Tuesday, June 25, 2024


Dhaka Tribune

Addressing two issues will help Bangladesh manage the economy in the new financial year

Without these, inflation is likely to continue and the slowing performance of the economy continues

Update : 14 May 2024, 08:12 AM

The Bangladesh economy is under the pressure of continuing 10% inflation, a financial system which is failing to perform well, weak export growth, an unstable foreign exchange position, and weakening economic growth. 

These five very difficult problems must all be solved if economic growth is to be restarted. There are no easy solutions. All the actors are there: IMF, India, WB, Japan, and China working with the Ministry of Finance and the Bangladesh Bank.

The existing program is rather confusing and although there are many actions, so far nothing has produced any results -- although most ideas are just being implemented. 

There are two issues considered herein: (1) Immediate actions to reduce the pressure on the economy of the high rate of inflation. (2) Actions that will enhance the probability of rapid long term growth. 

We note here that in the 8th Five Year Plan it is stated that the most important improvement of the Plan is to raise the quality of the economic data. This important position needs emphasis as the quality of economic data is poor. 

In this article we will focus on these key problems. In the short run the most important problem is to contain inflation. There is widespread agreement that the current inflation is the most serious economic problem facing society. 

Essentially the inflation rate jumped from 5-6% to 10%. What drove this? 

First, there was an increase in dollar prices of imports following increases in prices in Europe and North America. This caused import prices to rise sharply while export prices remained sluggish. The subsequent deterioration of the balance of payments caused the taka to depreciate, increasing the inflation rate further.

The ambitious government expenditure program with limited increase in revenues defines current fiscal policy. A slowing economy and higher interest rates have some moderating effects on inflation. However the government reacted by not paying its bills but the enterprises continued work paying workers, assuming that the government would pay these bills. 

How much the government deficit was reduced is uncertain but it was not enough. To reduce the inflation required a sharper reduction in government expenditures. We shall see if the new budget presents a reduction. 

One is not optimistic. I expect an outcome when the FY25 is over 5-10% in real terms. The strategy of the government is to borrow more money from abroad to finance the government deficit. But this may not reduce the inflation rate.

While interest rates are rising, the impact on investment is uncertain. The relationship between interest rates and private investment in Bangladesh is complicated and the simple relationship of higher interest rates reducing investment is not a correct view of the motivation for investment. 

The concern that one should have is the attempt to blame the inflation on cartels. This is the common view of the public but it is wrong

Expectations of returns for investment are 25-30% and changes of interest rates of 2-5% are irrelevant. Furthermore, borrowers have an expectation that should they face difficulties in repayment, managing delay is alway possible.

Reducing demand for goods and services is more effective by reducing the government deficit. Such reduction must be 2-3% of GDP; implying a substantial decline in government expenditures. That would cause the inflation rate to fall immediately. 

The concern that one should have is the attempt to blame the inflation on cartels. This is the common view of the public but it is wrong. Bangladesh markets are competitive and not monopolistic. 

Another common mistaken belief is that the government can control prices. No government can do so and all that have tried have failed. Monetary policy is unlikely to have much impact. 

This is not the time to try to complicate programs to increase or redirect budget expenditure. What is needed is a ruthless cutting of expenditures for the next two years. The inflation rate will decline and the economy can then be expanded. 

The second action needed for both the curtailment of inflation and restoration of growth is the support for exports. Prospects for exports of leather and footwear have been mishandled. Corrective actions are not too difficult but must be managed to be successful instead of the decade of failure. 

Prospects for shrimp are also excellent and have been lost due to poor policies. Earnings have fallen by half; proper policies could have helped earnings reach $3 billion. Corruption and weak governance have set back this sector. 

The RMG sector remains vital for the future. However, training, R&D, and widening product development have all been unsatisfactory. A serious program in these areas is needed.

Without such programs, Bangladesh will lose its share in the world market and the economy will weaken. For the most important sector in the economy, data is very poor. There is no agreement on the level of employment; there are no price indexes for exports and imports; there is no good data on production costs. 

The growth of exports from the RMG sector has slowed. The causes of this decline are not clear, but it is important to understand. Taxation of the RMG sector is confusing but the sector is not pulling its weight in financing the government. Labour conflicts with the EU and the US may cause difficulties. There are a host of problems and corrective actions needed.

Short term actions to increase exports over the next five years are vital to enable return to rapid economic growth. The Ministry of Commerce must increase its plans and analysis of the export sector to accelerate policies and projects needed.

In the face of the setbacks to the economy the response of the economic team has not been positive. The increase of exports rather than the reduction of imports by administrative actions was the more appropriate strategy. It is still the appropriate course of action.

There is a great deal of analysis done by Bangladesh economists pointing out the anti-export biases in government policy and what is needed to shift trade policy. Part of the work of the Ministry of Commerce is to own the actions to remove the anti-export bias and fight to implement these.

The recovery of the economy from its present problems thus rests on reducing the inflation through lowering of the government deficit over the next two years and a serious set of actions to increase exports. 

Without these steps, inflation is likely to continue and the slowing performance of the economy continues. One must focus on these two issues; other problems can be tackled later.

Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.

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