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Critical challenges for the economy in 2018

  • Published at 09:49 pm December 23rd, 2017
Critical challenges for the economy in 2018
During 2000-2005, the annual reduction in overall poverty rate was 1.8 percentage points, which declined to 1.7 percentage points during 2005-2010, and further declined to 1.2 percentage points during 2010-2016. The most alarming trend is that while during 2000-2005, the annual reduction in extreme poverty rate was 1.8 percentage points, the rate declined to 1.5 percentage points during 2005-2010 and to 0.8 percentage points during 2010-2016. This  suggests  that  the  scope  and  success  in  reducing  overall  and  extreme poverty rates in Bangladesh have become limited in recent years. Our estimates suggest that with the business-as-usual growth rate of GDP, Bangladesh will have an overall and extreme  poverty  rates  of  around  10%  and  4%  respectively  by  2030.  Even with  an accelerated average growth rate of GDP of 8%, overall and extreme poverty rates, by 2030, will be around 6.5% and 2% respectively. There are four reasons for which despite accelerated economic growth in recent years, there has been much slower progress in poverty reduction. These are slow employment generation, poor public spending on education, poor public spending on health and growing inequality. Political uncertainty looming over national election which can further affect private investment, rising food inflation, being on track with respect to SDGs, challenge of growth of exports and remittance and finally governance issues around the banking sector are five critical challenges for the Bangladeshi economy in 2018. Stimulating the private sector investment still remains a big challenge. A rising GDP growth rate since 2012-13 had been largely driven by factor accumulation and government expenditure. But, the sluggish private investment and rise in public investment continued as the share of public investment in total investment became one-fourth by 2016-17 from around 16.5% in 2008-09. The country witnessed a falling in growth rate in exports until 2016-17. However, during July- Nov 2017-18 exports grew at 6.86% compared to the similar period in 2016-17. The RMG registered  a  growth  rate  of  7.46%.  The  leather  sector  exports  encountered  a  negative growth rate of 2.95%. Despite the fact that the leather industry was declared as the ‘Product of the Year’, this sector performed poorly. The prospect of the rising export growth in 2018 depends on both the domestic and external factors. On the domestic front, there are problems of policy-induced and supply-side constraints. The real effective exchange rate of Bangladesh is still highly appreciated compared to Bangladesh’s competitors. During 2012 and 2016, REER of Bangladesh, with respect to US dollar appreciated by 22.3%. Further adjustment in the nominal exchange rate will be obvious given high import demand and the slow down of export and remittance growth. However, mere devaluation of the nominal exchange rate will not be enough for getting the REER right. There is a need for necessary measures for export growth by addressing the domestic competitiveness issues as well as for product and market diversification. The country also witnessed a falling growth rate in remittance until 2016-17. However, during July-Nov 2017-18 remittances grew at 10.1% compared to the similar period in 2016-17; yet it was 6.6% lower than the similar period in 2015-16. According to the World Bank’s recent projection remittances to low and middle-income countries are on course to recover after two consecutive years of decline. This means that there is a brighter prospect for the Bangladeshi economy in 2018. There has been a surge in import of rice in recent months. While during July-September 2016-17, import of rice was only Tk35.7 crore, during July-September 2017-18, import of rice increased to Tk2912.1 crore. In the first three months of 2017-18, import of rice has been around 5 times of the total import of rice in the past financial year. Also, the rising import  of  capital  machinery  and  raw  materials  need  to  be  tallied  with  the  current investment situation. Rice prices are still high and on the rise despite imports. Using a computable general equilibrium (CGE) model, we simulated a shock of 35% increase in the price of rice in the Bangladesh economy and the results show that there is likely to be a rise in headcount poverty rate by 0.32% points due to a hike in rice prices in this year. This means, 520,000 people have fallen into poverty due to rise in rice prices this year. The South Asian Network on Economic Modeling (SANEM) suggests a ‘Rice Policy’ with respect to production, import, supply management and strategic agreements with the rice exporting countries. SANEM is highly concerned about the rise in scams in the banking sector and high rise in the non-performing loans. These are reflections of weak regulation, political patronage, and lack of vision. The ‘Banking Companies (Amendment) Act-2017’ which has allowed four family members on bank board of directors for nine consecutive years will increase the fragility of the  banking  sector  further.  There  is  a  need  for  a  political  will,  proper  regulation, empowering Bangladesh Bank, and speedy trial of the financial crimes. In conclusion, there are two messages. The first message is that the business-as-usual scenario will not help when it comes to generating productive employment, making growth inclusive, accelerating the reduction in the poverty rate, developing human capital, and achieving the SDGs by 2030. The second message is that there is a need for “getting the priorities right”, which requires prioritizing education, health and social sector investment, speedy complementation of the infrastructure projects (including SEZs) within justified cost estimates, and undertaking reform measures with respect to trade, industrial and macro policies and institutions.   Dr Selim Raihan is a professor at the Department of Economics, University of Dhaka, and executive director of South Asian Network on Economic Modeling (SANEM)