The study explores the potential impact of the pandemic-induced disruptions in Bangladesh under three alternative scenarios: low, medium, and high shock. It outlines the transmission mechanisms through which the economy is being affected to assess the impact on major macroeconomic variables and sectoral outputs. The results are then incorporated into the social accounting matrix to simulate the likely effects in Bangladesh.
Researchers: Dr Sultan Hafeez Rahman; Abdur Razzaque; Jillur Rahman; Wasel Bin Shadat
Partners: Research and Policy Integration for Development (RAPID)
Timeline: 2020
Status: Completed
Method: Quantitative
Contact: Dr Sultan Hafeez Rahman; hafeezsr@bracu.ac.bd
Publications:
Context
Understanding the economy-wide impact of COVID-19 in Bangladesh has been challenging. Using the Global Trade Analysis Project (GTAP) model (Hertel, 1997)—a multi-region and multi-country computable general equilibrium comparative static framework—the study explores the potential impact of the pandemic-induced disruptions in Bangladesh under three alternative scenarios: low, medium, and high shock. It outlines the transmission mechanisms through which the Bangladesh economy is being affected to assess the impact on major macroeconomic variables and sectoral outputs. These results are then incorporated into the social accounting matrix for Bangladesh to simulate the likely income and poverty effects for various types of households. The study also explores the likely impact of government support measures through the stimulus package in mitigating the adverse consequences.
Objectives
To explore the potential impact of the pandemic on major macroeconomic variables and sectoral outputs in Bangladesh using (ex-ante) general equilibrium model-based simulation exercises to derive theoretically plausible and consistent macroeconomic results that have important policy implications.
This study is relevant to SDG 1 (No Poverty), particularly to ending poverty in all its forms everywhere.
Methodology
The study tries to assess the overall social and economic impact of the pandemic on Bangladesh based on the following measurable transmission channels: (1) a demand-side disruption arising from unemployment and reduction in households and corporate earnings leading to a fall in consumption and investment; (2) a sharp decline in domestic and international travel and tourism; (3) a drop in energy prices; (4) a trade shock affecting overall economic activities; and (5) fiscal policy measures of the government. The study uses both a “top-down” global modelling approach and a Bangladesh-focused approach to conduct a wide-ranging analysis of the likely impact (ex-ante) of various policy changes and shocks on economic performance indicators.
Findings and Recommendations
The pandemic-induced shocks will cause output shortfalls in the range of 3.5% to 9.3%, as against the baseline of 8% GDP growth of the Bangladesh economy. Exports are simulated to fall by around 10% under the low-shock scenario and 23% under the high-shock scenario. These disruptions are reflected in reduced outputs in various sectors, with leather, textile and apparel sectors showing the largest declines in production from the respective baseline outputs. Processed food, construction, and some services sectors also experience considerable decline. Simulations from a global migration model show the remittance inflow into Bangladesh to shrink by 3.8% to 7.7 %.
Loss of outputs of different sectors are linked to factor incomes and household consumption. Simulations from a social accounting matrix (SAM) multiplier model suggest that sectoral output changes cause household consumption spending to decline by 2.8% to 7 %. If the earlier simulated likely weaknesses in remittances are added to this, the corresponding household consumption decline further to reach 3.5% to 7.5 %. This results in the rising poverty incidence by 2.2 to 5.3 percentage points, depending on alternative shock scenarios. For the three poverty-prone household groups of small farmers, daily labourers, and non-farm wage-employed households, the average proportion of households in poverty rises by 3.5, 2.5, and 2.4 percentage points respectively under the low-shock scenario. The corresponding figures could be as high as 7.5, 6.2 and 6.5 percentage points under the high-shock scenario.
The loss in household income and consumption has substantial implications for poverty outcomes. The household income loss obtained from the SAM multiplier model has been introduced in the Household Income and Expenditure Survey (HIES) 2016 data to estimate the impact on poverty. It is estimated that, under the low-shock scenario, COVID-19 could push up the proportion of the population living in poverty up to 22.7% from the immediate pre-pandemic rate of 20.5%.
The government policy response has some impact in offsetting the economic consequences. The announced stimulus packages, if implemented fully, can mitigate 0.6 percentage points impact on GDP under the low-shock scenario and 1.1% under the high-shock scenario. It is found that the policy measures can contain export shocks by 3% to 5 % under different scenarios. Given the massive drop in global demand, significant export recovery is thus dependent on global economic recovery.
