Cracks appear in economy | The Daily Star
12:00 AM, June 12, 2019 / LAST MODIFIED: 02:32 AM, June 12, 2019

Cracks appear in economy

CPD in pre-budget press briefing

Cracks are appearing in the economy in the face of deepening crisis in the banking sector, widening gap between revenue collection and expenditure, and rising pressure on foreign exchange reserves, says the Centre for Policy Dialogue.

The economy is now under more stress than at any other point of time in the last 10 years, observes the think-tank.

“It is a matter of worry,” Debapriya Bhattacharya, a distinguished fellow of the CPD, said at a press briefing in the capital’s CIRDAP auditorium yesterday.

The briefing followed the unveiling of the CPD’s report “State of Bangladesh Economy and the Budget Challenges”.

The think-tank said the country is doing comparatively well in terms of economic growth and per capita income but it lags behind in private investment and industrialisation compared to that in some other countries.

Weakness in revenue collection has become an insurmountable hurdle to development, it noted.

“The situation will turn bad if the government is to collect funds from other sources for financing,” said Debapriya.

Financing from other sources, such as banks and foreign lenders, will worsen the macroeconomic stability as the interest rates of those sources are very high, the CPD said, adding that macroeconomic stability was a strength of the country in the past.

The CPD estimated the revenue shortfall in the current fiscal year to be around Tk 85,000 crore.

It recommended an all-out effort for accelerating revenue collection by expanding the tax base and curbing tax evasion.

Apart from low growth in tax collection, pressure on balance of payment is rising despite an increase in export and remittance inflows, the CPD pointed out.

The think-tank suggested that the government allow depreciation of taka against the greenback to increase export competitiveness and attract increased remittance inflows through formal channel.

The rate of inflation is low now, and if taka is devalued now, the economy has the capacity to absorb the possible import-induced inflationary pressure, the CPD said.

If the government devalues taka gradually, it will not need to provide fresh cash incentives to exporters and remitters in the next fiscal year, it mentioned.

According to its estimate, Tk 7,900 crore would be needed to provide 1 percentage point additional cash incentives on export earnings and 3 percent on remitters.

“Depreciation is a must,” Debapriya said, adding that taka remains overvalued artificially.

The other problem in the macro economy is crisis in the banking sector. The sector has been suffering from many problems like under capitalisation, high volume of non-performing loans, liquidity crunch, and falling deposits in banks, the CPD mentioned in the report.

All the steps that the current government took to address the problems in the banking sector actually harmed the sector, Debapriya said, adding that defaulted loans rose significantly in the last few months.

As per a new policy of Bangladesh Bank, defaulters would be allowed to reschedule their classified loans by providing down payment of only 2 percent, instead of the existing 10-50 percent.

A maximum of 9 percent interest rate would be levied on the rescheduled loans, lower than the existing 12-16 percent. The time for repayment was also generously set to 10 years with a grace period of another year.

The government should not intervene in fixing interest rates in the banking sector, the CDP said.

Debapriya mentioned that the beneficiaries of the crisis in the banking sector are very powerful, and their influence was apparent in policy formulation in the sector.

“People may lose confidence in the banking sector if the money launderers and scamsters are not brought to justice ... Otherwise, it will not be good for the nation,” mentioned Debapriya.

Besides, there have been reports that the government is going to allow black money holders to whiten their undisclosed income, the economist said.

“This will be a clear deviation from the Awami League’s election manifesto,” he said, calling for an independent banking commission to bring about reforms in the sector.

Towfiqul Islam Khan, senior research fellow at the think-tank, presented the CPD report.

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