CPD review underlines structural reforms, currency devaluation, seeks clarification about benefit from drive against ‘casino economy’
The government would fail to achieve the growth target for the current fiscal year as revenue collection, baking sector and stock market were in a bad shape for lack of structural reforms, said Centre for Policy Dialogue (CPD) on Sunday.
“Overall situation has aggravated as very little structural and institutional reforms have been undertaken in the economy,” the financial watchdog said in its ‘State of the Bangladesh Economy in FY 2019-20’.
CPD Distinguished Fellow Debapriya Bhattacharya said the economy was now in the weakest state in the last 10 years.
The country’s leading think-tank also said the government’s repeated recapitalization to the state-owned banks and bailing out private bank were setting bad precedence and encouraging irregularities in the sector.
The stock market was grappling with vested quarters’ influences and listed companies were failing to give dividends, leaving the general investors to worry, it added.
The CPD made the remarks while launching the report ‘State of the Economy in FY 2019-20’ at CIRDAP Auditorium in the capital.
“The government would not be able to meet its budget target if we consider the state of the economy in the first three months of the current fiscal year. The volatility in the banking sector and stock market suggest that pressure on the economy intensified,” said Debapriya.
He said without enhancing capacity of banks, the government was injecting cash into the ailing banks, which created dependency of banks for further bailouts.
“The government is running an economy based on government investment which is not a good sign. The policies are adopted on an ad hoc basis, without having enough data. Also, there remain questions about authenticity of the available data,” he said.
He also questioned the authenticity and estimation of GDP growth, asking that while major economic indicators were declining, how the GDP could grow.
“If the private sector investment does not increase, how can the GDP grow?” he wondered.
CPD Executive Director Fahmida Khatun said during the April-June period of 2019, a total of Tk15,460 crore bank loan was rescheduled and another Tk54,464 crore was written off.
"The government also provided Tk1,100 crore bailout package to rescue Farmers Bank. This has set a bad example and will encourage other banks to indulge in irregularities,” she observed.
“Earlier, we used to see bad loans only in state-owned banks. But now we see the private banks are also in the race. It means the efficiency of the private banks is also declining,” she noted.
CPD Research Director Khondaker Golam Moazzem said volatility in the country’s stock market was leading to further crisis in the economy.
“Lack of good governance and inactive role of institutional investors are major problems in the stock market. As of October, only nine companies reported higher dividends, 52 companies’ dividends declined and 23 companies declared no dividend,” he said.
He said the government tried to stabilize the stock market only through injecting money.
“Such measures are short lived and the market will become volatile soon. Injecting cash will never solve the problem. The leadership of the securities regulator should be reconstituted to strengthen the stock market. Also, the Financial Reporting Council should be reformed to ensure quality IPOs,” he said.
CPD Distinguished Fellow Mustafizur Rahman said the balance of trade was negative in the first quarter of the current fiscal year for the first time in the last 10 years.
“If the trend continues throughout the current fiscal year, the overall balance, forex reserve and exchange rate will come under increasing pressure,” he said.
Mustafiz said the only growth registered in remittance, increasing by16.6% in the first quarter of the current FY20.
“But the number of workers going abroad is declining. It was 10.08 lakh in 2017, declined to 7.34 lakh in 2018 and in the opening quarter of current fiscal it was only 4.7 lakh. The trend indicates, the number will decline further,” he predicted.
“We need to develop skilled manpower to take preparation for the LDC graduation. Also, we need to diversify our labor market,” he said.
He also said the government should also devalue the Taka to stay competitive with the neighboring countries.
CPD Senior Research Fellow Towfiqul Islam Khan said the government was dependent mostly on indirect taxes rather than focusing on direct tax income.
“We estimate that there would be a huge revenue shortfall in FY20 as the tax net is not being broadened. This will increase government’s bank borrowing and create further pressure on the banks and private sector investment,” he warned.
He also suggested that government should be careful on providing tax exemption in different sectors.
CPD said the revenue collection in first quarter was the lowest in a decade and forecasted higher revenue shortfall in the current fiscal.
As per Bangladesh Bank data, the overall deficit recorded a 73% growth, additional about Tk14,194 crore, in July-August of FY20 which was 23.8% of the annual target.
The government borrowing from banks witnessed 311% growth in Q1, additional about Tk18,555 crore, which was 53.8% of the total annual bank borrowing target.
Net government credit registered a 34.9% growth in July-August period which was the highest since FY12. At the same time private sector credit registered the slowest growth, around 10%, since FY14.
The CPD said the government should stop black money whitening and bring the tax evaders to book.
‘The existing black money whitening facility through voluntary disclosure failed to register expected response. Apparently only Tk196 crore was legalized from 220 people during FY17-FY19,’ it said.
The CPD also said NBR should also make it clear and transparent how the revenue collector would be benefited from the recent drives against “casino economics’.
On the issue of casino, Debapriya said the cash liquidity in casino came from corruption, defaulted loans and tax evasion.
“Under the given situation of mismatch, the state of current economy is the weakest in the last 10 years,” said Debapriya.
The think-tank said mounting liquidity crisis in the banking sector posed the risk of economic downturn.
Nearly zero to below zero real interest rate on deposit, cap on deposit rate at 6%, falling confidence of depositors due to high non-performing loans and illicit financial outflows were the main reasons for weak deposit growth, said the CPD report.
The total volume of non-performing loans increased to Tk1,12,430 crore in June 2019 from Tk1,10,970 crore in March.
"The government could build three Padma bridges, five metro rails, and seven power plants like Rampal with this amount of non-performing loans,” said the report.
The CPD report said irregularities and malpractices by influential quarter created scope for siphoning off large amounts of money.
"As a result, the small investors have been betrayed time and again, who lost their hard earn money," it said.
The CPD proposed that government should adopt policy of gradual depreciation of currency in line with the competitive currencies.
"In January-September, the competing currencies with BDT were moving at a faster pace," it said.
"What is also becoming increasingly apparent, based on export performance, is that without addressing the underlying factors of competitiveness, incentive alone will not serve the purpose," observed the CPD.