When I met PM Khaleda Zia on a Ramadan evening in 2013 to give her a rundown on the Bangladesh economy, she was crystal clear with me on Bangladesh's growth mantra -- “more investment, more employment and thereby accelerated poverty reduction.”
With her recent death, a long and eventful chapter in Bangladesh’s political and economic history has come to an end. Under her leadership, a process of reform was initiated that has had far-reaching impacts on both the country’s economy and politics -- more importantly in charting the path for a private sector-led economy.
Even today, one of the most frequently used words in Bangladesh is “reform.” But in reality, it has always been among the most difficult tasks to chart out reform agenda and drive those to implementation.
Following the fall of the Ershad regime through the mass uprising of 1990, Bangladesh returned to a democratic process. During that period, several important reforms were initiated in politics and the economy. Subsequent governments, to varying degrees, tried to maintain that continuity.
During PM Khaleda Zia’s tenure, economic reforms were led by the then Finance Minister, Saifur Rahman. It is widely known that as PM she gave him a free hand in pursuing reforms. This is considered a significant step in Bangladesh’s economic transformation.
When Saifur Rahman assumed office as finance minister in 1991, the Ershad regime had just fallen. Many argue that Ershad’s decade was a dark period for the economy, though toward the end of his rule, some reform initiatives were undertaken under pressure from development partners, but these remained incomplete. Notable among them were reforms in the tax system and the financial sector.
Saifur Rahman upon assumption of office launched major economic reforms. It is worth recalling that around the same time, Manmohan Singh also became India’s finance minister. The reform agenda was largely initiated across South Asia.
Globally, there was a strong wave of reforms, particularly in trade liberalization. Saifur Rahman followed that path as well, as reform was the only viable option for advancing the economy at that time.
The Khaleda Zia government also announced a new Industrial Policy in 1991. This policy led to rapid expansion of foreign investment and the private sector, especially small and medium enterprises.
It allowed 100% foreign ownership and joint ventures without restrictions. The growth of the private sector and the shift of the economy toward private-sector centricity owe much to this policy. All subsequent governments have maintained its continuity.
In addition, during Khaleda Zia’s first term, the foundation for social development was laid. Programs such as the Char Livelihood Development Program and the Ashrayan and Housing Programs played major roles in poverty eradication.
In 1993, primary education was made compulsory. In the same year, the “Food for Education” program was launched to encourage children from poor families to attend school. At the same time, secondary education for girls in rural areas was made tuition-free, and a nationwide stipend program for female students was introduced.
The most significant economic reform during Khaleda Zia’s tenure was undoubtedly the enactment and implementation of the Value Added Tax (VAT) law. Introduced in 1991, this law imposed VAT for the first time at the production and import stages, opening a new avenue for domestic resource mobilization. At the same time, as part of market liberalization and trade openness, import tariffs were significantly reduced.
Even today, Bangladesh’s tax-to-GDP ratio remains below 8%. Nearly 70% of total tax revenue comes from indirect taxes, mainly VAT . Nevertheless, the sharp decline in the share of foreign aid in the national budget (despite increased foreign borrowing in recent years) is largely attributable to VAT.
This VAT system was introduced during Khaleda Zia’s first term. Within five years of its implementation, the share of domestic resources in the development budget rose from 21% to 40%. When I met Manmohan Singh personally in Delhi in 2003, he had all the praises for Saifur Rahman for his success with VAT.
The next success for PM Zia and Saifur Rahman was the adoption of a flexible exchange rate regime in 2003. Both major reform initiatives were undertaken by Saifur Rahman during two different terms with PM Khaleda Zia and both implementations faced tremendous resistance from vested interest groups and communities averse to change.
Though Saifur Rahman initially didn’t hold the apparel sector in high esteem due to its lower value edition, PM Khaleda Zia always held them close to her heart due to its employment generation capacity for poor women.
As a humble banker, if you ask me, where she and her government was very focused and listened to what development partners suggested -- was not to allow any more commercial bank license during her last tenure of 2001-06.
Typically, a new government tends to issue licenses for new banks, often driven by political considerations rather than economic needs.
PM Khaleda and her team were very clear on this. I would also remember their biggest test to be able to release the name of the defaulting borrowers despite a lot of push backs from their own MPs and cabinet colleagues.
Due to private-sector-friendly investment policies and strategies, industrial growth accelerated, JP Morgan Chase and FT London included Bangladesh among the world’s 11 rapidly emerging economies(next 11) alongside countries like Indonesia, Vietnam, Egypt, and Turkey after BRICS.
It is to be also remembered, during PM Khaleda Zia’s tenure, with Saifur Rahman as Finance Minister, several trade liberalization measures were undertaken. The tariff structure was rationalized, enabling Bangladesh to participate more strongly in the globalization process. The benefits of these initiatives were realized in later years. Succeeding governments maintained this continuity, although toward the end they adopted some protectionist measures.
The reduction of export subsidies also began during Saifur Rahman’s tenure. He always wanted the Bangladesh trade sector to come up the curve and face the world. At one point, export incentives were as high as 25%. As competitiveness improved, he decided to reduce them. This reduction continued gradually, bringing incentives down to 4-5% today.
At that time, discipline prevailed in the banking sector. Bangladesh Bank exercised strong authority, and the level of non-performing loans was obviously not as severe as it is now. PM Khaleda Zia was convinced that disarray in the banking sector would have major political repercussions too.
We all know, Bangladesh as a whole suffers from weak enforcement of rules and an identified deficit in good governance. Nevertheless, most of the reforms that have taken place originated in the post-1991 period.
Analysts from home and abroad believe that significant credit for these reforms belongs to the governments led by PM Khaleda Zia. She always believed that the “private sector should be at the centre of everything we do or decide to do going forward.”
For Dr Shahabuddin Talukder and his esteemed colleagues at Evercare Hospitals, very few people in 2001 believed that a high-paying private sector multi-speciality hospital in Bashundara would be viable. However, we looked beyond and did the financial structuring as well as the syndicated fund raising led by Standard Chartered. PM Khaleda inaugurated this hospital and she liked it, took its services, and eventually breathed her last here.
Mamun Rashid is an economic analyst and first Bangladeshi CEO of a global bank.