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           Volume 11 |Issue 01| January 06, 2012 |


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Special Feature

2012: Judgment Day is Inevitable

What gave way to the current economic situation in Bangladesh?

Sharmin Ahmed

Not so long ago in the fiscal year of 2011, we were made many promises that would raise our living standards, our socio-economic status and that much needed push to the take-off towards development. However, as the year ended our major economic indicators turned out not only looking grim but also screaming out the nearness of an impending doom. But judgment day it seems is inevitable.

The year 2011 has been a bad one for the stock market. Photo: Amirul Rajiv

The major economic indicators reflected great falls in foreign exchange reserves, foreign aid, export, investment/ Foreign Direct Investments (FDIs). Consequently, that led to a major drop in our national income. On the other hand, the rises were even more fearful. Rise in government borrowing, dollar prices, import costs and subsidies eventually pushed up the already high inflation rate. Therefore, our purchasing power was squeezed and the Gross Domestic Product (GDP) of the country does not seen to be increasing in this fiscal year.

However, the question remains what exactly were we doing while the mercury climbed up-and down throughout the year? The trickle down effect of the global financial crisis should have been warning enough. While the European sovereign debt crisis brought Greece, Ireland and Portugal on the brink of bankruptcy, our own homemade problems were looming large in the streets.

As the inflation rate continues to rise, food prices are going up. Photo: Amirul Rajiv

Everyone's a millionaire where promises are concerned
Stock market failures due to flawed speculation and manipulation of share prices resulted in violence, riots and vandalism. Even our finance minister dusted his hands off the matter about the difficulty of finding competent persons for restructuring the Securities and Exchange Commission (SEC) at the DSE. "Restructuring of SEC is extremely difficult.The stockmarket has reached such a stage that it is impossible for a person to sit there and learn the subtleties of the market regulations," he said.

The Dhaka Stock Exchange (DSE), what was once a booming market, took a nose dive and that too in short intervals because of lack of confidence in the market. Even, the Tk 1000 crore fund package as advised by the Bankers Association Bangladesh to solve the stock market crisis never materialised.

Subsidising fuel has been costly for the government Photo: Amirul Rajiv

Dr Mohammad Musa, Professor, School of Business at United International University, Bangladesh, says "Basically many promises were made but none kept.” He explains that these packages never see the light of day because the banks do not have enough funds to finance the Tk 1,000 crore package. As a result, the market gets destabilised again due to people's loss of confidence in it. "The DSE needs good administrators. A new group has been formed let us hope they do their jobs better,” he adds.

Amin Reza, a stock broker confirmed Dr Musa's argument saying, "Share prices on the country's prime bourse rather went down due to a lack of confidence as the bailout package taken to stabilise the share market did not come into force. They all failed."

Eventually, when our Finance Minister could not come out clean, he justified his silence by stating, "Bangladesh's share market is an odd market. There is none like this in the world. Whenever I reply to something, it affects the market. It is not possible to give a reply."

Md Kazi Nurul Islam, a clerk, working at a local newspaper says, "At the beginning of the year, my share holdings was worth Tk16 lakh and now at the end of the year it has gone down to Tk 7 lakh. This year has been very bad for us and I am sitting around with the shares in hopes that the situation will improve."

Don't keep a man guessing too long – he's sure to find the answer somewhere else
To add salt to the wound, the predicted GDP growth which should have been 7 percent, has a mid-year hovered at a mere 6.3 percent as observed by the Centre for Policy Dialogue (CPD). At CPD's observation, our Finance Minister had retorted, "Rubbish, totally rubbish. If the CPD said so, it is very unfair, wicked and politically motivated. I am sorry." The GDP rate at the end of year 2011 was just about 6 percent.

There are many reasons behind the disappointing growth rate. With a fall in demand as a result of the global financial crisis, in Europe and America, who now have more rigid budget constraints, consumer expenditure has declined. Thus our export products have started seeing bad days.

  The government had to borrow more money from the Central Bank.
  Photos: Amirul Rajiv

Take off your red shades the world is a different colour
Policies to subsidies fuel-run power plants have also been flawed. At a time of substantial surge of oil prices in international market, this policy increased government expenditure significantly. Our government also subsidises the agricultural sector which in itself would have been a good move if not for the inefficient apportion of funds which has left little impact. The initial subsidy allocation for agriculture was about Tk 1,200 crore and later revised to about Tk 1,650 crore according to a paper prepared under the programme Independent Review of Bangladesh's Development (IRBD) implemented by the Centre for Policy Dialogue (CPD) in November, 2011. However, the fuel subsidy requirement was underwritten not as much by the rise in international prices than the by growing demand for petroleum products in the backdrop of rising fuel needs to service the newly installed fuel-fired quick rental and rental power plants. Bangladesh Petroleum Corporation (BPC), the sole importer of petroleum products, in FY2010-11 BPC had incurred a loss of about Tk 7,200 crore. This was way over the revised subsidy allocation of Tk 4,000 crore kept for the BPC in the revised budget of FY2010-11.

Moreover, the increasing demand for foreign currency has only lead to a continuous depletion of our foreign reserves. At present our import reserve may only be able to fund import for the next few months. And then what will we do? After all we have to import non-gas-fuels, fertilisers and electricity. There is no way that all these fuel needs can be met at subsidised prices. It will only contribute to the government having to foot the bill. The possible sources of funds would most likely come from the people either in the form of taxation or by increased government borrowing.

Muaz Jalil, a development practitioner at a multi-donor funded project says, "As much as it was primarily because of the policy shift towards export promotion rather than import substitution, which stimulated economic growth within the country, it is also true that if the government initiates protectionist measures and subsidies to promote inefficient sectors at the expense of export oriented ones they only end up with more bills in their hands".

Photos: Amirul Rajiv  
The Euro-zone crisis has badly affected our exports.  

For instance, in the shrimp industry, which is one of the largest contributor to our export earnings, the presence of subsidy is significantly distorting the market and promoting malpractice. This may be harmful to the industry in the long run. Currently, the subsidy structure is highly biased towards the shrimp processing plants. This has resulted in a situation where there are more processing plants than the market needs. Because the plants are generously subsidised, entrepreneurs invest in building plants rather than investing in their backward linkage. Consequently, such plants often run at only 30-40 percent capacity.

Additionally, because the subsidy is tied to the net weight of export, some malpractices have started there. The companies in collusion with foreign importers increase the water content of their export and essentially get subsidy on it. While the idea of protecting infant industries has some foundation, it is often misused to promote personal interest and serve different power groups and propagate inefficiency.

Your penny is not worth a dime
To make matters worse, the International Monetary Fund (IMF) projected that the inflation rate is likely to exceed 11 percent in the fiscal year FY2011, against the government's prediction of 7.5 percent. A major reason for the increasing inflation rate is the depreciation of local currency against the dollar. The increasing demand for foreign currency, in turn, is putting pressure on foreign exchange rates. In December 21, last year, inter-bank exchange rates crossed Tk 81 per dollar with a 15 percent increase since the year before.

As the value of Bangladeshi currency as opposed to foreign reserves, goes down there are quite a few series of negative implications for such a change. For one, as interest rates go up, the whole credit market is affected. People have less money in their hands to buy goods and services. Moreover depreciation of the domestic currency will also contribute to a fall in the purchasing power of the people, meaning foreign goods will appear expensive to Bangladeshis.

What am I without your bank account?
In the last five months, the country received only $5 million in net foreign aid compared to $250 million during the same period last year. There is little wonder why, it would be difficult if not impossible to attain funds as donors all over the world are going through a cash crunch. Our corrupt system has only worsened the situation. And this is why snags in the economy, like the uncertain Padma bridge project, threaten to hamper the GDP growth.

Even a sustainable tax policy as a remedy to check rising inflation may not work. The condition of Bangladesh, in tax collection remains an unsolved mystery. The rate of tax collection in the non-NBR (National Board Revenue) tax component was 17.7 percent growth recorded in FY2010-11. This was lower than the annual target of 25.8 percent and this is something that is worrying because tax is a significant part of government funds. Dr Debapriya Bhattacharya, Distinguish Fellow, CPD, says, “the country needs a stronger macro-economic management system, we need to cut down on expenditures and attract more foreign funds”.

The outlook for 2012 hinges on two crucial aspects, how soon will the global economy start to recover and second, how disruptive will our policy makers be. While one can have confidence about the first, as for the second if the past has taught us anything, they will very likely outdo themselves. One could always hope that, like before, we will grow despite the failure of our leaders to keep their promises. But then again, it might be the end of the world as we know it and in that case it was much ado about nothing.

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