Published: Wednesday, Jan 14, 2009
Ahsan Mansur and Zaidi Sattar
Published on Wednesday January 14, 2009
Current setting. After passing through a prolonged period of political uncertainty Bangladesh is now at the threshold of getting an elected political government. Now that all eyes and minds are focused on the upcoming elections, unlike last year this time, economic news seem to have mostly disappeared from Bangladesh radar. This situation is in sharp contrast to the economic shocks of external and domestic origins, which distressed the nation and dominated the media last year this time. As stated in the old proverb that "no news is good news", this absence of economic distress signals in the radar is a welcome development. This situation on the economic front, however, is in stark contrast to the ongoing economic crisis creating havoc throughout the globe. Against this unique background, this article attempts to assess the state of Bangladesh economy at this juncture by looking at the recent past and figuring out the near-term outlook. We start with the economic developments and management during 2007/08, describe the current state of the economy on the eve of a newly elected government taking over economic management, and conclude with the key challenges and opportunities for the future government in moving Bangladesh firmly toward a middle income country.
What the economy has passed through recently. The year 2008 certainly had a stormy beginning on the economic front and economic management was extremely challenging. The combined effect of two rounds of flood, cyclone Sidr, and the global energy and commodity price shocks, all happening or starting in the second half of 2007, produced an economic crisis that was uncommon even by the disaster-prone Bangladesh standard and pushed many families to poverty.
As the tensions caused by numerous shocks slowly eased off, economic activity started to regain momentum. The first signs were visible in the export sector as buyers started to place new orders in much larger volumes following the restoration of law and order after 1/11. The opportunities created by relative peace on the political front and rising cost pressures in major garment exporting countries (like China and Vietnam), focused the attention of global buying houses on to Bangladesh. The outcome was a strong surge in exports beginning in December 2007. Exports of garment products increased by 29% during the 10-month period through October 2008. This export surge also laid the foundation for the recovery in manufacturing sector expansion in 2008.
The rebound of the agriculture sector has been phenomenal in the post-Sidr period. Government's concerted efforts to ensure a bumper agricultural output to overcome food shortages, combined with farmers' response to the high product prices, contributed to a strong agriculture sector recovery. Following a bumper wheat crop, potato output reached a level that the farmers and traders were incapable of handling. Government's all out efforts to ensure supply of electricity, diesel and fertilizer and the record high rice price induced the farmers to produce a record boro output (18 million tonnes or 19 percent higher than the previous boro crop). The supply surge was entirely attributable to the introduction of hybrid boro on a large scale and compensated for the loss of aman crop due to the floods and Sidr. The high level of procurement price also enabled the government to build up the depleted stock of rice rapidly through a record volume of procurement of boro crop, laying the foundation for greater market stability and food security. Compared with the 3.0 million tonnes of domestic consumption demand for 2007/08, domestic production of food grain was to be about 29.8 million tonnes. If objectively looked at, government's handling of the food situation was remarkable despite its initial stumbling, and in many respect defied the doomsday predictions of many analysts.
In the event, most headline indicators performed remarkably well, although inflationary pressures resulting from higher commodity prices caused a lot of hardship for fixed- and low-income households. Real GDP grew by a respectable 6.2 percent in 2007/08, despite a very weak first half. Notwithstanding the surge in import payments (26% in dollar terms), the external current account was in surplus due to growth of remittance and export receipts. Bangladesh was the only country in South Asia with a current account surplus in this difficult year (Fig. 01). The growth rate of remittance inflows was the highest among the regional countries, which helped increase per capita income in dollar terms by the highest amount ($76 or14.6 percent) in any year in the history of Bangladesh, reaching $599 as of June 2008. A record number of workers left Bangladesh for work abroad, primarily from the low-income and rural families, helping alleviate the unemployment problem and also strengthening the capacity of these families to cope with adverse shocks.
The cumulative impact of the shocks in 2007 was largely manifested in higher prices. The price discovery function of the market sent a shockwave with rice prices almost doubling within a few weeks in the aftermath of Sidr and the imposition of rice export ban by India. Other basic commodities like edible oil, wheat and pulses, which are mostly imported from abroad, also jumped globally sending a tsunami-type shock wave for the Bangladeshi consumers. Already low and rapidly depleting stock levels of food grains, coupled with unscrupulous behavior of certain segments of the business community to maximize personal gains from the higher prices, made the situation alarming. With food prices accounting for a very large segment of the household budget, inflation as measured by the consumer price index (CPI) reached almost 12 percent by July 2008. The market signal was ruthless, but helped identify the vulnerabilities in food security arising from crop losses, low stock level, limited access to imports and the surging global commodity prices. Although the government was caught unprepared initially, these developments and the associated political repercussions forced it to mobilize supplies from abroad and ensure effective distribution of inputs to farmers realizing a bumper agricultural output. This surge in inflation was unacceptably high, but still lower than most regional countries (Fig: 02 & 03).
Where does the economy stand at the end of 2008? All signs on the domestic front are very favorable in the first quarter of fiscal year 2009. Real economic activity appears to have gained further momentum, while inflation is firmly on a downward trend. The phenomenal growth in exports (42 percent) and import of industrial raw materials as reflected through LCs settled, point to a further acceleration of the manufacturing sector expansion. Absence of flood and cyclone, coupled with high rice prices in the domestic markets, contributed to a bumper aman crop this year. Domestic demand has remained strong with government budgetary current outlays increasing at a record pace and as manifested through strong private sector credit expansion (26% during the first quarter of 2008/09 over the corresponding period). Under these circumstances, currently the economy appears to have been expanding at no less than 7.0 percent in real terms in the first half fiscal 2009.
While government expenditures are likely to grow fast in line with the budgetary plan, the overall fiscal deficit should be significantly lower than the preceding year because of the large savings expected to be realized on account of subsidies on petroleum products. Thus domestic fiscal borrowing should be significantly lower, releasing more resources for the private sector.
The financial meltdown and the global economic crisis of 2008 have essentially taken the wind out of the sail of inflation. Global commodity prices have been on a downturn since mid-2008, with petroleum prices plummeting to below $40 in December 2008 against the peak of $147 in July. All other commodity prices also followed suit. Inflation in Bangladesh fell to 6% in November on a point-to-point basis, and under 10% for the year. The outlook for the rest of this fiscal year is for inflation to moderate further, perhaps to below 5%.
While economic condition in Bangladesh remains buoyant, 2008 will be remembered in history as the year of the global economic crisis that began with a financial meltdown whose epicenter was in the US economy. By all accounts this economic crisis has been described as the worst since the Great Depression of the 1930s. Strong and robust economies of the developed world were soon engulfed in a crisis that threatened to tear down the very rubric of the capitalist economic system as we know it. Even China, the leading emerging market economy and, for decades, the top performer in the world, was not spared. By the last quarter of 2008, the ripple effects of the crisis had reached the shores of South Asia, hitting hard the economies of India and Pakistan. The big question in everybody's mind is: will Bangladesh be able to ride out the storm?
Surprising many analysts, the Bangladesh economy has remained on course up until the end of the year. The financial sector, due to its limited openness and dependence on the global financial market, has essentially remained untouched by the financial meltdown in the industrial and emerging Asian economies. It is only through exports and remittances that the global meltdown may have a contagion effect on Bangladesh. So far there is no indication that the garment and knitwear sectors, which account for 76 percent of Bangladesh's exports, have been affected by the adverse external environment in the destination countries (Europe and North America). Even with some moderation in export receipts and remittance inflows in the coming months, after taking into account the savings in import bill due to the fall in energy and commodity prices, the balance of payments should once again record a sizable current account surplus.
These favorable developments notwithstanding, it would be naïve to think Bangladesh will remain completely immune to the global crisis. How badly it might be affected depends on how long and how deep the global recession is going to be in the industrial world. The honest opinion is we cannot be sure. Economists are much better at analyzing the past than in predicting the future. We must wait until February-March 2009 to be able to gauge the adverse impact, if any, of the global crisis on Bangladesh with some degree of confidence.
Looking forward, Bangladesh has enormous potentials and challenges. The economy has faced numerous shocks in recent years, from natural and man-made catastrophes, external as well as internal; yet showed considerable resilience in tiding over them with a level of economic performance that often exceeded expectations. In the past five years, despite all odds, the economy registered average annual GDP growth rate of over six percent. There is wide agreement about its potential to grow at much higher rates. According to a recent World Bank study, the economy's transition from a low income to a middle income country within a decade is very much in sight. But power and infrastructure constraints top the list of barriers to high growth. Add to this poor governance and we know why Bangladesh does not look like Thailand, even after 38 years of independence.
If the problems are known, and they are not intractable what is keeping us from finding effective solutions to them? Again, the answer to this question is also well known, and we choose not to belabor the point.
For a poverty-stricken country, we must acknowledge upfront that the best way to fight poverty is through accelerated growth. Historical evidence for the past two decades supports the contention that accelerated growth has had the most significant positive impact on poverty reduction globally including in China, India and Bangladesh. Headcount poverty, measured by income or consumption, declined some 10% between 2000 and 2005 in Bangladesh, when annual GDP growth averaged 5.5%, well above the rate of growth in the previous two decades. Poverty might be down, but nearly one-half of the population still remains steeped in it. That is still the most important challenge confronting any government in the future. No doubt, alongside any strategy for achieving still higher growth, there must be accompanying measures to ensure that such growth is inclusive and pro-poor, so that the benefits of high growth reach the lowest rung of the population.
An important feature of Bangladesh's growth performance is that the average annual GDP growth has risen by one percentage point every decade since 1980, reaching an average of 6.3 percent in the last five years (Fig. 4). It has also been less volatile.
This was achieved despite recognizable deterioration in governance all around. Caught between the nexus of low income and poor governance--two characteristics that feed on each other--we find the economy struggling to break out of that mould and achieve a higher growth trajectory, of 7-8 percent per annum, on a sustainable basis. Yet Bangladesh's labor cost advantage and proven entrepreneurial drive shown in the RMG sector and elsewhere has convinced analysts that the economy has the potential to do even better. Shortage of power now serves as a binding constraint on growth. Once this is removed, even modest improvements in governance can yield significant dividends in terms of higher growth. At the current level of $599 per capita income as of June 2008, it looks like Bangladesh should cross World Bank's threshold of $850 for middle-income countries in about three years time (i.e., by 2011).
In 2008/09, with the specter of the global economic crisis looming large, there is strong consensus that the official projection of GDP growth at 6.5% will not be achieved. Banking on a robust agricultural growth (bumper aman harvest), strong export and remittance growth in the first part of the fiscal year, steady growth in manufacturing and services until end 2008, a GDP growth of around 6 percent in fiscal 2009 still appears feasible. The prospect of 7-8 percent GDP growth in the near future, together with price stability, appears to be well within the realm of possibility.
Sectoral performance (Figure 05)
Agriculture sector growth for 2008/09 is projected at 4.5% and likely to be achieved due to a good aman crop. Despite the spread of mechanized cultivation and irrigation, and the use of HYV seeds, crop production is still subject to wide year-to-year fluctuation. The rapid expansion of poultry and fishery has added some measure of stability to the growth rate in this sector. Nevertheless, agriculture sector growth, in the long-term will still be a modest 3.0%, which might rise to 4.0% as productivity improvements take effect. This implies that sustained high growth in the range of 7-8 per cent will have to come largely from industry and partly from services.
Industry, comprised of manufacturing, construction, mining and utilities, has been the main driver of growth and its acceleration over the past two decades. Industrial growth has averaged 9% since 2000, which is higher than the average growth of 7.0 per cent in the 1990s. After registering growth rate of 7.7% in FY08, the sector was poised for a better performance this fiscal, were it not for the global slowdown which has given rise to dark storm clouds on the horizon. The Quantum Index of industrial production, which mainly tracks manufacturing performance, showed sharp increases over the period April-June 2008. Though QIP data for current fiscal is not yet available, the strong export performance in the first quarter of FY09 indicates that the positive trend is unbroken until the end of 2008. RMG production, which makes up over 40% of manufacturing, is potentially under threat during the second half of this fiscal. As such, it is difficult to state with confidence what the final industry performance will be in FY2009.
Growth performance of this sector has been consistent over the years and steadily rising, reaching an average of nearly 7% in 2001-07. The emergence of several dynamic sectors like IT, telecommunications and financial intermediation services, apart from the traditional wholesale and retail trade, makes this sector a major contributor to jobs and income growth. While the structure of GDP has undergone significant transformation in the past two decades, with agriculture declining to 20% as a share of GDP, and industry rising to 29%, the share of services has held steady at around 50%.
Savings and investment
Current level of investment at 24% of GDP is quite inadequate for achieving the target of 7-8 percent GDP growth on a sustained basis. On the basis of recorded Incremental Capital-Output Ratio (ICOR), Bangladesh will require investment of about 30-32% of GDP for attaining that level of growth. This appears to be the biggest challenge - generating additional investment of 6-8 percentage points of GDP. To make that possible, there needs to be a substantial improvement in the investment climate, more infrastructure projects through public-private partnerships, and a number of high end projects, such as Padma Bridge, Dhaka-Chittagong Expressway, Dhaka Mono Rail, Chittagong Deep Sea port, and the like. Where might these additional resources come from apart from multilateral donors?
As a low income country, Bangladesh is unique in generating a level of national savings in excess of investment, since 2002 - an emerging macroeconomic paradox indeed. While Gross Domestic Investment (GDI) has stagnated around 23-24 percent of GDP since 2000, Gross National Savings (GNS), which includes hard-earned savings of migrant workers, has risen from 23% in 2000 to 29% in 2008 (Figure 06), resulting in an excess of savings over investment of 5% of GDP, or roughly $4 billion per year. This could pay for two Padma Bridges every year! With such a savings surplus, why on earth do we need foreign savings (i.e. foreign aid) of 1.5% of GDP a year that is tied to so much conditionality, one might ask?
The fact is there is nothing good about this situation, which might be described as a savings glut. The economy is hungry for investment in infrastructure, health and education, and yet it cannot transform the high level of domestic savings into domestic investment. In the private sector, it is the failure in financial intermediation that leads to this result. In the public sector, though revenue mobilization falls short, even by low income country standards, we have observed a remarkable incompetence to execute a significantly larger Annual Development Plan (ADP), which represents public investment. The net result is a case of gross under-investment relative to available investible resources. At the aggregate level, Bangladesh has moved from being a resource starved economy to a resource-surplus economy, unable to spend the surplus productively. Here lies the policy challenge - to come to grips with this problem of under-investment.
Public Finance and Fiscal Management
The Government's fiscal management has been prudent and usually on target since 2001. Substantial increases in public expenditure in the latter part of 1990s created pressures on the budget with deficits trending upwards of 5% of GDP and threatening to become unsustainable over the long term. Thus the pubic finance challenge at the turn of the century was to curb wasteful expenditures, mobilize revenues, and reign in budget deficits to prudent levels. By and large, this has been achieved as deficits narrowed to around 3.5 percent during the past five years (Figure 07), despite increased social spending including disaster relief operations. In the past fiscal year, the Ministry of Finance transferred part of the quasi-fiscal operation on to the budget equivalent to 1.4 percent of GDP. This was done through a debt operation to cover earlier losses of Bangladesh Petroleum Corporation (BPC), the state-owned petroleum company.
FY08 turned out to be a year of impressive revenue growth of 27%, thus generating extra revenue to the exchequer equivalent to nearly 1% of GDP in a single year. The challenge will be to maintain that trend for subsequent years, but current signs for fiscal 2009 do not look so bright as July-September 2008 revenue collection has lagged well behind last year's performance. Bangladesh continues to lag behind its comparators in revenue mobilization at 11.2 percent of GDP. Increased revenue mobilization is absolutely essential to pay for the large public investments needed in infrastructure, health, and education. There have been modest improvements recently in revenue mobilization with reforms executed in fits and starts rather than in a coherent and consistent fashion. We need hardly emphasize the importance of reforming the tax system and its administration to generate the kind of revenue enhancement that is called for.
The Government ought to be commended not just for maintaining fiscal prudence but also for its approach towards deficit financing with the right blend of domestic and foreign financing which kept inflationary pressures at bay while keeping interest costs of public debt contained. Domestic financing, the more costly mode, was kept under 2.0 percent of GDP, except in the last fiscal year, when it rose to 2.5 percent on account of bringing SOE losses on to the budget, in the interest of transparency. Foreign financing was mobilized to finance the rest of the deficit.
Bangladesh's debt management has generally been very prudent, particularly due to continued reliance on concessional external debt. Debt to GDP ratio has been steadily falling in recent years (Fig. 08) due to decline in the foreign debt component. Higher real GDP growth, exchange rate stability and high concessionality of foreign debt have contributed to the reduction of both the external debt and debt service burden in recent years. However, with increased reliance on domestic borrowing and interest rates on such debt being much more expensive, domestic debt and debt service burden have been increasing in terms of GDP, although at around 20 percent and 2.0 percent of GDP both components are still low and at comfortably manageable levels. Notably, Bangladesh's debt service ratio (payments as percent of foreign exchange earnings) at 5% is amongst the lowest in developing countries.
Trade and Balance of Payments
Greater trade openness and progressive integration with the world economy through trade has been an important aspect of Bangladesh's economic transformation. There are advantages as well as disadvantages arising from this development which can be described as a major component of globalization. As our producers take advantage of economies of scale offered by world markets, it is important to recognize that they are also vulnerable to external shocks. Two such recent shocks that have had or will have significant impact on the Bangladesh economy are the commodity price shock of 2007-08 and the financial meltdown of 2008. Thus openness presents challenges as well as opportunities. It calls for coping strategies, not isolationism, to suitably respond to shocks.
There is strong evidence that greater openness and rise in trade volumes have supported growth acceleration. The trade-GDP ratio, which was only 20% in 1990, has risen to 42% as of 2008 (Figure 09), thanks to the rapid growth of exports and income, which in turn generated rising demand for imports for consumption, production, and investment.
The tremendous success of the readymade garment industry epitomizes the contribution of trade to the economy. The sector has created 2.5 million jobs directly, and provides livelihood for some 10 million of our population directly or indirectly. The economy experienced phenomenal export growth for the past two decades and the trend appears not to have finished. Overall, the double digit export growth of the 1990s has been carried past 2000 and even after 2005, which saw the phase out of Multi Fiber Arrangement (MFA). All eyes are on exports in FY2009 for which a sensible target of $16 billion was set prior to the advent of the global crisis. Developments of the next three months will have to be watched closely in order to make an assessment of the final outcome for this fiscal.
After readymade garments, the activity that brings the most foreign exchange is the remittance of migrant workers. At close to $8 billion in FY08, this was slated to grow past $10 billion this year. But doubts are now being raised in view of the fact that Gulf countries, the source of two-thirds of these remittances, have been hit by the tumbling oil prices. How much of a threat is that to our workers? It all depends where the oil prices stabilize in the coming months. The Gulf oil producers are in the midst of implementing massive investment programs amounting $2 trillion. If they expect oil prices rebound and stabilize at more than $60 per barrel, most of these projects are likely to survive. Otherwise, many of these projects may have to be abandoned with consequent impact on workers' remittances. Again, we need to wait and watch for the next three months before anything can be said with certainty as to whether the targeted remittance inflow will actually materialize and what impact that is likely to have on our economy.
While the balance of trade (exports minus imports) has been perennially in deficit albeit shrinking lately, the new phenomenon over the past five years or so has been the emergence of current account surplus of around one percent of GDP (Figure 10). The surge in remittances since 2002 accounts for this development. With import prices on the decline, this trend appears likely to continue in FY2009, though much depends on how exports and remittance stack up over the last six months of the fiscal year.
Are these current account surpluses good for the economy? For a growing economy like Bangladesh, one would expect accelerated demand for imports of machineries, industrial inputs, as well as consumer goods. As is evident from the Chinese and Indian experience, a greater import penetration is healthy for stronger export performance. The key is to keep any emerging current account deficits within affordable limits, no more than 1-2 percentage of GDP, with a view to maintain external stability.
Exchange rate movements (Figure 11)
In May 2003, Bangladesh adopted a floating exchange rate regime, shall we say, with much trepidation. With fiscal balance on a sustainable course and current account in good shape, the float might have raised eyebrows, and the naysayers were loud in their critique of the new system. But nothing really happened, to create macroeconomic imbalance, internally or externally. As demand for imports surged in 2005/06, Bangladesh Bank allowed the exchange rate to depreciate in the interbank market thereby reducing pressures in the balance of payments. Though the system has become a managed float, like most other economies with floating exchange rates, it must be said, in all fairness, that Bangladesh Bank has done a commendable job so far of keeping the exchange rate on an even keel, thereby maintaining export competitiveness, without creating undue pressure on inflation or on industrial input costs.
In recent months, and particularly since the beginning of the global economic crisis, the exchange rate of the euro and other regional currencies have sharply depreciated against the US dollar. Since Bangladesh taka has remained remarkably stable against the dollar, the exporters are apprehensive about the significant appreciation against the euro, Indian rupee, and other regional currencies. However, Bangladesh Bank appears to be rightly more concerned about tackling the inflationary pressure as its priority number one. Continued strong export performance and remittance flows certainly support the position of the Bangladesh Bank. As the inflation comes down significantly in the coming months and if weaknesses start showing up in the external sector, the Bank may have to move on the exchange rate front.
Monetary management (Figure 12)
Monetary management which remained prudent and restrictive for the most part, gave in to demands of the business sector towards the latter half of FY2008. Since then, monetary policy has been accommodative. Beginning February 2008, broad money growth accelerated, reaching nearly 20% by August 2008, and domestic credit growth also kept pace, rising to 22%. Though inflation is on a declining trend, challenges of monetary management are not over yet, as upward domestic wage and price adjustments are still taking place. With credit and broad money growth significantly above growth of nominal GDP of 13-14%, prudence dictates the kind of monetary stance that avoids being too accommodative.
Global economic crisis and Bangladesh
The global financial crisis is no longer limited to the financial sector. The onslaught has already spilled over into the sphere of production, consumption and jobs in the real economy. The irony of it all is that the big casualty of this phenomenon is not on Wall Street or the American Main Street. It is the world's poor. With $3.5 trillion being pumped in by western governments to shore up wayward financial institutions, it should hardly be a surprise to see resources for poverty reduction in short supply soon. That will eventually hurt poverty programs in Bangladesh. Our response? Continue to expand poverty and safety net programs, but rely more on domestic rather than external resources.
The economies of Europe and USA are already in recession. The only relevant question for Bangladesh is how long and how deep will this recession be? Stark predictions about the future state of the world economy has come out of the International Monetary Fund (IMF) whose annual report, World Economic Outlook (WEO), is closely watched by governments, business and industry. October 2008 WEO has revised global growth projections downward to 3.9% for 2008 and only 3% for 2009, as compared with 5% actual for 2006 and 2007. For the developed countries, WEO projects 1.5% growth for 2008 and a mere 0.5% for 2009, compared with 2.8% in 2006 and 2007.
These numbers have important implications for Bangladesh's economy as our superior export performance depends largely on the prosperity in the developed economies of North America and countries in the European Union. Unfortunately, our export sector suffers from two vulnerabilities that we have been unable to overcome: first, export concentration, arising from the fact that 76% of our export basket is made up of one commodity group, readymade garments; second, over 90% of our exports are destined for the markets of USA and EU. Efforts to diversify our export basket or export destinations have not yet borne fruit. With the economic crisis gripping these developed economies, can Bangladesh be immune?
Most prognosis of the linkage suggests that the financial tsunami will only leave minor imprints. Most of the impact will be transmitted through trade flows rather than the financial markets. To be sure, the Bangladesh economy is much more open today than it was in 1990. But most of the opening up has taken place in current account transactions of the balance of payments, with current account convertibility having been invoked back in 1994 under IMF's Article VIII. The capital account remains non-convertible with very few private transactions, except foreign direct investment and portfolio investment, being permitted. While current account transactions, made up of exports and imports of goods and services, income and current transfers, including remittances, made up 65% of GDP in FY 2008 as compared to barely 35% in FY1990, capital account transactions made up of capital inflows and outflows have remained around 2% of GDP only during the same time.
The major impact might come through a fall in consumer expenditures which make up two-thirds of US and European GDP and are the prime drivers of these economies. The financial sector appears quite immune to the current global crisis as our financial institutions are not exposed to the complex financial derivatives or synthetic securitization instruments that have proved to be the bane of western banks and financial institutions. Moreover, prudential regulations and strong monitoring by the Bangladesh Bank has been able to ensure adequate liquidity and capital in the system.
There is some silver lining amongst the dark clouds. Assuming the developed world suffers from a long and deep recession, oil prices continue to remain at their current lows, and commodity prices remain depressed, that would surely ease Bangladesh's battle with inflation. Also, lower import prices will help improve the terms of trade with favorable implications for the current account of the balance of payments.
Finally, it has to be acknowledged that Bangladesh economy continues to have strong macroeconomic fundamentals that make it capable to withstand adverse shocks emanating from short-term declines in export demand. To Bangladesh's advantage, the current account has been running surpluses, the exchange rate is flexible, foreign exchange reserves appear comfortable, inflation is moderating lately, and budget deficits are within tolerable limits. Thus the macroeconomic scenario looks good for Bangladesh to cushion an adverse external shock should it happen.
An economic stimulus package?
It seems Keynesianism has gone global. All the leading developed economies, having gone into recession, is doing there utmost to climb out of it before the entire world economy is engulfed by a Depression of the 1930s variety. In a concerted manner, these economies have drawn up economic stimulus packages amounting to hundreds of billions of dollars. On the back of low-interest and liberal monetary policies, they have gone for fiscal stimulus in a big way, a la Keynes. For once, fiscal prudence has been thrown to the winds as economies of USA and Europe have courted larger budget deficits and mounting public debt.
Suffice it to say that Bangladesh does not face the prospect of a recession in the conventional sense notwithstanding some negative predictions. Yet, there is no ground for complacency. At a time when Bangladesh should be eyeing 7.0% GDP growth, -- something that would have been within reach if there was no global economic crisis -- an economic slowdown caused by external developments would be worth staving off in order to avert jobs and income losses. What are the options for Bangladesh? Should the Bangladesh government devise its own economic stimulus package in light of some pessimistic prognostications?
Since the leading economies of the world have embraced Keynesian economic stimulus packages, Bangladesh might consider coming up with one of its own in the event the economic situation worsens. At the moment, however, given the already expansionary fiscal and monetary stances, and the wage-price pressures in the domestic economy, there is no need for injecting any more stimulus. The implications of such a stimulus need to be kept in view. Any fiscal stimulus would lead to a budget deficit in excess of 5.0% of GDP, which will have to be financed by more public debt, domestic or foreign. Foreign financing is cheaper but takes to line up. Domestic financing is costly, and has inflationary and other consequences for the economy.
What would a possible economic stimulus package for Bangladesh look like? First, a tax cut -- income tax -- is off the table because of low compliance and limited coverage amongst taxpayers. An across-the-board scaling down of tariffs or VAT might be a booster, besides taking the economy a step forward in the direction of trade liberalization. More effective stimulus, however, has to come from the spending side. In these circumstances, an augmented ADP would have done wonders but experience shows the government machinery simply lacks capacity to implement a larger ADP, should that be necessary. To be sure, there is room for augmented public works programme to build infrastructure. The new Bangladesh government that takes power in January 2009 could have a 100-day plan to reverse any slowdown in the economy. The mode of project implementation should be through public-private partnerships (PPP). What is important is to find innovative ways to ensure quick start and rapid implementation. In particular, Upazillas and Union Parishads could play a major role in implementing local level projects at a fast pace. These institutions could indeed serve as catalysts for economic revival in the event of a slowdown of economic activity, should that occur.
(Dr. Zaidi Sattar is Chairman and Dr. Ahsan H. Mansur
Executive Director of Policy Research Institute)
Last Updated on Tuesday, 28 December 2010 05:41