Current Affairs

Stimulating Expectations

Nader Rahman

The word stimulus has been bandied about a lot in the last six months, from America to China, England to Japan and in each country it takes on a new meaning. In America the first stimulus package suggested by George W. Bush brought their presidential campaign to a halt with Obama and McCain rushing to Washington in an effort to prove their presidential credentials. Across the pond Gordon Brown scrambled everything he could to keep England's economy from falling apart. The trickle down effect of globalisation finally reached Bangladesh as on Sunday, as we announced our own stimulus package. It was not huge, it did not help everyone but in its own limited way it served its purpose, just don't ask the clothing sector what they thought of it.

Finance Minister AMA Muhith announcing the stimulus pacakage

When Finance Minister AMA Muhith announced last week that he was working on a stimulus package to help deal with the effects of the global recession, businesses and industries around the country anxiously waited for its announcement. When the figures were finally rolled out the clothing sector was under whelmed by the government response to what they thought was the biggest problem to face their sector since the end of the Multi Fibre Agreement. Having earlier demanded Tk 6000 crore alone for their sector, they were crushed when they realised that the whole stimulus package amounted to less than Tk 3500 crores. They were further aggravated when they read the fine print which excluded them entirely from the stimulus package. Muhit claimed the current policy support and bank loan rescheduling help that the government recently provided for them was all the stimulus they needed.

The Tk 3474 crore stimulus while derided by some was promising for the agriculture and power sector as it singled them out for the greatest stimuli. In the plan, the government earmarked Tk 1,500 crore for the agriculture sector, Tk 500 crore for farm loan re-capitalisation, Tk 600 crore for the power sector, Tk 374 crore for social security (food) and Tk 450 crore for the exports sector. Dr. Abul Barakat, Professor of Economics at Dhaka University says, "the (current) stimulus package is encouraging because it shows that the government is committed to enacting its election manifesto. It was in their manifesto that they clearly outlined the agriculture and power as two of the most important sectors to look after and nurture. Thus, by providing them with this stimulus, they are living up to their word."

The Finance Secretary, Dr Mohammed Tareque said the Tk 500 crore allocated for the agriculture sector would be used to ensure smooth flow of agri-loans through recapitalisation of Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and Karmasangsthan Bank. By putting the emphasis on the backbone of our argi-based economy, the government realises that it is the poor who really need the stimulus, rather than those whose profits have fallen. The move to allot the agriculture sector 2000 out of 3474 crores has been wise as it proves that the government has a clear grasp on the wide ranging affects of the global recession. Instead of giving into the different pressure groups that brayed for the money, they took a bold and popular decision but now they seem destined to be vilified by the country's clothing sector.

On paper the clothing sector has something to gripe about, they account for 76% of the country's export earnings and the recession around the world has pushed their prices down. Confirmed orders are now being renegotiated, while a few manufacturers have lost crores due to the closure of a few international chains. Utilisation declarations were negative for the first two months of the year and generally orders and prices were down. With all of that in mind the garments manufacturers demanded nothing short of a dream stimulus plan where the government would provide bank loans at a single digit interest rate. They also asked for a relaxation of the Credit Information Bureau rules, termination of the 0.25 percent tax at source, extension of loan rescheduling from the three-and five-year terms to seven and 10 years and withdrawal of VAT on utilities.

The total bill stood at a whopping Tk 6000 crores for a sector that has in real terms experienced a slight fall in confirmed demand and that has not yet projected negative growth till June (when the next budget will be announced). The real question to ask could then be, why such a hue and cry from them? While the answers differ, some economists claim it is out of lack of a better idea. They say with stimulus plans being offered to the same sector abroad, they feel they are entitled to one here in Bangladesh. While the fact that they account for a whopping three-fourths of our export earnings cannot be denied, the government cannot be held hostage either. If the sector had been severely affected by the global downturn maybe then it would have warranted such a response from the government, but the fact of the matter is that a slowing down of orders and profits is a simple phase of the common business cycle. The garments sector's real worry, is how long this trough will continue and that is a question that has no definitive answer. That is where the real problems lie.

The clothing industry aside, the power sector is where the stimulus was really felt. The Tk 600 crores that was promised to the power sector doubles its budget and also proves to the people that the government understands its importance. Now the real thing to look into is how this extra Tk 600 crore will be spent. AT Capital Weekly, a publication of Asian Tiger Capital, a financial institution focussing on private equity and venture capital said with regard to the recent stimulus package for the power sector, "The consensus from the Government is that there are no near-term solutions. But we need “out-of-the box” thinking that outlines short term energy generation strategies which will need to focus on rental power plants, coal imports, merchant power policy and potentially Floating Liquid National Gas (LNG) imports." They recommend, "installing several small and medium sized coal fired power plants (Up to 100MW) mainly near the two sea ports and the northern region where Bangladesh's 5 coal mines exist." They also believed that imported coal from Indonesia, Australia and India would be able to fuel those power plants until the finalization of the governments coal policy and domestic coal mine development. Other possibilities include setting up a LNG terminal beside the Shangu offshore Gas field platform. These are all ideas and suggestions that the government must research and make an educated decision on. If not then the extra money will be of no real use, in fact it will hardly be stimulus at all.

Whenever the government hands out a subsidy or a stimulus in this case, it is the tax payers that have to bear the burden of footing the bill. In America this has caused widespread public outrage as the average Joe was livid that his tax Dollars were being pumped into companies like Fannie Mae, Freddie Mac and AIG. Here in Bangladesh that idea has not really caught on, yet others such as economist Akhter Mahmmod believe there is something to be gained out of using ones tax money for such subsidies. He says, "When a government gives out subsidies, it is usually for two things, either to maintain the status quo or to extract some changes. In Bangladesh this time around it seems like it is being done to maintain the status quo, but what we really need is for it to bring about some change. After all it is our tax money, and when it's being used, it should be used properly."

Mahmood goes on to say, "the money should not just be handed out without any monitoring. This is an ideal opportunity for the government to hold the subsidy receivers accountable for what, how and where they spend their money." Aside from increasing accountability he says this is the prefect time to bring about change, such as improving productivity, finding newer products and markets as well as improving social and environmental compliance standards. If these changes could be linked to the subsidies that are being provided as they were in 60's and 70's when East Asian governments associated subsidies with results then this could prove to be a great step forward for Bangladesh, its businesses and its business practices.

In the end the stimulus package while it leaves one major sector out, it essentially does what it is supposed to. If implemented correctly, as being result oriented and with a proper level of accountability it could prove to be a success.

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