'Bangladesh’s macro economy is currently under pressure than at any time in the past 10 years'
Bangladesh’s macro economy is under severe pressure now than at any other time over the past decade, the Centre for Policy Dialogue (CPD) has said.
The local think tank came up with the observation while unveiling a report, “State of Bangladesh Economy and the Budget Challenges” at Cirdap auditorium in Dhaka on Tuesday.
“Bangladesh’s macro economy is currently under pressure than at any time in the past 10 years,” Debapriya Bhattacharya, a distinguished fellow of CPD, said.
Macroeconomic stability was a strength of Bangladesh’s economy, but it has developed cracks and shows signs of weakness. The big challenge now is to protect the economy from this crisis, said Debapriya.
About challenges facing the upcoming budget for the fiscal year 2019-20, the CPD identified three issues, including revenue collection, reforms in the banking sector and addressing the exchange rate against the US dollar, as crucial for the government.
The issues, such as revenue collection, banking reforms, especially making the interest rate flexible, and addressing the exchange rate, would be very crucial, said Debapriya.
Failure in revenue collection has become an insurmountable barrier for Bangladesh's economic development, said the economist, warning that if the country fails to overcome this, it would squeeze out the investment opportunity needed for development.
“Implementation of development projects and Annual Development Program (ADP) is being hampered due to failure in meeting the target of revenue collection,” he mentioned.
According to CPD, since 2012-13 fiscal year, ADP implementation rate was 90% to 95%, which came down to 80%-85% in 2018. And as per the latest data available, about 48% of ADP has been implemented in the first three months of 2019.
If the government tries to collect funds from sources other than revenue, economic weakness would possibly be aggravated, cautioned Debapriya.
“Allowing black money whitening in the upcoming budget would be a departure from Awami League's electoral pledge,” Debapriya said, replying to a question.
In the election manifesto, AL had pledged to eradicate bribery, black money, and earnings through muscle power, he mentioned.
He also said that the government must realize the commitments made in the election manifesto, Seventh Five Year plan, and sectoral policies in regards to providing allocations for education, health, social protection, and Sustainable Development Goals (SDGS).
Reforms to increase revenue collection
“A credible program and all-out efforts will be required for accelerating revenue mobilization in FY20, including implementing planned reforms, expanding the tax base and new areas of revenue, enhancing administrative capacity, rationalizing fiscal incentives, and curbing tax evasion," Towfiqul Islam Khan, senior research fellow of CPD, said in his keynote presentation.
The CPD also opposed multiple VAT rates and suggested a 12% unified rate for all business.
Cash incentives in a different way
Talking on the cash incentives given to different sectors to boost export, the think-tank called for coming up with reforms and a new structure.
“Fiscal incentives, both in the form of tax exemptions and cash incentives, need to be revisited based on evidence. The forthcoming budget must be transparent by reporting the figures of revenue forgone in view of various tax incentives,” said Towfiqul.
The value of taka needs to be rationalized through gradual devaluation, which would ensure that new cash incentives are not required for exporters and remitters as the prevailing low inflation would support such macroeconomic adjustments, said the economist.
Banking commission for bringing discipline
To bring discipline into the country's ailing banking sector, burdened with huge bad loans, the CPD urged the government to allocate adequate funds for setting up an independent banking commission.
An independent commission for the banking sector should be constituted without further delay, with budgetary allocation for good governance in the sector, said Debapriya.
Crisis in the banking sector would not be resolved only by bringing down the interest rate, as despite a single digit rate, private sector credit growth is declining, he noted, calling for letting the market set the interest rate.
Debapriya Bhattacharya also said that all steps of the present government have become harmful for the banking sector. He demanded that loan defaulters and embezzlers be brought to book to restore confidence in the sector.
Considering the deteriorating liquidity crisis, pressure on interest rate should be relaxed to enhance deposits, he pointed out.
Towfiqul Islam Khan said recapitalization of losing banks should be stopped, and observed that this public money had better alternative use.
Refuting the central bank's relaxed loan classification policy, which extended time for repayments to bring down the huge amount of default loans, the CPD analysts said that there was no logic in giving such benefits to defaulters.
"Reform in the banking sector is an unfinished agenda as the sector suffers from several acute problems due to poor governance for a long time," said Towfiqul.
The volume of non-performing loans (NPLs) in the banking sector has been so high in recent years that in eight years between 2010 and 2018, the amount of NPLs would have been enough to pay for both the national education and healthcare expenditures, he said.
The keynote paper said that dependency on national savings certificates should be reduced in order to cut the debt burden of the government.
It further said that fiscal incentive-based measures would not work for capital markets.
The think tank said that the capital market needs major reforms to ensure transparency and accountability in the operations of both bourses (Chittagong and Dhaka) and BSEC (Bangladesh Securities and Exchange Commission). The commission’s regular oversight activities need to be more efficient.
“Bond markets should be developed in order to create new investment opportunities,” said Khondaker Golam Moazzem, research director of CPD.