A quagmire of economic problems

High consumer prices take a heavy toll on ordinary people. Photo: STAR

THE Indian finance minister was quoted recently as saying “I am concerned, not depressed” on the sidelines of the underperforming economic giant. Still, Germany and the BRICs are probably the only consortium of nations left impervious to the global recession that began half a dozen years back. But with Germany being forced to underwrite the massive EU debt and Chindia's growth tapering off drastically to record lows, immunity to the global headwinds is now a thing of the past.
In Bangladesh however, the economic conditions have led even the most optimistic jingoists to consider having “anti depression” tablets to resuscitate life back to their sanguinity. Although inflation numbers have officially touched single digits, the grocery markets in my locality continue to charge essentials double its price from last year. Even the most economical of economic restaurants that found my taste buds wanting every weekend has not only hiked the price of its entrée but also reduced its quantity much to my displeasure.
Surely it has been frail times for Bangladesh's economy and with the stock markets continuing to go south, every common man wonders how long can they survive in an economy which offers little hope. As resident economists are rolling out their free services probably to be the first economic adviser to the PM, a magic panacea is something that still eludes many in putting Bangladesh back to its feet. The economy stands on a thin thread with multiple issues plaguing the country ranging from feeble export markets, volatile energy and food prices to falling forex reserves, rising subsidies and increased government borrowings.
It is often said that a country's capital market acts as a barometer of its economic health. If that is true, Bangladesh is in a state of coma. The stockmarket crash that began in December 8, 2010 caused many investors to take to the streets as the index fell from a high of 8,500 to 7,000 points. As I speak or rather write, the index stands at 4,200 and the few retail investors that braved their creditors until now are probably looking to end their “Riches to Rags” journey soon. The country's central bank by adopting a restrained monetary policy to curb inflation has sucked liquidity out of the market and a controlled divergent stance is the only way to perk up the markets.
In February this year, a sibling of mine was supposed to pursue his higher education abroad but with a 15 percent depreciation of the taka against the US dollar in a space of few months quashed his dream forever. For him and many others who secure that coveted admission letter from their dream university, they often overlook the impact of currency volatility. On the back of higher petroleum imports for diesel run power plants, capital machinery imports and steep decline in foreign aid at the end of last year, the taka witnessed a major depreciation vis-à-vis the dollar. Although the taka has clawed back some its depreciation, it is still susceptible given the demand for imports are price inelastic. The Indian rupee has suffered a 25 percent fall this year against the dollar and the Indian govt is contemplating to introduce a dollar bond with higher interest rates to attract non-resident Indians. Resurgent India Bond of 1998 and India Millennium Deposit of 2000, previously introduced by the Indian government, channelised $10 billion into the Indian economy immediately arresting the rupee's slide.
The readymade garments industry has for long been the bedrock for Bangladesh's exports but inclement weather both at home and abroad is ruffling feathers sparing none. At home, minimum wages fixed for the workers about two years back have not been able to commensurate the rise in rent, food and other essential items for their consumption. With inflation reaching its highest levels in 15 years in January, it was only a matter of time when Ashulia, a major RMG belt, went up in arms demanding a wage hike. Outside home, Bangladesh's two major export destinations, Europe and US, are experiencing a major slowdown in their economies and the situation is not expected to improve in the short to medium term amid the EU debt crisis. To substantiate the inclement weather in figures, Bangladesh's exports experienced a downturn three months on the trot since March this year. In March this year, exports dipped by 7 percent followed by another 7 percent in April with May declining by 4 percent compared to a year earlier mirroring the subdued state of the EU-US economies.
Fiscal profligacy in the form of huge subsidies to shield the end consumers from rising global energy and food prices has led the S&P to issue a warning on Bangladesh's fiscal prudence. At present, the government shoulders subsidies amounting to Tk 24 per litre on diesel, Tk 16 for furnace oil and Tk 2.78 per unit for electricity. The government in the past year or so has tried to hike prices of such essentials but the amount of subsidies refuses to pare down to sustainable levels. Case in point is Bangladesh Petroleum Corporation which received a massive $1.1 billion in subsidies in the fiscal year ending this June against $500 million it received in FY 2010-11. This massive layout in subsidy is partly due to the fuel required to feed the newly built oil-based power plants and partly due to the rising global oil prices after a halt in oil production in the Middle East-North Africa region as an aftermath of the Arab Spring.
The subsidy allocation for FY2012-13 is estimated to be around 2.5 percent of GDP and one way to fund the massive subsidy is through increased government borrowings. The government plans to borrow a massive $4 billion for FY2012-13 as against the $3.5 billion borrowed last fiscal year. This has already led to crowding out of private sector investment and increased the odds of an impending rise in interest rates thereby halting the process of development in crucial sectors.
To the common man, they could not care less of the recent inflation or GDP numbers for what they strive for is enough wherewithals to support three square meals and a roof to call home. On the contrary the donor and credit rating agencies could not care less of the populist measures in the form of a massive subsidy establishment. It is tough managing the finances of a country wherein any subsidy cut and/or adoption of an expansionary monetary policy might cause inflation rates to soar threatening to send scores of people below the poverty line. On the income side, Bangladesh's total revenue collection stands at a mere 13 percent of the country's GDP and an increase in taxes to mobilise resources for increased revenue threaten to unseat the ruling party given elections are due in 2013. Bangladesh is engulfed in a quagmire of economic problems and the situation that confronts us makes me strongly deem that being the finance minister of Bangladesh is the least favoured in anyone's career wish list.