Does Bangladesh need a stimulus package?

THE global financial crisis has made all the countries think about protecting as well as reviving the growth of their respective economies. Most of them have already come up with various stimulus packages to bolster economic activities.
There are debates on how to execute this stimulus, and on the best possible way to attain the ultimate objective -- to enhance economic growth amidst global meltdown. However, there is little doubt about the necessity of the stimulus package, or encouragement to the growth sectors.
As Bangladesh was not directly affected by the global slowdown, there was some complacency in the beginning. However, this crisis is still unfolding, hurting asset groups and countries in different ways.
We are aware that our exports and remittances have become vulnerable in the face of diminishing global demand. Although we have not as yet been hurt significantly, the uncertainty raises the question of what we should do to protect our economic growth.
One way is to stay as we are, and take action as the situation unfolds. However, it may be too late if we let this situation worsen further, and then even an active stimulus package may not be effective enough. A stimulus package is needed right now to tackle the problem before it becomes a threat.
What kind of stimulus will be appropriate for Bangladesh? Do we want to push for continued expansionary monetary policy, or focus more on fiscal stimulus? Which one will be more effective? What would be the price of this stimulus? Can we afford this? Our budget deficit is already at 5%. Should we not be concerned about increasing the deficit further?
The government has been elected with a strong mandate to curb inflation. Further easing of monetary policy may create obstacles in keeping price level at the desired level. How can the government strike a balance between these two?
The high level of inflation in the last 2-3 years mostly stemmed from international commodity prices. As we import a lot of commodities, we were impacted significantly. The continuous credit growth of around 25% in the financial system also bore evidence to that.
However, since September, international commodity prices have started to come down. As a result, inflation is going down and should go down further. The reduction in prices of commodities has also curtailed the value of our imports significantly. As a result, the credit flow will also come down.
But as we are monitoring the data with a lag of 2-3 months we are finding it difficult to determine how much room we actually have to increase credit flow and inflation. The January L/C opening data shows 37% reduction from last year. Also, our revenue collection has been well below the target level as the value of imports came down significantly. We are also observing that all the banks have surplus US dollars, which they are surrendering to the central bank.
If the central bank had not bought the dollars, the taka would have largely appreciated, whereas our policy makers want to devalue the currency a bit more to support our exporters and remitters in the face of devaluation of our competitors' currencies. As global demand is drying up rapidly, it is imperative that we support our exporters to maintain and, in many cases, expand their market share.
All this suggests that the fundamental principle of any stimulus should be to enhance the credit flow. In the current scenario, we have enough room to expand the credit flow to 30% and still keeping inflation within single digits.
Enhanced credit flow, on one hand will help create incremental economic activities and employment, and on the other hand will help our exporters to snatch away market share by expanding capacity.
Though the currencies of our neighbouring countries have depreciated due to market driven factors, the taka has maintained its position, as we have not experienced large capital outflows like those countries. If devaluation is not possible, we can also think of providing targeted subsidy to sectors that are hard hit.
We can also think of reducing the reserve ratios, which has recently been adopted by many Asian countries to increase liquidity in the market. This stimulus would have to be simultaneous in both the monetary and the fiscal fronts.
With monetary easing we would make the banks liquid enough to expand credit flow. The government should spend on infrastructure building, which will indirectly improve the business viability of a lot of SMEs. With a more viable business environment, SMEs will find enough room to grow with greater availability of credit from the financial sectors.
All this will generate more economic activity and create employment, with a relatively stable price level. The reduced international commodity prices will ensure that we will not have to pay as much subsidy for food and oil as previously anticipated.
We should plough back this amount to the financial system to generate more economic activities without much threat of incremental budget deficit. Enhanced credit flow would also ensure the growth of our revenue collection, which is also necessary to maintain macro-economic sanity.

Mamun Rashid is a banker and economic analyst. E-mail: [email protected].