founders shows that early stage companies are the immediate sufferers in the current scenario. Funding

opportunities have dried up in the short-term, and perhaps for the rest of the year. Many startups will fail, unless they are able to solve their immediate cash flow deficit. Even in the most “normal” of circumstances, startups move fast and fail fast. The Covid-19 crisis has put the startup ecosystem at the brink of collapse.

Stages of the Companies impacted by Covid-19

(-100%) Business had to be

shutdown completely

(50%) Significant decrease in business

(-20%) Small decrease in Business

(0%) No change in business

(+20%) Small increase in business

(+50%) Significant increase in business

Pre-Seed Post-Seed Pre-Series A

Pre-Series B

Seed

Series A Series B

7%

7% 7%

2% 2%

2%15%

7%

7%

12%

5%

5%2%2%

2% 2%

5% 5%


Source: A Sequoia-backed company

MacroScenarios (Outside our control)

52


If we take a look at the 2008 financial crisis, we can observe the VC investment trend during a bear market. VCs invested around USD 3.5 billion per quarter in seed, A, B and C rounds during 2006 which grew to USD 5 billion per quarter in 2007 and early 2008. Then the investment velocity dropped by half to USD 2.9

billion, USD 2.7 billion and USD 2.3 billion in the quarters following the crash. In the second quarter of 2010, the market finally bounced back. Seed was the fastest to recover while series C was the slowest. The long eight quarter rebound time might have worked in a reces-sion-struck market but can take even longer in a

Fundraising was tough enough as it is, and with Covid-19, many will either a) not be able to fundraise, or b) have their earlier commitments withdrawn. Additionally in a recessionary environment, foreign capital will focus first into countries they already have operations first before Bangladesh which is a new country for most.

Bangladeshi startups should optimize their runways at these trying times to keep the existing investors motivated. Second step should be to keep looking for new sources. Going after impact investments like catalytic fund or matching fund could be a timely option

for early stage startups. In a pandemic struck market, getting access to a patient capital can only help the startups buy more time. Recently, a catalytic fund named Biniyog Briddhi has been launched in the country powered by the Swiss Agency for Development and Cooperation and Roots of Impact, and implemented by LightCas-tle Partners. The fund aims to both train, finance and advocate impact investors and enterprises through Impact Ready Matching Fund (IRMF up to USD 100K) and Social Impact Incentives (SIINC up to USD 250K). (details) Additionally, programmes like UNDP Youth Co-Lab with a strong impact focus can be reached by early stage startups.

Source: Tomas Tunguz, venture capitalist at Redpoint Ventures

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To spend or not to spend

Globally startups are slashing ad budgets, giving away products, and using content to stay connected with shoppers. The situation should not be different in Bangladesh. These work from home days are perfect for differentiating resources that are absolute musts from resources that are just nice to have.

Recently Airbnb has suspended its marketing activities to save USD 800 million and the CEO has promised to spend USD 250 million to reimburse hosts for cancelled bookings. If the lockdown persists for an extended period of time, startups in Bangladesh can also look into measures to cut expenses. Getting rid of a high maintenance office, telling employees to use their own resources rather than company laptops, organizing webinars instead of events, arranging virtual meetings instead of physical ones, using digital marketing methods instead of expensive advertising are some of the most common ways to keep the cost minimal even when the lockdown is lifted.

The most crucial decision: Human capital management

The founders of Airbnb have declared to not draw salary for the next six months while top executives will take a 50% cut. Airline industry, being one of the worst affected by the pandemic, has been taking extreme measures to survive. Players like Emirates and Malindo have been asking pilots and cabin crews to take unpaid leaves while other airlines are simply laying off people and halted new hiring from the beginning of March. Tesla will cut pay for all of its salaried employees and will flaying off hourly workers until May 4 when it intends to resume production

of electric cars. Media company BuzzFeed announced a graduated salary reduction for the majority of employees, some of whom will see a nearly 25% pay cut and the CEO will forego his salary as their advertising revenue declines. Wonderschool, a childcare startup backed by VC firm Andreessen Horowitz, has laid off 75% of its staff via a Zoom call.

At the same time some companies are following less drastic measures like salary cuts going into the employee option pool. While most of the sectors are furloughing people, Amazon, among other logistics sector players, plans to hire an additional 100,000 warehouse and delivery workers amid a surge in online orders due to the coronavirus outbreak. The company is also raising pay for warehouse and delivery workers by USD 2/hour in the U.S. market.

Some of the Bangladeshi startups had to cut jobs or reduce payroll while some of them introduced salary cuts for executives as a loan to the company. If this continues, not only will it result in a domino effect on local consumption, but may also lead the best talent to opt for safer haven of large multinational companies instead of helping the local ecosystem. Letting people go in the face of an economic downturn has some legal implications and is definitely not considered as a good practice.

Additionally this concept is culturally unprecedented in Bangladesh. In the more cutthroat economies like the U.S. the practice of laying off people in difficult times has worked out mostly due to the fact that the state provides them with minimal benefits, but in our country it will lead to a dismal display of unemployment.

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Pivoting in the face of the crisis

As startups scale faster, they will play an instrumental role in driving innovation and speeding up economic recovery in these testing times. Therefore the government needs to provide specific response packages to startups. While the GoB has declared stimulus packages to export-oriented industries like working capital refinancing, EDF funding, pre-export capital, industry and MSME credit at discounted rate (4.5%) totaling USD 8.5 billion – Startups weren’t directly a part of the package. Given Startups often do not directly operate with bank financing – and investors at least take 6 to 12 months to bounce back and invest – we assume the startups are going to need support for 3 to 6 months of working capital. The size of each startup is different but if we take a look at larger ones who have 100+ employees they would need between USD 500K to 1 million as a 3 to 6 months runway. Depending on the number of Startups that needs to be supported the total response package needed would be around USD 12.5 million (USD 500k each on average *25 Startups) at least. If the big ones survive the benefit would trickle down to the smaller ones.

In the coming years, Bangladesh’s startup ecosystem which was set to finally come of age, will face a major setback. Startups who will adapt quickly by pivoting their businesses can navigate their way back, while companies failing to do so will get lost. In order to weather the storm, Bangladeshi businesses need to become increasingly inclusive and start creating social and environmental returns on top of positive economics. And the role of startups would become even more critical for equitable growth.


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Bangladesh IT and Digital Sector Tackling Covid-19 Implications

Bangladesh has been working relentlessly to establish “Digital Bangladesh”, an integral part of the government’s Vision 2021. IT companies in Bangladesh started exporting software around two decades ago, joining the business process outsourcing (BPO) bandwagon. Bangladesh Association of Software and Information Services (BASIS), which started its journey with 17 companies in 1997, now stands at 1200+ companies involved in software development and providing IT services. ICT exports by 250+ companies, in 60+ countries around the world, accounted for USD 800 Million in which was 2.2 percent of the total export value.¹ According to USAID, North America is the country’s main export destination. Bangladeshi IT and ITES firms generate almost 35% of its export revenue from US buyers, 15% from the UK, followed by a number of EU countries such as Denmark and the Netherlands. A number of local enterprises also export IT-ITES services to UAE, Saudi Arabia, South Africa, Malaysia and Singapore. This is the hard work of the 1 Million people who are working directly in the ICT industry. The government had set an export target of total USD 5 Billion by 2021.

The sector has been declared as a thrust sector by the government assessing the ability and interests of the youth segment of the country. In

Bangladesh, there are more than 100 software houses, 35 data entry centers, thousands of formal and informal IT Training centers and numerous computer workshops. Additionally, Bangladesh Hi-Tech Park Authority (BHTPA) was formed with the vision to ensure sustainable development and proliferation of IT/Hi-Tech Industry in Bangladesh. Given the potential of the ICT sector in Bangladesh, it can work as a major economic driver.

1. ICT Export (2017), ICT Ministry, The Daily Star

56

Rageeb KibriaPrincipal Business Consultant

12

Industry Highlights

INDUSTRYHIGHLIGHTS

47%34%

3%

5%

11%

SoftwareDevelopment

e-Commerce

Multifunction

BPO

ITES

The digital e-commerce and e-service industry is growing in pace with ICT

Similarly, during the late ‘90s, the e-commerce industry started its journey in Bangladesh, however, did not witness any growth up until the last decade. The development of banking facilities logistics communication and electronic payment methods has created opportunities for the e-commerce sector of Bangladesh to grow. Over the past years, the country’s shopping behavior has shifted dramatically with the change in the living standard of the population. The emerging population is now more acquainted with making transactions of products and services online.

As of 2019, according to a research firm, published in a Bangladesh daily², the e-commerce market of Bangladesh is stated to be USD 1.6 billion and is expected to double to USD 3 billion by the year 2023. Bangladesh’s government imposed a 7.5 percent VAT on this sector that may adversely affect the ongoing digitization agenda of the government and

hamper the employment rate in this sector according to industry insiders. In terms of revenue from e-commerce, Bangladesh ranked 46th position globally. Growing smartphone penetration and popularity of 4G networks along with the increasing purchasing power of consumers are driving the e-commerce industry across the world including this south Asian country, Bangladesh. With the advent of Covid-19, the e-commerce industry is witnessing an unnatural upsurge globally and with the world heading into an inevitable global recession, the growth of the industry is bound to slow down.

IT companies in Bangladesh are tackling similar challenges to those faced by in India

The Covid-19 impact possesses an unique challenge for the IT industry as it is only in its growth stage in Bangladesh. Industry insiders expect the overall revenue for the 2020 year to decrease by 20-25 percent due to the pandemic. Companies that deal with BPO of medical and legislative data for North American

Source: (ICT Industry White Paper)

2. E-commerce sales to reach USD 3b in 4 years, The Daily Star

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companies, such as Therap, Augmedix are somewhat stable in terms of their business given the heightened respiration of the medical industry. However, the industry players that mainly focus on outsourcing of software development, are at a disadvantage. India serves 16 percent of the global market³ and they’re already predicting a lower growth rate than the previously estimated 7.5 percent for this year (Nasscom).4

Although the industry technically has the capacity to operate remotely by its nature, the impact of the pandemic is still felt due to stuttering business orders from end clients. Since Bangladesh ICT export is mainly dependent on business from North American and European companies, there has been a general fall in outsourcing given the spread of the virus in these regions. As most global tech companies are now shuttered with employees working from home, the impact of business growth has been stagnated and the ripple has been felt in the local outsourcing industry. Other than a few large tech companies in Bangladesh, most companies do not operate on a retainer basis and are dependent on project basis business generation. Due to the cancellation or postponing of projects in such an unexpected event, business continuity is in serious trouble, resulting in local companies facing cash crunches. This is applicable at least for those that do not have a force majeure provision in their contracts than works in their favor.

Maintaining steady cash flow is the biggest challenge during this time

Software companies than serve the local market

mostly are facing more challenges compared to those that are focused more on outsourcing. Due to the economic halt, local clients are stalling payment leading to cash flow challenges for these companies. Companies in north American and Europe are having to source locally for the time being, especially on security monitoring, disaster recovery etc. as delivery of work from offshore services, especially China has come to a screeching halt. Kabir, Co-Founder and CEO of BrainStation-23 says that there’s also potential here for growth – if companies are agile and are willing to pivot fast. According to him, video streaming, machine learning and online learning are strong business vertices to explore now. They have seen a strong upsurge in demand for Moodle, an open-source Learning Platform or course management system (CMS), from clients in the education sector due to the sudden increase in online classrooms. Government contracts where foreign governments are seeking software solutions in relation to the pandemic crisis are also a potential target growth area for the industry.

Infrastructure level challenges such as data protection and access to internet are major challenges of working from home

Layoffs are yet to happen in the industry but smaller companies with limited cash-flows might have to rely on pay cuts to survive if the pandemic persists long-term. On a micro level, since tech companies operate on an agile methodology of delivering work in a predetermined deliverable schedule, accountability due to remote work has disrupted

3. How The Digital Economy Is Shaping a New Bangladesh (2019), WEForum.

4. How the tech industry is ensuring business continuity in the times of coronavirus (2020), Economic Times.

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the delivery cycles. Also, most companies are having issues with remote work as loss and delivery of data over unprotected internet connections is a big challenge. Large companies operate through their own protected servers and systems in their office and data sharing and assurance of protection of said data on an open system is a big challenge for most. In India, some companies have begun installing corporate desktop computers at their employee homes but this is hard to sustain and implement in an industry-wide scale.5 Another systemic challenge reported by the industry is the lack of internet bandwidth when operating from home. Due to sudden upsurge of demand for home internet consumption, the infrastructure is strained and its impact is also felt in the IT industry. The only silver lining in such a grim situation is that outsourced service desks are having to support huge volumes of end-users trying to access systems remotely but it also comes with the challenge of engineers having to facilitate overwhelming demand often with technology stacks with which they have no training or familiarity.

Some e-services are faring better than others due to the pandemic

In a time such as this, the e-commerce and e-service industry is also facing similar challenges. Initially, with most of the urban Dhaka population put into isolation and following social distancing, the number of online purchases in the B2C e-commerce platforms (daraz.com, pathao, chaldal.com, etc) faced an unnatural spike. However, food delivery services have seen a sharp downturn in just the past week with orders falling by 75 to 80 percent according to an industry representative from Shohoz.

Consequently, 40 to 50 percent of restaurants have also closed down leading to the fall in business. As per a BRTA directive, ridesharing by Uber and Pathao have been banned to limit the spread of Covid-19.6 The demand for flu-related products such as cleaning agents and healthy supplements is high. However, due to the shortage of supplies owing to the pandemic, the limited products are priced at a higher range. Delivery of e-services have also come to an halt due to the implementation of quarantine. Chaldal has seen an increase in online grocery delivery demand and along with other food delivery services have replicated the contactless delivery system. Online grocery stores are experiencing double digit growths in the number of deliveries with Chaldal’s average 5000 orders-per-day jumping to 10,000 to 15,000 orders-per-day on an average. The digital e-health service industry is facing a sudden surge in phone call consultation with Telenor Health reporting a 30 percent increase in phone consultation services.7 Similarly, Praava Health has launched a low cost video consultation services to tackle the upsurge in healthcare advice demand. Since the e-services and e-commerce industry is highly dependent on day-wage/contractual earners, the sudden outflow of workers from the city has also led to serious staffing shortage.

The ICT and digital sector can be easily protected from the impact of Covid-19 if precautionary measures are taken

With the challenges now apparent for the IT and digital sector, it’s crucial that the government pays significant attention to its third-engine post

5. India’s outsourcing industry struggles to work from home, Aljazeera (2020)

6. Coronavirus and the Bangladesh Economy: Navigating the Black Swan Event of 2020, ULAB

7. Coronavirus and the Bangladesh Economy: Navigating the Black Swan Event of 2020, ULAB

59


coronavirus Bangladesh. On a B2C level, e-service companies such as food delivery and ride-sharing companies need to create a safe and hygienic environment in its operations through ensuring all its delivery men, riders and drivers take safety precautions seriously. On B2B level, tech companies need to support its staff through providing proper work-from-home initiatives and creating accountability through better management and delivery techniques. Companies also need to reassure its clients that their work-from-home will not impact business significantly and that precautionary measures are being taken to ensure business continuity. The coronavirus stands to wipe out 1.1 percent of Bangladesh’s gross domestic product, resulting in 894,930 jobs being lost as per a projection of the Asian Development Bank (ADB).8 It is highly likely that the IT and digital industry will fall into this crunch along with the RMG industry. For long term growth assurance, provisions should be made for the industry in the recently sought USD 1 billion in support from the International Monetary Fund (IMF) and the World Bank (WB) by the government. Admittedly, it’ll be impossible to not feel the impact of the pandemic in any industry but precautionary and supportive policies will ensure the tech and digital industry will not be crippled in a post Covid-19 economy.


8. The Economic Impact of the Covid-19 Outbreak on Developing Asia (2020), ADB

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Cross-cutting ThematicsCross-cutting Thematics

Bangladesh was one of the fastest-growing countries in Southeast Asia over the last decade, with an average of 6% GDP growth over time. However, due to the wrath of the great lockdown caused by the Covid-19 pandemic, the World Bank and IMF(International Monetary Fund) recast GDP growth to decline to as low as 2 percent in 2020.¹ In contrast, the pre-Covid-19 forecast was 8.2% for the same period.² So it is now evident, in sync with the rest of the world, the economy of Bangladesh is also in the face of a significant downturn, and recession looms near.

As this lockdown prevails, the businesses in Bangladesh face tremendous trouble ahead, especially the Micro, Small, and Medium Enterprises (MSMEs) sector, which contributes 25% of the total GDP.³ Bangladesh has around 10 million SMEs employing 18 million people, which is 25% of the entire labor force.³ Almost all enterprises are now being affected because of disruptions in the supply chains and demand depression. These are being affected differently, and in different degrees depending on type of activities, size & locations, risk absorption capacity, many enterprises are facing challenges owing to supply chain disruptions, the rising cost of raw materials, limited cash flow & loss of earnings & profit. These will strain many of their

capacity to pay rent, bills, salaries- ultimately forcing countless to shut down, triggering a spike of unemployment in the country.

So we ask, how the stimulus packages by the Government of Bangladesh plans to support the MSMEs to survive through and rebuild after this unprecedented crisis? To find out, let’s take a look at what the overall stimulus package offers compared to our neighbors in Asia.

BDT 100,000 crore stimulus package by the GoB is mostly working capital loan

The Government of Bangladesh (GoB) has unveiled a set of stimulus packages to save the people and the economy. The accumulated financial stimulus packages and relief schemes announced, as of 14th of May, stand at almost ~USD 11.7 billion (~BDT 100,000 cr)4, which is nearly 3.6% of the GDP of the country. The GoB has also reached out for soft loans of total USD 2.6 billion (BDT 221,000 cr) from foreign donors to cushion the impact of this pandemic and recession that prevails.5 The Central Bank has also taken several steps to inject liquidity in the banking sector (reducing the CRR & repo rate, purchase of bonds & bills). It has taken measures to delay non-performing loan

The Stimulus Package: Can it help our SMEs Tackle the Unprecedented Crisis?

1. Bangladesh’s GDP growth may plunge to 2 pc– The Business Standard

2. Bangladesh’s economy will grow fastest in South Asia: World Bank – The Business Standard

3. MSMEs – both a choice and a reality for Bangladesh – The Financial Express

4. Bangladesh’s stimulus package tops BDT 1.0 trillion – The Financial Express

5. Bangladesh seeks USD 2.6 billion coronavirus funds from foreign donors – Bdnews24

62

Mehad ul HaqueProject Manager & Senior Business Consultant

Ishtiak MourshedTrainee Consultant

13

classification, relieve late fees for credit cards, extend tenures of trade instruments, and ensure access to financial services to deal with the urgent scenario.

The majority of the package will be channeled through the banking sector. Out of the total package, above 50% (BDT 50,000 cr) will be sourced from the sector directly; nearly 43% will be financed by Bangladesh Bank, while the rest will be supported by the country’s fiscal budget. From which, around 70% of the stimulus will be disbursed through commercial banks, while 22% will be disbursed by the Bangladesh Bank.

The largest program from the seven declared is worth BDT 30,000 cr, which will be provided as a working capital loan to the affected industry and service sector through the banking system.6 Against this 9% designated rate, the Government will pay half (4.5%) as the subsidy to the banks while the particular consumer of this loan will have to pay the remaining half (4.5%) to the bank.7 This program however does not cover CMSEs as a separate program has been proposed directly worth BDT 22,000 cr at a 4.5% rate with an additional 5% subsidy supported by the Government. Following the above calculation on the combined BDT 52,000 cr programs, the Government’s net burden (subsidy rates) stands at BDT 5,287 cr (USD 62.2 million).

27.5% of the Stimulus Package is directed towards SMEs

The Government of Bangladesh has allocated 27.5% for SMEs out of the total Covid-19 relief fund as working capital finance for a duration of 3 years. SMEs will receive the BDT 22,000 cr from commercial banks as loans against 9% designated rate, from which the Government will

pay 5% as the subsidy to the banks while the borrower will pay 4% to the bank.8 Farmers who are suffering due to the lockdown will be provided loans at 4% interest from a BDT 5,000 cr agricultural stimulus package. Micro and marginalized businesses will also be applicable for refinancing schemes of BDT 3,000 cr through MFIs. Banks will also be entitled to a refinance scheme from BDT 10,000 cr fund at 4% interest for up to 50% loan portfolio from Bangladesh Bank to provide this working capital for the next three years. In addition, Farmers who are suffering due to the lockdown will be provided loans at 4% interest from a BDT 5,000 cr agricultural stimulus package.8 Micro and marginalized businesses will also be applicable for refinancing schemes of BDT 3,000 cr through MFIs.

According to Bangladesh government’s guidelines, the working capital will be provided on the basis of bank-client relations and a maximum of 10% of last year’s portfolio can be disbursed in CMSME sector in a single fiscal year . Enterprises in manufacturing, services, and trade-based firms would receive respectively 50%, 30%, and 20% of the annual loans where Cottage, micro, and small industries will account for at least 70% of the total loans. In addition, 15% of the loans must be allocated for borrowers in rural areas, and at least 5% for women entrepreneurs.9

6. How will the Covid-19 stimulus package be implemented? – The Daily Star

7. Bangladesh Bank sets strict conditions for BDT30,000cr stimulus package – The Business Standard

8. Bangladesh Bank to provide half of BDT 20,000cr stimulus package for SMEs – The Daily Star

9. Three more stimulus package guidelines arrive– The daily Star

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The Stimulus Package: Can it help our SMEs tackle the unprecedented crisis?

While the stimulus package brings hope for SMEs, disbursement of the hefty stimulus package remains a challenge. Interest rate fixed at 9% coupled with the increasing non-performing loans, the banking industry is going through an intensive stress-test. The guidelines do not seem to take into consideration the challenges and are creating greater risk aversion by the banks.

Considering the average interest rate spread of 4.04¹0, high overhead costs, and a greater probability of defaulting in SME lending, it is almost certain Banks are going to take the risk-averse position and deny loans to commercial banks. The liquidity crunch is further worsening since a good number of

corporate and individual clients are withdrawing funds regularly. Proper disbursement of the loans still remains the biggest challenge in addition to the risk of an upsurge of NPLs as the capacity of credit repayments decreases during the lockdown.

2 out of three SMEs have only 4 months of runway if the lockdown ensues further

A recent study by LightCastle Partners and Sheba.xyz on 230 respondents from the Trading & Production sector and the Service Industry revealed that 52% of the SMEs have completely shut down their operations amid the ensuing lockdown.

Government has allocated 27.5% out of the total fiscal stimulus package for the SMEs

Source: LightCastle Analysis

Source: LightCastle Partners and Sheba.xyz Primary Survey conducted on April 6-8, 2020 (n=230)

0.3%

6.3%

6.3%

15.9%

27.5%

37.5%

6.3%

Ministry of Health & Family Welfare

Agriculture Stimulus Package

Pre-Shipment Credit Refinance Scheme

Export Development Fund

Small & Medium Enterprise

Large Industries & Service

Export Oriented Industries

52%

28%

11%5% 4%

BusinessShut Down

Large Decreasein Revenue

Small Decreasein Revenue

Small Increasein Revenue

Large Increasein Revenue

10. Weighted Average Rate of Interest on Deposits and Advances – Bangladesh Bank

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With no means of generating revenue, 68% of the respondents reported to have only 4 months of runway. Enterprises are cutting corners

massively by optimizing costs – 46% of SMEs are projecting to layoff over 50% of their Staff within four months.

With no means of generating revenue, 68% of the respondents reported to have only 4 months of runway. Enterprises are cutting corners massively by optimizing costs – 46% of SMEs are projecting to layoff over 50% of their Staff within four months.

Way forward to ensure proper implementation of the stimulus package

The enhanced stimulus package by the GOB is

undoubtedly a necessary step in the right direction, but the nature of the impact is such that even a large stimulus package may only serve as a band-aid solution. New schemes such as rent subsidy, relaxation of TAX and VAT are plausible options to fight the pandemic and upcoming recession. Moreover, introducing credit guarantee schemes and ensuring a fair disbursement of the funds- banking sector collaboration with MFIs, MFS, and specific guidelines coupled with utmost transparency and accountability should be put into place.

The study also showed more than two-thirds of the SMEs (70%) seek soft loans/working capital loans to tackle this crisis. However, other benefits such as government grants, relaxation of VAT &

TAX, unconditional loans from the government will shield many businesses further from capsizing.



70% SMEs are Seeking Consessional/Working Capital loan totackle the crisis

Less than4 months

4-8 months 8-12 months More than12 months

68%

19%

6% 7%

Soft loans at a lowerinterest rate

32%

7%20%

11%6%

6%3%

4%2%9%

Manufacturing and Trading

Service

Working capitalloan

Flexible installmentpackages

Govt. grant supportto pay salary

Increased loan tenurewithout any penalty

52%

18% 15%9% 6%

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VAT and TAX relaxations can be implemented to cushion the financial burden on the SMEs

The NBR may consider a number of support measures which could include, increased depreciation of assets for the upcoming two years, special reduced rate of VAT for the domestic purchase of goods and services for six months, relief from penalties and interest for tax-related payments till December 2020 and deferred payment of quarterly AITs till June 2020. NBR may also consider raising tax exempted annual turnover limit for SMEs from BDT 50 lakh to BDT 1.0 crore for the year FY2020 and FY2021.

Rent subsidies will support 60,000 food service establishments

Foodservice establishments in the country are estimated to be around 60,000, where more than 15 lakh people are working.¹¹ In Dhaka alone, there are approximately 10,000 restaurants that employ 3 lakh people. While the businesses are shut down, the restaurants are still liable for rent. Entrepreneurs of small businesses, with monthly revenue of less than BDT 5 lakh, may be provided with rent subsidy during the lockdown period and for one month thereafter.

Introducing Risk/Credit guarantee schemes

One of the proven tools to globally address the current challenges of the Banking sector are credit guarantee schemes. Since the government shares potential losses in case of a default, Credit/Risk guarantee schemes enable financial institutions to provide riskier loans.¹² The current package does not include any such support and

this is an avenue the government could explore by allocating portions of the stimulus package to create the schemes. With such support, the financial institutions will be able to provide ample access to finance for the vulnerable SMEs.

Increasing accountability by leveraging mobile financial services for transparency and traceability

Since the country’s mobile financial services are highly sophisticated, a combined effort between the Government, non-governmental organizations, and informal sector organizations can highly assist in implementing this social assistance program. Keeping in mind, 38% of the SMEs are not under financial inclusion, who will suffer to reach out for the banks as most do not have the necessary documentation, transaction history, and lack collateral. Mobile financial services can ensure the transparency of delivering the stimulus to the right individual at a faster pace – resulting in a significant convergence of several low and middle-income individuals along with SMEs under financial inclusion. In times like this, mobile financial support should be promoted for promoting social distancing also.

Collaborate with MFIs to extend reach out to SMEs all over the country

The large number of small and medium industries operating across the country will create a paramount challenge for the Government or the banks to monitor and control this operation efficiently. As MFIs have grown over the years and become more professional, some have begun to move into the SME

11. Restaurant Sector Hit Hard by the crisis -The Daily Star

12. Corona stimulus package in Bangladesh: Getting bigger bang for the buck – The Business Standard

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segment. Many see this gradual transition to SME finance as a natural shift, as the MFIs follow their customers’ development/journey. According to the Microcredit Regulatory Authority (MRA) rules 2010, the ME loan outstanding of an MFI cannot be more than 50% of the total Microcredit portfolio. This rule can be relaxed in this dire time, and collaboration can be merged to reach out to the need, leveraging the experience and capacity of MFIs. Also, there can be a collaboration among the banking sector and SME Foundation, Palli Karma Sahayak Foundation (PKSF), and non-government organizations (NGOs) to create an authentic database of the most affected SMEs to ensure the proper deployment of funds.

Specific guidelines to maintain transparency and accountability

Formulating specific guidelines for the proper management of the incentive packages is equally important as the fund itself. Since the Government has already lagged behind in the revenue collection of this fiscal year, efficient utilization of the rescue packages is of paramount importance.

Given the context of the country, there are countless ways to misuse the funds when loans are disbursed based on bank-client relationships. Thus, the highest level of transparency and accountability must be put into place to ensure the loans are reaching the actual entrepreneurs who are in dire need of it. What is imperative is the Government’s honest political will to the supreme degree.

Habitual loan defaulters contribute largely to the non-performing loans, and it is imperative to keep them away from the package. It is still

persistent in the system that many subscribers take out loans only to delay the payments and reschedule continuously. Only the adversely affected entrepreneurs who have a sound financial transaction record must be made eligible to receive the loans.

In the current development paradigm of Bangladesh, SMEs have played a significant role in generating jobs and GDP growth. SMEs have the potential to change the face of Bangladesh’s economy and therefore the sector should receive more emphasis to keep afloat during this crisis and way forward.


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Mobilizing CSR Funding to Tackle Covid Fallout

The Covid-19 pandemic has brought about multi-faceted impacts on the economy, encompassing disruptions across the value chain in almost all the sectors. As an economy with large scale contributions from semi-formal and informal sectors, the impact of the pandemic has disproportionately reverberated across the economy in terms of income and job losses for the informal sector workers. The resulting economic and humanitarian crises are hard to tackle solely through government fundings. Contributions from private sector enterprises are imperative for fulfilling the unmet needs of the economically vulnerable population.

CSR: The concept

The concept of Corporate Social Responsibility (CSR) was introduced in the 1950s and defined CSR as the obligations of businesses to pursue their policies, make their decisions or follow their lines of action in accordance with the terms of objectives and values of society. The rationale was not to limit a businesses’ responsibility and their actions within the firm’s direct economic or technical interest, but to make them contribute towards broader social ends.

In 2008, Bangladesh Bank formalized CSR guidelines which allows companies in the

financial sector to allocate a percentage of post-tax profit for CSR activities. However, companies can spend a maximum of 30% on education, 20% on health care and 10% on climate and disaster management of their total CSR outlay.

In situations like the Covid-19 pandemic, where a global recession is imminent, countries like Bangladesh need to redirect the private CSR funds towards containing the crisis, developing health care infrastructure and cushioning the economic blow that will follow once the crisis is managed. However, lack of monitoring of CSR fund disbursement and lack of institutional policy support will work as a major bottleneck when considering this approach and its effectiveness. Practices like ad-hoc one time donations and greenwashing needs to be redirected towards supporting the economy in order to mitigate losses and minimize casualties.

CSR in Bangladesh: The Status Quo

Companies carrying out CSR activities in Bangladesh can benefit in the following ways:

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Saif NazrulSenior Business Consultant & Project Manager

Sanjir AliSenior Business Consultant & Project Manager

14

Corporate Tax exemptions for fulfilling CSR commitments in terms of budgetary allocations. Bangladesh Bank offers a conditional 10% income tax exemption.

Improved brand image and possible higher added-value to products on the basis of ethical considerations. An example may be BAT Bangladesh being awarded Asia Responsible Entrepreneurship Award in 2014 under Green Leadership by Enterprise Asia for their Aforestation activities.

Less stringent regulation on core activities by monitoring bodies or the Government. An example may be the heavy compliance standards of bodies such as Alliance & Accord on RMG.

Improved likelihood of receiving investments, especially from foreign investors. Improved worker motivation and productivity.

The financial sector in Bangladesh spent BDT 627.13 Cr on CSR activities between Jan-Jun 2018. A total of 51 scheduled banks contributed to different causes in accordance with their company’s mission and vision. Islami Bank Bangladesh Limited was the highest contributor in this regard with a total expenditure of BDT 281.32 Cr on CSR. (Source: IDLC)

British American Tobacco (BAT) focuses on green sustainability through afforestation, the flagship programme of BAT which led them to receive several corporate social awards. The organization also focuses on safe water and solar home system developments under its livelihood improvement thematic category.BAT global has also recently pledged on working for the vaccination of Covid-19. (Source: BATB Website)

As part of its CSR activities, Unilever Bangladesh focuses on four thematic areas in order to fulfill its social obligations as an organization: Employees, Community, Climate & Environment, Organization. (Source: Mapping the Current Status of Corporate Social Responsibility Activities and the Scope of Workers Participation)

PRAN, one of the biggest local conglomerates in Bangladesh, contributes to government expenditure in education, infrastructural development, public employment generation and cash transfer under safety net. PRAN also promotes long term individual sustainability through provision of tools and knowledge required to ensure the self-sufficiency of its value chain actors. (Source: PRAN Website)

Most private organizations like the aforementioned contribute towards CSR significantly. However, the efforts are dispersed and impacts aren’t evaluated. Therefore, concentrating the cumulative CSR funds towards a single point/cause would definitely help recover from the aftermath of the Covid-19 crisis and provide clarity on the impact of such initiatives.

Private sector tackling public crisis

The coronavirus pandemic has mobilized funding from governments and corporations across the globe. Bangladesh, too, has seen some tremendous response from both private sector and NGOs alike. Private sector contributions to tackle the Covid-19 fallout have generally been across a combination of three streams: (a) cash donations or in-kind contributions directly addressing the Covid-19

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health crisis; (b) temporary restructuring of operations to mitigate the Covid-19 health crisis; and (c) contributions to tackle the financial fallout arising from the Covid-19 pandemic.

In cases of the first, companies and individuals have been making direct contributions to tackling this health crisis. To cite some examples from fashion houses, Dolce & Gabbana has been financing research into the coronavirus, while Giorgio Armani has been directly funding hospitals to help their response in this crisis. In Bangladesh, companies such as Summit Group and multiple banks, among others, have donated to the Prime Minister’s relief fund. In kind contributions have been offered by companies such as Navana Group, Akij Group, Bashundhara Group and Green University who have offered their facilities to set up temporary hospitals or isolation zones in order to help deal with the crisis. Beximco Pharmaceuticals has donated PPE, test kits and medications to help tackle this crisis. Perhaps, most prominently, Alibaba Foundation (the non-profit arm of Alibaba Group) has sent PPE and test kits to at least 10 Asian countries and more than 40 African countries to help them prepare for the Covid-19 crisis.

Some companies have also agreed to temporarily re-structure their operations and production lines in order to tackle the virulent pandemic. Internationally, General Motors, an automotive company has been re-organizing its production lines to manufacture ventilators, while Dyson, a British home appliance manufacturer have invented a new type of ventilator altogether. Ventilators are artificial respiratory equipment that are essential to save lives in this pandemic. In an inspiring turn of events, Walton Electronics has received the patent and source code for ventilators from Medtronics, an international

medical device company and plans to be the first in Bangladesh to commercially produce ventilators, PAPRs, and oxygen concentrators despite most of its other production lines being closed due to the government shutdown. The BGMEA and Marks & Spencer have begun to produce large volumes of PPE locally that are needed to arm the frontline health workers. Other ways companies have been adjusted during this crisis include Karew & Co., a local distillery, which has shifted its resources to producing hand sanitizers for sale at fair prices during this time of acute shortage. Online meal delivery services such as Pathao Food and Foodpanda have also reformed their operations to encompass retail shops in the hopes of minimizing customers’ external contact and help enforce social distancing This has also been a time for technology companies to step up their game. Internationally, several remote communication and file sharing companies have offered free products/ products at reduced prices to support people who are working from home and students in remote learning. In a similar manner, the Bangladeshi streaming service Bongo has opened up its premium content free of cost for the duration of the coronavirus pandemic. In America, major MNOs such as Comcast, Verizon, T-Mobile and Sprint have signed a pledge to keep Americans internet-connected for the next 60 days, even if people cannot afford to pay. But such an initiative has not been replicated by the MNOs in Bangladesh.

Finally, companies have also looked at ways to mitigate the very real and tangible financial fallout arising from the Covid-19 pandemic. Internationally, Apple and Amazon have announced unlimited paid sick leave for their employees who had contracted coronavirus, and

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continued payment to staff whose hours have been disrupted by store closures. The self-employed gig economy is especially vulnerable to the coronavirus crisis, and in these times, Microsoft and Google have announced that they will keep paying their temporary (hourly) workers. Uber has also pledged to support their drivers during this period. Some companies online retailers such as Amazon and supermarkets such as Aldi have offered their staff bonuses in recognition of the risk they are taking in continually serving customers and because of the increased demand for groceries during this period. In Bangladesh, the focus has been primarily on the manufacturing industries, where working from home is not a pragmatic option and idle production lines can translate into layoffs and unpaid salaries. Bangladesh government itself has unleashed a stimulus package of BDT 5,000 crore for export-oriented industries, and it is assumed that proceeds from the PM’s relief fund will also go towards keeping the vulnerable populations afloat. Migrant workers have also suffered massively due to this crisis and at least

40 small and medium-sized local foundations and NGOs have been engaged in activities related to financial assistance and delivering food, hygiene products and protective equipment to vulnerable communities in Bangladesh.

Way forward

In Bangladesh, there is no clear guidance for CSR spending and disclosure. Bangladesh would have been more prepared to mobilize CSR funding more effectively had the government created a coherent CSR policy articulating its expectations and providing guidance on the kinds of CSR activities possible. At the moment, the

government’s largest CSR initiative is the PM’s relief fund where companies can contribute, but donation is not mandated by law and the fund’s disclosure and transparency mechanisms could be improved further. Outside of this fund, most CSR practicing companies which practice CSR do so independently, and often without dedicated departments or external expert recommendations. It also does not help that one of the biggest motivators for companies to contribute is to reduce their tax burden (as contributions are tax-free) and increase their profile among government stakeholders. In fact, a local study had found that many companies, whilst providing CSR, did not comply with the law in providing basic labor standards to their employees.¹

To find examples of other countries where CSR Policies have been implemented more coherently, one needs look no further than India. In India, CSR has been legally enshrined through amendments to the Companies Act. Companies with a net worth of INR 5 billion (USD 70 million) or more, or an annual turnover of INR 10 billion (USD 140 million) or more, or net profit of INR 50 million (USD 699,125) or more are mandated to spend at least 2 percent of their profits on CSR, and the Government of India has also specified the list of initiatives in which companies can allocate their CSR funds.² CSR spending has also been made time-sensitive and companies cannot withhold CSR funds for more than 3 years. The CSR contributions are also disclosed with full transparency through a dedicated government portal.³ Finally, the list of sectors where companies can contribute CSR funds towards is also dynamic; recently, funding to combat the coronavirus has been introduced into the list.4

1. Corporate Social Responsibility in Bangladesh: Practice and Perpetuity Promoting, Safety & Rights

2. Corporate Social Responsibility in India, India Briefing

3. National CSR Data Portal, Government of India

4. Now, Indian Inc can spend CSR funds to combat coronavirus, Business Today

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Bangladesh, too, should enshrine mandatory CSR through comprehensive legal enactments. The government should also resist the temptation to manage and implement all incoming CSR funds by itself and be cognizant of the benefits of engaging NGOs in certain types of service delivery and in certain regions. CSR proceeds of the PM fund should be shared with NGOs on the basis of their strengths and competencies in achieving desired outcomes, with strict monitoring and control measures.

After enactment, awareness should be raised amongst businesses about corporate social responsibility and the kinds of CSR activities they could undertake. Public disclosure should be practiced to the fullest with businesses disclosing their CSR engagement to the public through their annual publications. Transparent reporting can improve the companies’ credibility; it can also open up opportunities for coordination of CSR initiatives across businesses, and facilitate better research and inter-stakeholder dialogue resulting in general improvement of CSR.

Given the likelihood of Covid-19 to become a seasonal disease like the flu, some CSR funding should be directed by the government to engage in curative and preventive (e.g. vaccines) for Covid-19 as well. With the wealth of human resources and technology at the hands of the private sector pharmaceutical companies, they might be taken on board for a PPP initiative, to which the pharmaceutical companies will contribute a significant amount.


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Leveraging Innovation for Bangladesh’s Growth

Bangladesh, home to about 170 million people, is one of the fastest-growing economies in Asia, with a constant annual GDP growth rate of around 6% over the last two decades.¹ It dominates the global RMG market in 3rd position, right after China and Vietnam, earning USD 30 billion (83% of total export earnings) as of 2018.² As the country develops, an additional 11 million jobs are expected to be established by 2025.³ Connectivity has reached its peak, with 97% mobile phone penetration (166 million) and 58% internet penetration (100 million).4 Consequently, startup activity has surged as local and global businesses emerge with innovation and new business models to satisfy unmet demand across the country. The government of Bangladesh has also taken national and regional initiatives, such as bootcamps, hackathons, co-working spaces, accelerators, and incubator programs, realizing nurturing innovation and entrepreneurship is an essential key driver of economic growth.

Over the last decades, the digital revolution has transformed how businesses operate with new business models creating new markets. Developed nations have leveraged innovation to accelerate economic growth through funding research and development, human capital development and talent management, improving

manufacturing capabilities, and the concentration of high-tech public companies.

While there has been significant development prospects, Bangladesh is yet to catch up on innovation. As technology evolves to be cheaper and efficient, The country’s current strategy to import innovation and technology from the developed countries is imminent to become detrimental in the foreseeable future.

As Bangladesh endeavors to become an upper-middle-income country by 20315, we question, can Bangladesh leverage innovation to take its growth on to new heights? To do that, we need to understand where the country stands right now in terms of innovation, the present barriers and hindrances in play, and how the ecosystem stakeholders can mitigate them in the future.

In terms of innovation – Bangladesh is ranked at the bottom low

As of the Global Innovation Index 2019, Bangladesh ranked 116th out of 129 countries.6 The index is a composite measure of 80 parameters categorized under human capital & research (ranked 127), institutions (124),

1. IMF Data Mapper: Bangladesh

2. Dhaka Tribune: RMG exports saw 8.76% growth last fiscal year; July 2018

3. Daily Star: Widening job market a challenging prospect; January 2020

4. BTRC: Mobile Phone Subscribers; February 2020

5. UNDP: An upper middle-income Bangladesh starts with a livable Dhaka; December 2019

6. WIPO: Global Innovation Index 2019

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Mehad ul HaqueProject Manager & Senior Business Consultant

Ishtiak MourshedTrainee Consultant

15

business sophistication (120), creative outputs (115), market sophistication (96), knowledge and technology outputs (91) and infrastructure (86).

When compared with other 26 South East Asian countries, Bangladesh was ranked 17th right after Cambodia, Nepal, and Pakistan as one of the least innovative countries.

Despite the rank, over the last couple of years multiple innovations and initiatives have taken place collectively or separately by various ecosystem members like the government & public sector, start-ups & private sector, academic institutions, and financial investors.

Bangladesh’s rank in sub-sector parameters (lower is better)* Source: Global Innovation Index 2019

Source: Global Innovation Index 2018

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The government has a vision for digital Bangladesh with promising policies, regulations but inefficient implementation hinders progress

The government of Bangladesh deployed the National ICT Policy in 2009 to become Digital Bangladesh by 2021. The government defined a single vision, 10 objectives, 54 strategic themes, and 306 action items in the policy. All ICT based activities are led by the ICT Division, and a2i (Access to Information) Programme, a whole-of-government program of the ICT division, supported by the cabinet division and UNDP. For boosting entrepreneurship and innovation in the community, the iDEA project by ICT division has formed co-working spaces, taken initiatives of the national and regional level of accelerators and incubators, and has given out seed investment in forms of government grants. For the first time, ICT division has also established a public-private venture capital entity called Startup Bangladesh, with an allocation of USD 6 million fund to invest in growth-stage startups and help them grow in terms of alternative investment.

Other feats from the government include on improving infrastructure, such as the establishment of a Tier-III Data Centre; connected 2,600 unions and 18,434 public offices to the internet through fiber-optic connectivity; implemented 4,176 digital classrooms & labs in schools and colleges; mandated ICT in school curriculum from grade six onwards; launched emergency hotline (999) and information (333) call center; launched Bangladesh’s first satellite in space – the Bangabandhu Satellite 1.

The initiatives and steps taken are quite remarkable for the country. Still, without having the proper people in place and the absence of local private sector and independent knowledge body partnerships, it makes it challenging to implement such robust programs and initiatives successfully and bring required results within time. A key solution would be to stop brain-drain from Bangladesh and bring back the Bangladeshi foreign intellectuals back to the country. Countries like South Korea have grown into major technology hubs with government incentives that tackled brain-drain and also brought back their intellectuals from innovation economies like the US – most of whom formed companies in the country or joined universities like KAIST (Korean Advanced Institute of Science and Technology).

Disruptive innovation like bKash is leading from the startups and private sector

The age of Startups for Bangladesh dawned in the early 2010s, and the ecosystem is only beginning to spread its wings. Currently, there are over 100 active startups, with most of them situated in Dhaka, and (a handful in) Chattogram. High growth disruptive innovation companies in e-commerce, ride-sharing, and logistics sector have secured successful international investments, for example, Shohoz from Golden Gate Ventures (USD 15 million), Pathao from Go-Jek (USD 12 million), Chaldal from IFC (USD 5.5 million), Shopup from Sequoia and Omidyar Network (USD 3.1 million).

Disruptive innovation is a critical strategy that can lead to a country’s dramatic economic development, as proof, let’s take a look at

7. MITSloan: How Disruptive Will Innovations from Emerging Markets Be?; Fall 2012

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Japan.7 After World War II, the Japanese companies like Nippon Steel, Sony, Toyota and Canon started producing inferior quality products compared to those of their Western competitors but cheaper, enabling them to capture the low-end segment of the global market. Soon, as their performance and quality of the products improved, they entered new markets and profitable segments. Ultimately, Japan captured most of the technology segments and pushed their Western competitors either out or to the very top of the market.

An example of a local disruptive innovation would be bKash, the pioneer mobile financial service (fintech), currently has an active user base of 31 million in its ninth year of operation. With an undisclosed amount of investment from Ant Financial, an affiliate of Alibaba Group, bKash is driving the country towards a cashless economy.

As bKash grows, it empowers the ecosystem around it to grow as well. For instance, mobile financial services complement the rise of e-commerce consumption, which is also propelling the growth of the logistics industry. An increase in service demand helps businesses to cut on unit-economics, delivering higher quality at a cheaper cost that drives repeat purchases.

Hence, It is necessary for startups to take bold targets of launching disruptive innovations. The online service marketplace, Edutech, and Agritech have been marked as the next forces to drive emerging innovations.

Local angels and institutional investors need to upgrade their risk appetite

Decades before Bangladesh saw a glimpse of startup, a venture capital firm called BD Venture was incorporated back in the early 2000s. Currently, there are 17 firms registered as alternative investments company under B-SEC (3 of whom have received the license to launch funds), asset management firms, multiple foreign investors, angel syndicates like BD Angels, corporate investors across RMG, ICT sector who are showing a growing appetite for equity and quasi-equity based investments.

Despite all efforts, Bangladesh based Startups have only raised USD 27 million compared to USD 4.2 billion in India in 2018.8 Even considering the difference in economies, the gap of 155X is quite disproportionate. Though a growing number of international investors are interested in investing in the country, challenges to exit any profit out of the country continues to discourage the wider investor audience who are willing to finance. As foreign investment starts pouring in, local investment firms are yet to match their risk appetite to fund Series A and above. To further propel innovation, investment is the key. Therefore it is of utmost importance for the government to improve the investment climate that will not just attract more foreign investment but also more expertise and ideas.

8. Financial Express: Bringing unbanked poor under financial services; January 2020

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Lack of public funding and industry-disconnect are reasons behind academic institutions for failing to produce the right talents

While global spending on innovation is growing, Bangladesh allocated only USD 6 million for scientific research in its annual budget 2019-20. From which, the education ministry allocated a mere 4% for public universities for research purposes. It is unclear if the country lacks adequate funding options or a lack of motive to invest in research and innovation. Adding to that, the lack of proper usage of funds and the shortage of experienced academicians to lead research programs create a shortage of platforms for students to participate and practice. As a result, they fail to deliver in the job sector, creating a massive challenge for the business ecosystem to access quality talent from the local market.

While there are many (53) public, (90) private, and (2) international registered universities in the country, the industry-academia disconnect means there is an absence of guidance for the right kind of innovation and resources for the market. Moreover, fundamentally universities in Bangladesh do not yet focus on developing entrepreneurial talent – nor do they have the right sort of incubation programs, access to funding, or R&D labs to facilitate Startup/SME growth. Industry-academia linkage is imminent to set up the right kind of infrastructure to nurture innovation and talents at school/university level as well as leverage knowledge remittances from all over the world through incentivized initiatives.

Covid-19 – A curse for all yet a blessing for few

Recently, an internal survey on startups was carried out to realize the impact of Covid-19 on their business and collectively on the sectors

Ride-share, E-commerce and Service Industry suffers while Grocery, Logistics

and Mobile Financial Services prosper due to Covid 19 lockdown

Source: Bangladesh Startup Covid-19 Response Group (n=200) & LightCastle Analysis

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wholly. For the complete nationwide lockdown to maintain social distancing – rideshare, e-commerce, and service-based startups are all out of operation. Few sectors saw growth, like the ones citizens directly need, such as Grocery Delivery, saw a steep increase in demand over 200%-300%. For logistics businesses, while most of their clients were out of business, others were operating and meeting the market demand, collectively showing slight growth. Mobile financial services also saw an increase for the need to transfer money.

As the world progresses and we adapt to newer technologies for innovation, there still remains many areas for improvement. However, with the combined effort of the Government, academia, public and private sector, Bangladesh can very well be on the path to become a country that fosters the ‘culture of innovation’ to its core.


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Impact Investing: New Frontier for Bangladesh?

Businesses are increasingly having a fraying relationship with societies and the environment. Hence instead of focusing on the old school method of profit maximization by enterprises – we are seeing investors, financial institutions and businesses looking to create financial returns coupled with measurable positive social and environmental impact. One such avenue is “impact investments”.

However, traditional investors, especially in a country like Bangladesh, are often apprehensive of entering the sector. The assumption is impact investing is more for NGOs, Development Financial Institutions and is a riskier, less liquid asset class generating below market returns. However, is that really true?

Impact investing capital deployed worldwide is projected to be in excess of USD 500 billion + in 2020 (source: GIIN) and the double-digit growth is not slowing down. BlackRock, the world famous investment group, will grow their investment in sustainable businesses/ asset classes 10-fold from USD 90 billion to USD 1 Trillion in a decade. As of now already 10% of the global PE capital can be attributed to impact investing (source: Mckinsey) and in the coming decade, the percentage of impact capital is only set to grow.

Let’s take a step back and discuss two points. A) Despite the global investor confidence in impact capital worldwide, what does the return really look like – especially for a country like Bangladesh? And B) Why is impact investment critical for Bangladesh?

Does impact investment generate less than market returns?

India has received close to USD 5 billion+ in impact capital from 50+ investors since 2010 – with the asset class growing 14% Y-o-Y. India has demonstrated how to sustainably deploy impact capital and also generate returns. Based on 40+ investment exists between 2010 and now – the median IRR was 10% while the top 33% generated a return of 34%.

Most of the deals took place in agriculture, clean energy, education, microfinance, financial inclusion and healthcare. It seems in terms of return, financial inclusion was in the top percentile followed by clean energy and agriculture. Education and healthcare seem to need more time to grow. The diagram below shows returns versus exits for the Indian market.

Bijon IslamCEO

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Source: Impact Investors Council, Mckinsey, VCC Edge, LightCastle Analysis

In Bangladesh – bKash which is regarded as the first unicorn Startup from the market – received impact capital from The Bill and Melinda Gates Foundation while the leading online grocery company Chaldal.com received Series A funding from IFC. Sheba.xyz – leading online service marketplace and service SME development company received blended capital from UKAID. These are but a few recent examples in the long list of successful impact enterprises in the country including names like Shop Up, Solshare, iFarmer who have received impact capital and are scaling.

Experience in the Indian market and leading examples from the Bangladesh market shows that not necessarily impact capital will generate below market returns. Exits from the Indian market showcases tangible returns and impact enterprises in Bangladesh showcases the same trajectory. There are obviously risks but what’s

interesting is the risk-return ratio is comparable with commercial venture capital asset class.

Why is impact investment important for Bangladesh?

Bangladesh over a decade has grown with a GDP delta rate at 5% to 7%+. There is a large middle-income population, currently estimated at 12 million which will triple over the next decade. We have a young (50% under 35), technology adaptable (40 million+ on smartphones, 99% 2G internet penetration, 35 million+ mobile financial services account) population. However, a lot of the growth we see is investment led mostly by public expenditure in large power and communication infrastructure.

Bangladesh is extremely dense – 175 million+ heads in a small delta country (with 1200 people/sq km) bordered by India from 3 sides

USD 500k to USD 3 million size deals produced the best results

< USD 0.1 million USD 0.1 - 2 million USD 2 - 5 million > USD 5 million

0%

-25%

-50%

25%

50%

75%

100%

125%

0

4

8

12

16

20

% o

f Ret

urn

on E

xit

No.

of E

xits

2

12

16

8

No. of exits Lowest return Highest return


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Source: Bangladesh Bank, BBS, HES 2016, WB, LightCastle Analysis

under the looming shadow of China. Additionally, in-equality has been also been on the rise – according to the Household Income and Expenditure Survey (HIES) released in 2017, the poorest five percent of Bangladesh’s population had their national income reduce from 0.78% in 2010 to 0.23% in 2016 while the richest five percent saw their income increase from 24.61% to 27.89% of national income in 2016 compared to 2010. This increase in income inequality, further accelerated the increase in the Gini Coefficient– an indicator of inequality of a country.

So, we see that high growth for Bangladesh hasn’t always resulted in equitable growth for the country’s citizens and if we don’t change the status quo, the gap between the socio-economic groups will widen. Plus, we are a country with

extreme population density – with finite resources – any negative externalities and impact we have on the environment can become catastrophic.

However, there is also a silver lining given our density dividend impact businesses can not only generate large impact per dollar invested but can also create profitable returns – just think how profitable the telecom businesses have been in the country with 80%+ penetration with 80 million people on the internet (source: BTRC).

As of recent are also experiencing a “Black Swan” event – the Covid-19 pandemic. As a country we would lasting impact on both exports (RMG sector already seeing falling demand amid backward linkage disruption), remittances (our human capital is coming back

Rising inequality despite high consistent GDP growthCo

ntrib

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n to

the

Nat

iona

l Inc

ome

Gin

i Co-

effic

ient


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into the country including Middle East and Europe where they were employed mostly in semi-skilled/unskilled category and domestic demand (not only tourism but internal demand for both services and products will scale back) leading to unemployment especially in the informal sectors. Given this scenario we need businesses to become increasingly inclusive and start creating social and environmental returns on top of positive economics.

Lastly, the government is committed to achieving the 17 SDGs by 2030 and given the current rate of public and development expenditures we can’t get there just on GoB and philanthropic capital/ODAs alone. Moreover, as Bangladesh moves on to becoming a middle-income country ODAs will dry up and concessional loans will not have preferential rates anymore and we need to curve GoB foreign borrowing to build up the country’s forex reserve more so given BDT is expected to devalue further in future. We need a new breed of investors and impact enterprises that are going to get us there. Hence for Bangla-desh to go into the next decade – impact invest-ing can and will play a significant role.

What’s next ? – Where do we go from here?

So how do we proceed? We believe each of us has a role to play.

Role of Seeding and de-risking by core impact investors: Even before mainstream investors can come in, a core group of impact investors need to come and de-risk investments into impact enterprises. In many cases, the impact entrepre-neurs would need smart capital and once they have a path to sustainability and growth – more

commercial-minded and traditional investors can follow. However, without the initial seed capital with an investor group who is willing to create success cases, it becomes difficult to scale investments in the impact enterprises asset class. This is where development partners can also come in providing the initial de-risking capital – a lot of programs in Bangladesh are already working like the Biniyog Briddhi program from Swiss Development Corporation and Roots of Impact which will provide catalytic funding or Business Finance for Poor In Bangladesh from UKAid which supported blended finance in pay by results model via a challenge fund. Addition-ally, development partners can also add value by including social/impact enterprises into their value chain and also help build the ecosystem including service providers.

Role of Government: The government in Bangladesh has been showing increasing support for Venture Capital especially the ICT Ministry is a front runner with them declaring a GOB backed BDT 100 Cr (USD 12 million) VC fund from Startup Bangladesh. However, incentives need to be given to impact investing specifically as well. The B-SEC (Bangladesh Securities and Exchanges Commission) now acknowledges “Impact Funds” as a separate investment type under Alternative Investments License. However, incentives need to be in place to encourage impact investing. That can be via fund of funds or formation of Social Impact Bonds – where impact funds will be compensated for their investments given pre-agreed measurable impact gets demonstrated. This fulfills the need for public good whereby mobilizing private capital and only paying if there is impact hence de-risking investment for the government. Additionally, it


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will be good to have a certification guideline for impact enterprises and guidelines for financial institutions to get into impact investments.

Role of Private Investors: Bangladesh is already showing early signs of local investors thinking about the impact space but we need more – once the early investors have de-risked investments, we need mainstream investors to come in and provide reasonable exists so that the capital can rotate and create a cycle of impact enterprises. Also, payout times would be larger compared to existing VC asset classes but returns would be comparable (as we have demonstrated earlier) and the positive measurable social and impact will create a sustainable long term future for Bangladesh.

Role of enterprises and entrepreneurs: The world has changed. More and more enterprises are focusing on triple bottom lines – people, profit, planet and looking to build inclusive ventures. Customers want to buy from responsible enterprises, the best talents want to work for impact-driven enterprises and the media wants to highlight the positive impacts created. And Bangladesh needs the next group of entrepreneurs who will solve critical problems for the country in energy, healthcare, food security, education, financial inclusion, climate change and beyond sustainably and profitably. Hence for the future, we need our enterprises to become inclusive and entrepreneurs to become impact ingenious and take Bangladesh to the next level.



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Covid-19: Impact on Bangladesh’s SME Landscape

SMEs¹ are the bloodline of Bangladesh’s economy creating employment for 7.8 million² people directly and providing livelihood for 31.2 million³

SMEs contribute 25% to our GDP but have the potential to contribute more. In our peer economies – Vietnam, Srilanka and Cambodia, SME contribution to GDP is 40%, 52% & 58% respectively.

The Covid-19 pandemic has affected all spheres of life and business, but the hardest punch hit the already vulnerable SMEs. The economic distress has added to existing problems such as lack of access to finance, poor market linkage, absence of skilled labour, and lack of export market.

According to the Asian Development Bank, the SMEs in Bangladesh account for 70 to 80% of the non-agricultural sector employment. 40% of the

manufacturing output is also by SMEs. Presently more than 6 million SMEs and micro-enterprises are operational in Bangladesh and they are constantly striving to upgrade the lives of many. (RRP Sector Assessment, ADB)4

Hardest punch received by the SMEs as they are dependent on a short cash cycle which has been affected as a result of supply chain disruption and loss of sales

To gauge the gravity of the crisis, LightCastle Partners and Sheba.xyz joined hands to conduct a study of the SME sector. Primary research spanning 230 respondents was conducted across all the eight divisions. Major industries include agriculture, poultry, dairy, fisheries, jute diversified product, retail store, food processing, & services (tailoring, electrical, laundry, mobile recharge & MFS shop). From the research, some insightful responses are presented below:

Omar Farhan KhanBusiness Consultant

Asif NewazBusiness Analyst

1. Definitions of small and medium enterprises (SME) as per the National Industrial Policy Order 2010

2. SME Foundation

3. Household Income and Expenditure Survey (HIES) 2016, Bangladesh Bureau of Statistics (BBS)

4. RRP Sector Assessment (Summary): Finance (Small And Medium-sized Enterprise Finance And Leasing), Second SME Development Project, ADB

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Source: LightCastle Partners Primary Survey conducted on April 6-8, 2020 (n=30)

Half of the respondents had to completely halt their business operations

Zero output due to the unavailability of raw materials and lack of scope to sell their outputs.

28% of the respondents have seen a drastic decrease in their revenue by over 50%

Cash reserves are running dry or with their debtors.

Services industry took a heavy hit as they are unable to provide their services and generate revenue.

52% SMEs completely shut down its operation

Marketing, Distribution and Rent are the first fields to go downunder significant cost cutting

Business had to beshut down completely

-(100%)

Significant decrease inrevenue -(50-99%)

Small decrease inrevenue -(0-50%)

Small increase inrevenue +(0-50%)

Significant increase inrevenue +(50-100%)

52%

28%

11%

6%

3%Service2%

4%

4%

1%

2%

7%

15%

25% 27%

13%


Marketing

Distribution

Rent

Operation

Production

Salary

90%

81%

64%

51%

29%

24%

42%

23%

32%

19%

16%

14% 10%

13%

32%

32%

58%

48%

Less than 10% of total expenditure

Expenditure brought down to 0


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42% of enterprises have cut back their marketing expenditure while 23% have done the same in distribution. This implies businesses are taking initial cuts on these two fronts to save some funds. It is also worth mentioning that 32% of the enterprises operated on their own facility – hence did not incur any rental expenses.

With respect to salary, 24% have cut down either to 0 or less than 10%. This indicates employees are already being laid off. This engenders concern as SMEs are one of the biggest employers in Bangladesh — they going down this route could end up with thousands of people becoming unemployed in a matter of months.

Due to the current lockdown, the enterprises not related to emergency food and medicine are suffering immensely. SMEs related to services and production of generic items such as jute, handicrafts, light engineering among others have been hit the hardest as they are unable to

maintain liquidity and operational activities. According to the survey, 68% SMEs reported that they will have to permanently shut down their business if the lockdown persists for more than 4 months.



68% SMEs will not survive lockdown for more than 4 months

46% employers are anticipating to layoff over 50% Staffif lockdown extends for over 4 months

Less than 4 months 4-8 months 8-12 months More than 12 months

68%

19%

6% 7%

Layoff 50%+ Layoff 25-50% Layoff 10-25% Layoff 0-10% Will not Layoff

46%

17%

11%

3%

23%


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About half of the SMEs (46%) will lay off more than 50% of their staff in a bid to cut costs

In other contexts too we see that at an aggregate 31% of the enterprises will go for some sort of layoff (1-50% of staff) to minimize costs and keep their businesses afloat

On a positive note, we also see that 23% of enterprises will not go for any type of layoff — indicating these enterprises have enough cash reserves to tackle rainy days

Government of Bangladesh’s response to the crisis compared toother economies

Source: Bangladesh Bank, Media Room Circulars & IMF,Policy Responses to Covid-19; Retrieved on 24 April, 2020

Before delving deeper into the current state of Bangladesh, let’s take a look at what our neighbouring countries are doing. India has unveiled a USD 34 billion aid stimulus package, the primary focus has been to back workers in the informal sectors who have experienced a steep decline in income or have lost jobs. Malaysia has pledged a USD 2.31 billion aid package for small businesses including startups. Indonesia cleared an aid package worth USD 8.7 billion, providing for a range of fiscal and

non-fiscal incentives in addition to a special stimulus for startups and small and medium-sized (SMEs) businesses. Thailand unveiled an aid stimulus package worth USD 15.4 billion that will be used for helping SMEs, especially tourism-related businesses; allowances worth USD 305 million is already approved.


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In a ramped-up effort with stimulus packages, Bangladesh has allocated a total of BDT 93 thousand crores (USD 10.9 billion) as a stimulus package to revamp the economy. As part of this, small businesses in rural areas will get subsidized loans of BDT 3,000 crore under the BDT 20,000 crore stimulus package announced by the government to support SMEs. Moreover, on April 12, a new stimulus package was unveiled worth BDT 5,000 crore to provide financial assistance to small and medium farmers in rural areas for boosting agricultural production facing the fallout of Covid-19. To this end, agro loans were reduced to 4% from the previous 5% interest rate.

To further help the daily wage earners, GoB has allocated BDT 760 crore (BDT 2,000 in cash to each of about 40 lakh families whose breadwinners have lost jobs because of lockdown), for day labourers, rickshaw or

van-pullers, mechanics, construction workers, newspaper hawkers, hotel workers.

Concessional loan, government support and digital transformation will help SMEs’ survival

“Prevention is better than cure” — is a quote familiar to most of us. To date, there is no cure for Covid-19 and the only way left for us is prevention. The lockdown is mandatory for our survival — with the current healthcare infrastructure it will be painstakingly difficult for us to fight and win against this virus at a mass scale level.

Keeping this into consideration, what should be the way forward for the government? We propose some concrete recommendations.


70% SMEs are seeking Consessional/Working Capital loanto tackle the crisis

Soft loans at alower interest rate

Working capitalloan

Flexible installmentpackages

Gov grant supportto pay salary

Increased loan tenurewithout any penalty

Service

32%

7%20%

9%6%

4%

6%

3%2%

11%

52%

18%15%

9%6%



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Concessional financing: From the current international practices as well from our study we observed that 70% of the respondents asked for soft loans/working capital loans to survive the crisis. Banks and financial institutions may sanction up to BDT 25 lacs to women entrepreneurs against the personal guarantee. Entrepreneurs’ credit limit may be ranged from BDT 50,000 to BDT 50 lacs.

However, current stimulus packages that are applicable through banks depend on existing relationships with SMEs which many of the smaller players won’t have. That means they might not be able to avail these concessional loans. Moreover, the banking sector is going through a liquidity crisis with many of them having stretched NPLs (Non-Performing Loans); hence they might not be able to fully disburse the stimulus. Furthermore, they would be more willing to fund their existing clients rather than SMEs which require the most. Here again, we need a more ecosystem-centric approach, where MFIs whose current portfolio consists of 37% SME loan5 and has a wider reach, can come into play.

Tax reductions and grants: The government should be reducing the tax rate and offering grants to businesses in hard-hit sectors in an effort to help reduce costs and boost the bottom line. Moreover, specifically for SMEs, VAT exemption on revenue and expenses for current and next fiscal year, exemption [or deferral] of withholding tax payments can be a timely initiative. By lower/exempting tax and providing grants, the impact of plunging aggregate demand as a result of the recession could be minimized.

Digital Transformation: Within the scope of the government’s financial assistance, the SMEs

should try to digitize their business operations to the best of their ability. Since the lockdown is forcing people to stay inside homes, it is imperative that businesses switch to online channels. Linking up with mobile wallets, MFS (Mobile Financial Service), DFS (Digital Financial Service), and Digital Supply Chain Management will help towards achieving medium-term solutions to tackle the extent of the crisis.

Digital Financial Services: Cashless transactions could transform the way SMEs conduct business. It widens the possibilities of reaching customers across the country. Mobile financial services like bKash, Rocket, UCash, Nagad opened new doors in transferring, transacting and storing money digitally instead of cash. Mobile Application & Web-based financial services of banks provide faster and secured transactions with little or no human intervention. It solves the limitations of MFS as online-based banking services have greater transaction limits suitable for SMEs trading in large volumes. Nexus Pay (Dutch Bangla Bank), EBL Skybanking, BRAC Bank Mobile are a few of the leading mobile-based Digital Banking applications.

Digital Supply Chain Management: Supply chains having web-enabled capabilities render enterprises the ability to source and sell on digital platforms. This not only increases the potential market by folds but also ensures a seamless transaction and traceability from the factory to the consumers’ doorstep.

Digital Credit: Traditionally, large banks that have had controlled capital investments in Bangladesh. Most financial institutions have been reluctant to lend beyond large corporates. One prevalent reason is assessing the

5. MRA Annual Report 2016-2017


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creditworthiness of SMEs has been seen by banks as more difficult and expensive. Apart from providing a platform to SMEs for selling their products/services — Sheba.xyz & Shopup also provide digital credit to SMEs and smaller enterprises, which are underserved by traditional banks. They are also leveraging digital platforms to expedite credit assessments.

In the short term, e-commerce giants like Chaldal, Daraz, Pickaboo have been experiencing tremendous growth due to the lockdown; sometimes to an extent that leaves them unable to fulfil demand because of a supply shortage. Therefore, this brings great opportunities for rural SMEs; those who will be able to adapt will survive.

SMEs create livelihoods and if they fail we will go into deeper economic shock with more and more people coming below the poverty line. Hence we all need to work together to support and uplift the sector. On the off chance that there is one thing that Covid-19 has shown unmistakably is that interest in digitization is not a luxury. Innovation is not only to survive this crisis but it is to create a sustainable business, which will be resilient and evolving in the ‘new normal’.



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Ivdad Ahmed Khan MojlishManaging Director

EDITORIAL PANEL

Bijon IslamChief Executive Officer

Zahedul AminDirector, Finance, Strategy and Consulting Services

Rafayet KhanBusiness Development Associate

Md. Tanjim MorshedCreative Design Associate

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Disclaimer:

All information contained herein is obtained by LightCastle from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein “As IS” without warranty of any kind.

LightCastle adopts all necessary measures so that the information it uses is of sufficient quality and from sources LightCastle considers to be reliable including, when appropriate, independent third-party sources. However, LightCastle is not an auditor and cannot in every instance independently verify or validate information received in preparing publications.

LightCastle Partners

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Gulshan 1, Dhaka 1212, Bangladesh.

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LightCastle Covid-19 Series 2020

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