Prepare for shocks to drive economic growth

Bangladesh should build on its astounding economic and development achievements instead of being complacent if it has to weather off any sudden shocks, said a noted economist yesterday.

"There are obviously much to be proud of in the course of the country's near-half century journey," said Rehman Sobhan, chairman of the Centre for Policy Dialogue (CPD), a think-tank.

Bangladesh clocked in 8.15 per cent GDP growth in the last fiscal year, the highest in the Asia Pacific region.

There is diversification in the agriculture sector, in rural areas and in the industrial sector, good results in the development of infrastructure and most significantly improvement in the conditions of the lives of people. 

Human development has been commendable, Sobhan said, adding that in many areas the country has outperformed India and Pakistan. 

"There are a variety of indices we have got to be much to be proud of. This is being recognised globally and we should also be very pleased about it. Now the country should look ahead instead of being self-congratulatory and it is more productive to see what can be achieved in the future, and not, in fact, rest on our laurels."  

Sobhan spoke at the inaugural ceremony styled "Bangladesh's economy: Envious Growth and Sustainable Development" at the Bangladesh Economic Conference 2020 at the Pan Pacific Sonargaon hotel in Dhaka yesterday.

Banik Barta, a Bengali daily specialising on economic and business news, and City Bank, a private bank, organised the event in association with LankaBangla Finance, a non-bank financial instituition, on the occasion of the 100th birth centenary of the Father of the Nation Bangabandhu Sheikh Mujibur Rahman.    

Sobhan compared the coronavirus to the black swan.

He referenced to the book 'The Black Swan: The Impact of the Highly Improbable' written by author and former options trader Nassim Nicholas Taleb.

The book focuses on the extreme impact of rare and unpredictable outlier events -- and the human tendency to find simplistic explanations for these events, retrospectively.

"This emerged out of nowhere and it is a lesson to all of us that even though everything is going well in the economy, random shocks can come and afflict you and you may not be prepared for this and you will need to develop appropriate reactions."

"Hopefully, it will be no such thing and all of the scientific skills of China and the rest of the world will enable us to escape from this becoming a global pandemic. The main message is: we need to prepare for random shocks, which may affect our economy."

According to Sobhan, there is a need to get the country's financial and banking system in order. "Much has been written and much has been said about this. Much needs to be done now."

As the country is on course to graduating to the big league, it needs to have a working financial system, which dispenses resources into the economy in a competitive and predictable way and where the viability of the system, the borrowing and the recovery of the funds and the sustainable growth of the economy are ensured.

"If you run into a system that is conspicuously malfunctioning and raises questions about the reliability and credibility of the system, this is not only going to impact the sustainability of the growth but also equally the capacity to attract significant amount of foreign investment." 

Speaking about Bangabandhu, Sobhan said the Independence leader's whole life was dedicated to the causes of the common people.

"He was a great believer in social justice and in the need to uplift the condition of the working people."

Bangabandhu aspired to build opportunities where the most marginalised and deprived would have chances to improve their living standards, he said.

Whilst the country has done well in achieving higher growth and reduction of poverty, there is a long way to ensure equitable justice to live up to the vision of Bangabandhu.

"We are on a path to considerable progress and success, but we have ground to cover and we have got still unfulfilled dreams to realise. I hope that the centenary year and the 50th year of independence will create opportunities for setting us in that direction," Sobhan added.

The savings instruments were introduced for the marginalised groups and pensioners but the system was distorted as the target groups did not receive the benefit, said Finance Minister AHM Mustafa Kamal.

This led the government to cut interest rates on postal savings certificates. 

The banking sector has been automated, which will not allow savers to exceed the savings limit at the national certificates.

"The interest rate on postal savings will not decrease. There is no chance for them to be cheated."

The minister also talked about the bearish stock market.

"My responsibility about the stock market is clear: I don't work for the ups and downs of the market. My task is to accelerate the economy. If the economy becomes stronger, the stock market will be stronger."

Kamal blamed the higher interest rate for the high volume of default loans.

The finance minister said he faced questions for his move to cap banks' lending rates at 9 per cent.

"But the market forces will take control when the situation becomes stable."

The minister also said the country's tax-to-GDP ratio would be more than 14 per cent -- and not the existing 9-10 per cent -- if all the tax holidays and tax exemptions given to large infrastructure sectors are taken into account.

"But we are giving the tax holiday and exemptions for accelerating industrialisation," he added.

All the problems facing Bangladesh are known and the solutions are there, said Salehuddin Ahmed, a former governor of the Bangladesh Bank.

So, it is time to implement them.

"We have moved out of the bracket of the 6-7 per cent growth rate. We are at a satisfactory level. But it took us 47 years. We can't wait for another 47, or 27 or 17 years for the next phase of growth. We have to move fast. That is the main challenge."

Many economic indicators are currently not at a very good level. Remittance is a bit better. The negative growth of exports has narrowed. The remaining indicators are facing challenges.

Bringing down the interest rate to 9 per cent will not bring expected results. The other costs associated with businesses have to be reduced and the unloading of goods at the port has to be fast-tracked, the former governor said. 

There are a lot of challenges facing the banking sector: the financial institutions are progressively getting weaker for lack of skill and corruption and honest and bold people are not being promoted.

In case of economic and banking sectors there might be political guidelines, but it is not good to dictate who will get loans at what rates.

Fixing the interest rates for savings and loans at 6 per cent and 9 per cent respectively does not seem practical.

There should have been a band from 6 to 9 per cent and 9 to 12 per cent, Ahmed added.

"Bangabandhu's call for economic emancipation is still relevant," said Hossain Zillur Rahman, executive chairman of the Power and Participation Research Centre, a think-tank.

Bangladesh's GDP still relies on two sectors: garment and remittance. But the effectiveness of these drivers of the economy would erode gradually.

So, the country should identify sectors that will drive the next phase of the economy and keep up the growth momentum, he said.

Bangladesh is facing a syndrome of inefficient expenditure, said Rahman, also a former caretaker government adviser.

The country is spending a lot but there are inefficiency, corruption, waste and dilly-dallying in the expenditure.

The inefficient expenditure has had a toll on the quality of growth.

Rahman called for increasing budgetary allocation for education and health sectors and improving the quality in the services to move away from the low-cost labour economy.

The spread between the lending rate and deposit rate has never been less than 4.5 per cent in Bangladesh, so it would be tough to limit it to 3 per cent, said Mirza Azizul Islam, a former finance and planning adviser to a caretaker government.

Deposit growth is declining and if banks can't mobilise deposits, they would not be able to lend. Private sector credit growth was already at the lowest level in a decade in December, he said.

If the banking sector can't channel money to the private sector, job creation will be affected, which will ultimately hurt poverty alleviation efforts, Islam added. 

Bangladesh was one of the top 20 reformers in the latest World Bank's report on the Ease of Doing Business, said Salman F Rahman, adviser to the prime minister on private industry and investment.

"We hope Bangladesh will advance by another 25-30 spots this year and will be in the double-digit ranking by next year."

In order to make the desired jump in the ranking, which was 168th in 2019, laws are being amended, he said, adding that required amendments will be done by this year.

Digitalisation would be the next driver of Bangladesh's economy.

Bangladesh has laid out fibre optic cable in most of the unions across the country, laying the foundation for digitalisation, Rahman said, adding that the country also has the second largest population of freelancers in the world after India.

Banks' lending dropped off and this will impact the economy, said Mashrur Arefin, managing director and chief executive officer of City Bank.

"It is a matter of concern."

The banker called for raising the tax-to-GDP ratio. "People's income has gone up but many are not paying tax."

The government should pay attention to revive the stock market, whose key index lost 31 per cent in the last two years, he added. 

Dewan Hanif Mahmud, editor of the Banik Barta, moderated the opening ceremony.