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Not only the external factors such as the Russia-Ukraine war, the energy crisis and supply bottlenecks but also the unaddressed legacy issues that are responsible for the current ills of Bangladesh’s economy, said economists yesterday.
They listed a surge in inflation, the fluctuation in the exchange rate, depleting reserves, fewer jobs, lack of purchasing power, inequality, lack of good governance in the financial sector and high non-performing loans as the major bottlenecks that are hurting the economy.
Their comments came at a roundtable on “Bangladesh economy: the way forward” organised by The Daily Star at The Daily Star Centre in Dhaka yesterday.
“The existing economic crisis is not only a reflection of one year. Rather, it is the outcome of long perceived misplaced priority that took place in the last one decade,” said Salehuddin Ahmed, a former governor of the Bangladesh Bank.
“The economy went under some kinds of selective incentives, to some extent, perverse incentives, which led to some kind of distortion in the market.”
According to the former governor, the country went after growth instead of focusing on creating adequate jobs.
“Now we need to revisit this as the suffering of people is not a one year’s exchange rate and inflation issues. Rather, this comes from a lack of jobs and purchasing power over many years.”
The local currency has weakened by 24.5 per cent to Tk 106.9 against the US dollar in the past one year owing to the plunging foreign exchange reserves.
In another blow, Bangladesh witnessed a record 9.5 per cent inflation in August, the highest in 12 years. It was 9.1 per cent in September, squeezing the buying capacity of the people and sending many below the poverty line.
Ahmed also expressed concerns about the ballooning private sector loans secured from external sources.
“Such a high level of external private credit had not been allowed in the past. Now it stands at $25 billion. I don’t know how it would be managed.”
Ahmed gave examples where the BB opposed borrowing dollar-denominated loans by the private sector during his time at the central bank.
But in recent years, the BB has allowed it to happen, saying it is sitting on a huge foreign exchange reserve.
“The over-confidence has created the current problem,” he said.
The International Monetary Fund is now prescribing reform in the banking sector. The same recommendation has been made by local economists for years, saying that the government was walking backwards by allowing to deepen the influence of family ownership in banks.
There have been a couple of narratives from the government that Bangladesh’s economy had been doing pretty good until the Russia-Ukraine war erupted and they are transferring the whole blame to the external shock, said Debapriya Bhattacharya, a distinguished fellow of the Centre for Policy Dialogue.
“Another narrative is that the whole world is suffering and Bangladesh is not alone. However, the narratives concealed some underlying problems that have become legacy in absence of effective measures and reforms.”
The tax-to-GDP ratio is very low. In fact, it is one of the lowest in the world and it has constrained the government’s ability to spend.
Bhattacharya said: “Bangladesh would have been able to manage the current situation better had the GDP-tax ratio been 12 per cent from 9 per cent now.”
The quality of public investment is still an issue and projects suffer from cost and time overruns, said the noted economist.
“On the other side, the operational expenditure of the government is increasing. In the financial sector, non-performing loans (NPLs) have remained high and the problem has been unattended for a long time.”
Defaulted loans in the country’s banking sector hit an all-time of high of Tk 125,257 crore in June.
The issue of subsidy pressure on the public coffer was also discussed at the roundtable.
“Bad subsidies have taken over good subsidies,” Bhattacharya said, citing the example of the capacity payments made to rental power plants.
The government paid Tk 16,785 crore in capacity charges to power plants in the first nine months of the last fiscal year.
MM Akash, chairman of the economics department at the University of Dhaka, emphasised two crises: inequality and lack of governance.
“These problems should be solved, but the governance crisis has been deepened by corruption.”
He said the basic reason for the prevalence of corruption is the government can’t punish the corrupt because the power structure has been captured by them.
Prof Akash went on to say that the state is now captured by three sections: dishonest bureaucrats, businessmen and politicians.
There is a nexus among them and they mutually support each other to control the state. In the nexus, bureaucrats and businessmen have gained the upper hand whereas politicians are in a relatively weaker position, the professor explained.
In recent times, the opening of letters of credit (LCs) has started to come down, but both exports and remittances have declined as well, a mixed development for the economy.
“The declining export is understandable given the business slowdown in the global market. But decreasing remittances is unexplained since the manpower export to the Middle East has boomed,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
Remittance has been on the decline largely because of hundi, an illegal cross-border financial transaction system.
“It should be controlled,” said Mansur.
Remittances to Bangladesh declined 7.4 per cent year-on-year to $1.52 billion in October.
Prof Sayema Haque Bidisha, research director of the South Asian Network on Economic Modeling, said that there is no way to neglect the agriculture sector and it has to be supported either through subsidies or other incentives.
She said inflation has to be contained, macro-economic stability has to be restored, the poverty rate has to be brought down, inequality has to be narrowed and adequate jobs have to be created.
The economics professor also called for narrowing the exchange rate gap between the banking system and the kerb market.
Prof Bidisha also underscored reforming the tax system.
“We need to reform the direct taxation system. Because if we cannot generate enough income and cut expenses, how will we be able to spend for people?”
Miran Ali, vice-president of the Bangladesh Garment Manufacturers and Exporters Association, said Bangladesh is not necessarily operating in the low-end of the market only.
“We are not the cheapest destination for garments in the world. We are the most efficient and transparent. In some categories, we have the biggest capacity.”
“We are not necessarily cheap. In fact, a lot of our products are sold in the North American, west European and Australian markets.”
The entrepreneur said that there is a problem with demand.
“But I believe it will stabilise and the export sector can continue to prosper provided the exchange rate is rational and free from the shackles of various mechanisms,” he said, urging the government to protect the business community from unnecessary and counterproductive policies.
Mahfuz Anam, editor and publisher of The Daily Star, moderated the roundtable.
(TDS)
