It has been an unnerving year, not only for the finance minister but for us all. Because anyone with some sense can find himself looking eye to eye with a Hydra head of thorny issues. Probably never had the economy faced so many problems at one time, each promising to grow bigger and squish its prey.
The ever growing lines in front of trucks at street corners selling cheap rice show the biggest of the problems the economy is faced with -- ever rising inflation. Suddenly people across the board -- those who queue at the open rice sales points, and those who cannot because of their status symbol -- are feeling the pinch. Everybody is trying to charge higher -- fares are going up, non-food items are getting pricey -- to cope with the situation. Only those with fixed income find themselves in a cauldron of helplessness. It can also be the perfect situation when the society will tend to easily jump into corruption's brace.
Reasons why inflation is going up are known to all -- global price shock, taka losing ground against the backdrop of weakening foreign exchange reserves, and high expansion of credit being the most prominent ones. We cannot do much when food and other commodities get costly on the international market. And when taka dips, imports get even costlier, fuelling imported inflation. And the simple rule is that when supply increases with credit growth, demand grows too, and so does inflation.
Now we can do little if not nothing about the global situation. But we could have tried more to improve our forex reserves. We could have tried to improve our foreign aid utilisation. We did not. We could have worked harder to tap more jobs abroad for our workers -- they after all pump $10 billion into the reserves. These two could easily ease the pressure on exchange rate and taka could retain its strength. We really did not seriously seek foreign direct investment -- nor that it would have come given the dismal power situation which has improved following the government's crash programme but still remains wobbly.
On the other hand, credit flow has increased quite extraordinarily as more and more money went out of banks into public hands. It has grown mostly to import power equipment and buy fuel. The sudden spurt of the much-needed infrastructure projects also required more credit flow. All together, they mounted pressure on price.
Subsequently, all our monetary targets have gone haywire and the central bank looked on haplessly as one after another figures went tumbling. There goes inflation. Now goes credit flow. And so on.
Now what can the finance minister do about this? Does he have enough political power to do anything at all? Can he go for squeezing credit flow? Or will squeezing credit flow by making it costlier work at all? Can he control credit flow without hurting the real economy? Will controlling money flow lead to stagflation -- with inflation remaining high and growth rate low?
For our finance minister this remains a real challenge.
If interest rates are upped say to 20 percent, can our industry remain in the global competition with global interest rate remaining much lower? When interest rates are high, the industry should have other areas of relief such as uninterrupted power, better business environment, quicker decision making, and so on. There is little hope that these areas will improve radically overnight. If not what will be the fall out on the economy? And exports? If inflation keeps rising, that will lead to wage pressure for the readymade garment sector. And exchange rate? And inflation again? We are then looking at a vicious cycle, probably.
There are other major areas of concern such as the Annual Development Programme (ADP), high amount of subsidy, and budget deficit.
An over ambitious ADP that critically depends on domestic financing has many consequences. First, the implementation. Although the finance minister had rightly identified poor implementation last year as a cause for concern, and promised close monitoring, he could not live up to his words. We are now again seeing last minute fund release. This may push up the implementation figure but not the physical work. This will lead to a backlog of funds and a lapse of quality. When quality question comes, it is critical to note that we only know who is spending the money but not the impact. There is no institutional mechanism for monitoring and reporting what the public money, particularly development spending, is buying and what development outcomes these expenditures are producing.
The financing mode of ADP is also a cause for concern as more than a half of it will come from domestic sources. This will have two implications -- more internal borrowing at the cost of cheaper foreign funds, and less accountability in spending. Corruption, at the end of the day, becomes a major reason for a party to become unpopular.
The other challenge the finance minister will have to bear is the rising subsidy. In the past years the amount of subsidy increased, and quite justifiably. But we have to keep in mind the "hysteresis" effect of subsidy -- a phenomenon manifested by the tendency of some politically sensitive decisions, which cannot be reversed even when necessary. Once subsidy becomes a habit, it becomes a part of the political economy and cannot be adjusted downward.
And if all these realities are put together -- a big ADP, huge subsidy, and rising prices -- they will eventually raise the necessity for higher and more efficient revenue collection. Otherwise financial insolvency will surface. This year's revenue collection is quite impressive. But aiming for a big growth following a big collection year can be difficult. And if revenue falters, that will have a domino effect across the board.
We find little solace for next year. Remittance risk from the Middle East situation will get more entrenched. Global economic revival is still doubtful. And the political calm on the domestic front is disappearing fast, making it even more difficult to deliver results.
The finance minister will have to negotiate all these fault lines this year -- each of them equally dangerous and linked to the other. A slip can cause heavy reckoning for everybody, especially the finance minister himself.