News Published: Tuesday, Oct 11, 2011
Economy braces for rough patch
Friday, October 7, 2011
Leading economists at The Daily Star dialogue spell out challenges
The economy is showing considerable signs of stress because of high inflation, abnormally high credit growth, rising need for subsidy, and depreciating value of taka, and those need to be addressed with harsh and unpopular decisions right now, top economists of the country said yesterday.
They said high oil import obligation because of the fuel requirement of rental power plants is posing a big challenge for the economy as this is drawing down the foreign exchange reserves very swiftly.
The economists also said there are distinct flaws in the application of monetary and fiscal policies, and political interventions render those even more useless.
They were speaking at a dialogue titled "Challenges facing the economy and the tasks ahead" organised by The Daily Star at its office. Former finance adviser to a caretaker government, AB Mirza Azizul Islam, moderated the discussion.
"The challenges are serious. If those are not managed, there might be a short-term crisis," said Sadiq Ahmed, vice-chairman of Policy Research Institute.
"I am not panicked but worried by the situation," said Dr Mustafizur Rahman, executive director of the Centre for Policy Dialogue.
Zaid Bakht, research director of Bangladesh Institute of Development Studies (BIDS), said, "The short-term outlook of the economy looks very bleak."
Prof Wahiduddin Mahmud, who sent a written statement to the roundtable, said Bangladesh has performed better than many countries in coping with several adversities in the global economy including recession and price hike.
"However, the macroeconomy is showing some strains that may further deepen in the coming months," said the noted economist citing examples of creeping inflation, tightening of the foreign exchange market, and rapid increase in the government's domestic borrowing.
According to the experts, rising inflation is posing a great threat to the economy at present.
Sadiq Ahmed, a former top World Bank official, said inflation is the number one problem, and it can create social and political instability. He also disagreed with those who say the inflation is imported.
"If it is imported it must be in other countries," said the economist adding, "Excess demand pressure also fuels inflation here."
Prof Wahiduddin said, "Inflation is approaching a danger zone where it becomes self-propelling and increasingly difficult to contain." He said it can no more be attributed to global inflation or to the market situation of specific items like food grains.
Dr Mohammed Farashuddin, a former central bank governor, said high inflation and future energy security are of great concern for the economy now.
"Inflation has put an unbearable burden on the middle class," he said, suggesting efforts to strengthen the Trading Corporation of Bangladesh (TCB) to intervene in the market to stabilise prices of essentials.
“But the economy is not in crisis,” Farashuddin said. “It is facing challenges. The overall outlook is not bleak at all.”
However, there are “several malaises and few of them are severe,” he said.
“The savings rate in Bangladesh is now 29 percent of GDP and investment is 25 percent. We have higher savings than investment. So there are problems in the economy,” he said. “Also, savings includes remittance and a lot of which goes to consumption.”
The economists also cautioned about the rising bank borrowing by the government and abnormally high credit growth.
Sadiq Ahmed said the trends in credit growth both in public and private sectors, and the import growth are not sustainable. "Why do we need 30 percent private sector credit growth?" he questioned. "It needs to be reduced to 15-16 percent."
"The government is more guilty for the credit growth," said AB Mirza Azizul Islam. He suggested strict enforcement of monetary policy to curb credit growth and money supply to the economy. "Popular decisions cannot be taken. It requires a strong political will," he added.
Farashuddin said credit growth should have been much more structured and disciplined. He said government borrowing from the central bank will fuel inflation.
Dr Mustafizur Rahman cautioned the government on a possible debt trap as it is borrowing from the banking industry to finance deficit in the budget.
The economists also shared their thoughts on government subsidies, development work, state-owned enterprises, and fiscal and monetary policies.
Political intervention into economic management, infrastructure constraints, capital flight, widening of the tax net, and pressure on exchange rate were also pointed out.
Sadiq Ahmed opposed subsidies saying those are meant to make up for inefficiencies.
Mirza Aziz favoured giving need based subsidy opposing the present practice of providing generalised subsidy which is enjoyed more by relatively better-off sections of the population rather than the poor.
Zahid Hossain, senior economist of the World Bank, said subsidy needs to be managed through administered price. "There is no painless solution. Economic surgery is not painless like medical surgery," he noted.
About rental power plants, Hossain said it was "unavoidable" as a short term remedy, but long-term solutions are needed to sustain the growth.
About the resilience of Bangladesh economy, he said there is a built-in growth momentum of 5 to 6 percent, but it needs to be raised to 7 percent.
Referring to infrastructure constraints, he said the railway has been neglected for years, and a lot of new roads have been built instead of maintaining the existing ones.
Farashuddin said physical infrastructure, especially railroads, is a bottleneck. “Successive governments have massacred rails, which are the cheapest and most environment-friendly mode of transportation.”
Zaid Bakht came down heavily on the rush to spend funds for projects under the annual development programme (ADP) in the final months of a fiscal year, saying that 40 percent of the allocation is spent in the last two months of every year.
Such expenditure turns out to be wasteful in many cases, he said.
“This is a recipe for macroeconomic destabilisation," he said. "Before Eid-ul-Fitr, roads were repaired in a rush. It appeared that money was being thrown from a helicopter."
BIDS Director General Mustafa K Mujeri said there is a disconnect between policies and the political process, and suggested better integration of fiscal and monetary policies.
Mujeri said the pressure to finance fuel import bills for quick rental power plants has become a draw back for the economy.
"We are yet to finalise the coal policy," he said adding that he had received a letter last week mentioning his inclusion in a 15-member committee on coal policy.
"So many days were wasted just talking about it. Now a committee has been formed," said Mujeri adding, "This is an example of how we waste our valuable time, and we have to pay a good price for delays in decision making."
He also suggested coordination between monetary and fiscal policies.
He criticised political interference in banks, saying managing directors of state-owned banks have been made less powerful as members of the boards of directors are interfering in day-to-day activities.
Quoting a study report Dr Mustafizur Rahman said there has been a massive capital flight from the country -- $1.8 billion a year between 1990 and 2005 -- through under and over invoicing of export and import figures.
Sadiq Ahmed criticised the rich for not paying taxes. He also advised the government to impose tax on capital gains from stocks and real estate, and to introduce property tax.
“There is no reason why capital gains from real estate and stocks should not be taxed. I do not see any economic justification. In the income tax, these are two of the biggest loopholes,” he said.
“Income is income. No matter where you get it from. If you have income, you must pay taxes.”
Another issue that has not received enough attention in the media is water, he said. “The way urbanisation is growing and the way buildings are being constructed, it will be very difficult for Wasa to provide drinking water to residents.”
“I think the whole issue of urban agenda is going to be a major challenge. From that point of view, we need to rethink our institutions. Without strong institutions, I see it is very difficult to solve the urbanisation problems.”
The economists at yesterday's dialogue made the following recommendations for the government to keep the economy on track
1. Find ways to control inflation
2. Limit credit growth
3. Manage dollar-taka exchange rate
4. Stop borrowing from the central bank
5. Reduce dependence on rental power
6. Finalise coal policy
7. Hydropower is a long-term solution
8. Import power from neighbouring countries
9. Rationalise energy prices
10. Impose tax on capital gains and property
11. Streamline and reduce subsidy
12. Strengthen public expenditure management
13. Integrate revenue and development budgets better
14. Strengthen social safety nets
15. Tighten public sector expenditure to cut waste
16. Make a master plan for railways
17. Form grower cooperatives to help them benefit from higher prices
18. Issue new IPOs to raise large-scale capital instead of borrowing from the banking system
19. The private sector should be allowed to borrow from the international market on a limited scale
20. Reduce the spread between lending and deposit rates
21. Discipline macro-financing/financial sector
22. Reduce political pressure on banks
23. Redesign monetary and fiscal policies for better coordination
24. Prune annual development programme
25. Prioritise foreign-financed projects
26. Attach importance to domestic resource mobilisation
27. Investigate capital flight through over-and under- invoicing
28. Assess possible implications of global economic crisis on the local economy
29. Ensure quality of public expenditure, stopsquandering of public funds
30. Introduce January-December fiscal year