Coping with the global crisis

IN light of the analysis in the first part of this article printed in yesterday's Daily Star, here I provide 12 suggestions that may be considered in designing future policies.
1. There should be no active intervention by Bangladesh Bank to devalue the currency.
2. The exports of the garments sector, both woven and knit, have not yet been hit in value terms. The argument that the exporters are facing decline in unit price does not seem to have any objective basis. Jul-Oct 2008 data show that the growth of both knitwear and woven garments in value marginally exceeded the growth in volume. Hence, the unit price could not have fallen. There is no case for enhanced cash incentive.
3. Withdrawal of VAT from utility and other services used by the garments sector does not merit any consideration. These constitute an insignificant proportion of the total production cost; withdrawal would cause loss of revenue with no benefit in terms of production or exports.
4. There was a considerable reduction of import duties on capital machinery, raw materials, and intermediate goods in the present budget, leading to a notable increase in the effective rate of protection for production for the domestic market. Exporters are entitled to such facilities as duty drawback, bonded warehouse, highly preferential income tax and cash incentives ranging from 5 percent to 20 percent. The duty structure, therefore, need not be revisited. But once the present crisis is over, effective rate of protection should be gradually reduced. Export subsidies should also be reduced or eliminated.
5. The argument that our competitor countries have announced revision of duty structure and/or other support measures for exports leading to erosion of our competitive advantage should be treated with a grain of salt. As noted earlier, Bangladesh has not experienced loss of market share in exports. Besides, the total incidence of tax/subsidy inclusive of all these measures needs to be considered in comparison with the incidence in Bangladesh, along with labour cost differential. Besides, in all these countries revenue/GDP ratios are double that of Bangladesh.
6. Among the export sub-sectors which may have been hit by the global crisis, as noted earlier, raw jute, jute goods, tea, and agricultural products suffered a decline in export values even before the crisis, in FY07. It needs to be investigated as to whether the present problems in these areas arise from domestic production predicaments or external demand decline. In the latter case, the scope for switching from exports to domestic market should also be explored.
7. Overall, a lot of fiscal action does not seem to be needed yet. However, the government may consider setting up an Export Stabilisation Fund. In the event some of the negative signs noted before become durable, support may be provided from this fund in the form of loan at subsidised rate for a period not exceeding two years. Those exporters who have not yet been hit should also contribute to the fund.
8. In administering the above fund, the government needs to explicitly distinguish between solvency and liquidity. It would be logical to maintain that the impact of the global crisis would be in the nature of a temporary liquidity problem which should be over as the crisis abates, most likely by early 2010. The fund should not be used to rescue enterprises which are inherently insolvent because of structural deficiencies.
9. There is a strong case for reducing the spread between deposit rate offered and lending rate charged by banks. The main impediments in this area have to do with collusive behaviour on the part of private commercial banks and lack of any effective instrument at the disposal of the government or the central bank to enforce the reduction of spread. It is time to tell the bankers firmly that they should reduce the spread within a definite time, failing which the government should initiate legislative action.
10. The need for increasing public expenditure in Bangladesh cannot be over-emphasised, with or without the global crisis. The rationale lies in the high incidence of poverty and inadequacy of both physical and social infrastructure. Expansion of social safety net could include returning migrant workers, particularly those whose employment was terminated before the end of contract. Public expenditure on training/retraining of these as well other workers employable abroad should be augmented. However, the increase in public expenditure will have to be balanced against the potential to increase domestic revenue and external assistance so as to maintain domestic deficit financing within acceptable limits -- no more than 3 percent of GDP (note that the current budget already contains significant fiscal stimulus, raising overall deficit and domestic financing to 5 per cent and 2.8 percent of GDP respectively). NBR should be more pro-active to plug leakages, particularly in the area of import duty, which has seen slow growth despite 22 percent increase in import value during Jul-Dec 2008 period.
11. The expansionary fiscal policy stance on the expenditure side should be complemented by mildly expansionary monetary policy. The enterprises which face liquidity problems due to the global crisis may be given relief in the form of extended maturity of loans, more liberal rescheduling facilities, etc. But no enterprise should be allowed access to both monetary policy benefits and export stabilisation fund. The emphasis on greater flow of credit to SMEs, women entrepreneurs and IT ventures initiated during the caretaker government's tenure should be strengthened. But the overall flow of credit to the private sector should not exceed 20 percent, taking into account the likely growth of GDP and inflation.
12. The government should not once again legalise black money. This is morally indefensible and provides incentive for continued perpetration of illegal activities. The provision in the present budget for legally earned but undeclared income (against which tax was not paid when income was earned) may be retained.

Mirza Azizul Islam, Ph.D. is former Adviser to the Caretaker Government, Ministries of Finance and Planning.