Four fault lines in economy

Low private investment, poor tax collection, inadequate investment in the education and health sectors, and improper distribution of social safety net are four fault lines currently weighing on Bangladesh's economy, said a top economist yesterday.

"If the country can't address them, its development in the last one decade will not be sustainable and it will not be able to move to the next stage," said Debapriya Bhattacharya, a distinguished fellow of the Centre for Policy Dialogue.

He was speaking at a dialogue at the Economic Reporters' Forum (ERF) in Dhaka.

Fault lines are problems that may not be obvious and could cause something to fail.

Bhattacharya described the last decade as the most promising one for Bangladesh.

In the decade, per capita income and export rose, agricultural production advanced, and the country became a lower-middle-income nation, achieved the Millennium Development Goals, and qualified to become a developing nation from a least-developed country.

"At present, our main problem is not the balance of payments; rather, the main problem is the weakness in the financial sector and not mobilising adequate revenues," said the macroeconomist.

"That is why it [the government] is not being able to provide adequate subsidies in the energy sector and food assistance to the poor."

The first fault line for the economy is low private investment.

The private investment has remained stagnant at 23 to 24 per cent of gross domestic product (GDP) for several years.

"This is the biggest fault line," Bhattacharya said.

As a result, the GDP is growing riding on the government's investment, whose share rose to 7 to 8 per cent of GDP from 5 to 6 per cent.

"When an airplane runs on one engine, it can't fly for a long time. If another engine remains inactive, it seeks a runway to make a landing," Bhattacharya elaborated while speaking about the impact of low private investment.

Foreign direct investment to Bangladesh stands at about $2 billion, or 1 per cent of GDP, which is not enough to maintain the current growth momentum of the economy.

The second fault line is the lower tax income. In fact, Bangladesh has one of the lowest tax-to-GDP ratios in the world although its GDP growth averages 7 per cent in the last decade. 

"Higher GDP means higher income. If income is higher, then why isn't tax rising at the same pace?" Bhattacharya asked.

"The question is whether the GDP data is not correct or the NBR can't raise taxes properly."

Most importantly, the direct income tax is much lower, creating disparity since the low-income groups also pay taxes in the form of value-added taxes.

Due to the lower tax revenue, the implementation of the budget has remained low despite unveiling higher income and expenditure plans year after year.

"This is a financial illusion," said Bhattacharya.

Amid lower revenue collection, the government depends on the banking sector to meet its expenses, creating liquidity crunch in the banking sector and crowding out the private sector.

According to Bhattacharya, the third fault line is lower spending on health and education.

"When a political deficit prevails, the government tries to build visible infrastructures to overcome it because the investment in health and education gives result in the long-run."

"But, the effective use of physical infrastructure depends on the quality of education."

The fourth fault line is related to the access of the real poor to social safety net programmes.

The government has allocated Tk 113,576 crore to execute its various social safety net programmes for the current fiscal year, up from the last fiscal year's Tk 107,614 crore.

"Though the government's intention is good, real beneficiaries are not getting the benefits," said Bhattacharya.

The noted economist also spoke about the business environment in the country.

He said he had been saying since 2003 that competitive investment environment is not being offered.

"Some individuals or firms receive special care from the government. As a result, qualified and global entrepreneurs can't compete. It is clear in every sector."

"Due to this culture, the country is losing and people are losing."

For instance, Bhattacharya said, the power sector is enjoying indemnity and the plants are continuing although the country does not need them and can't afford them.

"The same is happening in the case of LNG, and all of them are powerful."

Bhattacharya disagreed with some policymakers' argument that the economic pressure will peter out within three months.

"This denial tendency is not a good sign since it creates more distrust among people. Rather, the government should take transparent and effective steps."

He, however, admitted that Bangladesh is not witnessing any crisis. Rather, it is facing pressure.

"If proper steps are not taken, a structural problem will be created and a big problem will hit the country."

He does not see any chance for the country to get rid of the economic pressure by 2024.

He also pointed out that some clever people say that democracy is not necessary if development continues.

"But they forget that the prime minister signed the global agreement on Sustainable Development Goals where democracy and human rights are a major goal."

"When democracy is absent, some unnecessary projects take place."

Without naming, he said the government is implementing a project worth around $12 billion. A similar project in India cost $3 billion.

"Whether it is necessary, this is also a big question," he said. The project is Rooppur Nuclear Power Plant.

Answering a question, the economist said none opposed the Padma Bridge project, but the way it was financed was opposed.

The bridge was completed with domestic loans, which deprived the health and education sectors of investment, he said.

"Every cost has an opportunity cost. If the financing of the bridge could be managed using soft loans from development partners, the internal sectors would not have been impacted."

"We could buy a shirt and a pair of pants, but we opted to buy a shirt," he added.

In Bangladesh, the investment in the health and education sectors have almost remained stagnant in terms of GDP.

"So, its impact would be clear in the coming years," said Bhattacharya.

ERF President Sharmin Rinvi and Secretary SM Rashidul Islam were present during the dialogue.