Denial syndrome is hampering our economic policies

Visual: Teeni and Tuni

Since the national budget was placed five months ago, the country's economic situation has steadily deteriorated. This is visible on the balance of payments, and also in terms of revenue collection and public expenditure. The fiscal deficit seems to be steadily rising, and remittances and exports have experienced fluctuating fortunes. Bankers are having a field day, buying dollars cheap and selling at a higher price.

Our seven percent growth target has now been revised by external and international agencies to six percent. However, this is a tricky indicator – it is possible we can still achieve this because GDP growth rate has become like an expanding balloon that some say is devoid of any reality. However, it is concerning that the investment situation remains depressed.

The Russia-Ukraine war and global supply chain disruptions means domestic agricultural production has also become more important, although the government procurement targets are similar to last year – three lakh metric tonnes of paddy and five lakh metric tonnes of parboiled rice. And while migrant workers' numbers have increased, there is a mismatch between this and flow of remittances. Hundi transactions and pre-election illicit financial outflows are possible factors in this.

With regard to the interest rate, we have been operating on a 9-6 formula. The private sector argued it should be fixed due to high costs of capital in Bangladesh, and they were also permitted to borrow from abroad. That outstanding debt has now gone beyond USD 10 billion, with very little being paid back. The point is, the fixed interest rate system really did not lead to higher investment, although there are other major bottlenecks as well.

Overall, the situation looks very dire, but at the same time, economists should be careful about raising panic.

The critical question is, how did we arrive here? There are two dominant narratives currently doing the rounds. The official narrative, promoted by politicians and some bureaucrats, is that everything was fine until a storm of external factors hit us, including the war in Ukraine.

The other narrative is that, while there are global issues such as volatility in food markets, fuel prices and other inputs, they do not form the whole story. There are what I call legacy issues, which were not addressed on time and have now combined with recent events to form a very dangerous state of affairs.

The official response to this is that even advanced economies are suffering. But we must remember the abilities of different economies in terms of dealing with those stresses. Our capacity is quite different from the US or a European country, who are able to spend more and manage their economy through various institutions. In the same way that a Covid patient with existing vulnerabilities is likely to be more at risk, Bangladesh has some built-in unattended vulnerabilities that are now creating problems for us.

So, what are these legacy issues? The first is that we have failed to push our tax-GDP ratio beyond nine percent, and that it heavily depends on indirect taxes. Where does all the money go? Today, if we had a 12 percent tax-GDP ratio, policymakers wouldn't have to think twice in terms of allocating more subsidies to the poor. We also didn't focus on the quality of public expenditures, leading to overvalued projects with dubious outcomes, wrong gestation periods, and high-cost funding. The steady increase of operating expenditures vis-à-vis development expenditures is also a huge problem.

The banking sector is the soft belly of the whole thing. There is so much window dressing when it comes to the non-performing loan (NPL) amount, even though we know that there are provisioning and capital adequacy shortfalls. Even more importantly, the non-banking sector has been left unattended over the years, along with the stock/money market.

Subsidies are another area of concern. We must stress more on the quality of subsidies given by the government, rather than the amount. The composition of the subsidies is a more important matter. In economics, we always distinguish between whether the bad subsidies have taken over the good subsidies.

Ultimately, we really don't have the data to show what situation we are in. All professionals have been arguing for quarterly GDP growth and labour market figures. If we don't know how many people are employed and coming into the market, how can you make informed policy choices?

Three months ago, I mentioned that the economy is under pressure but not in crisis. I'm not quite sure about that today. There are three types of crises: a creeping one, a slow burn, and a sudden crisis. The official narrative is that we are in a sudden crisis because of unpredictable external factors. I think we are between a creeping crisis and slow burn crisis, but are coming closer to the latter now because of the absence of responses over the decade. The important question now is, are we coming out of our denial syndrome?

The government has responded to our economic woes belatedly, half-heartedly, without coordination, and without adequate follow-ups. Whilst I fully support the discreet measures that have been taken – including import control, marginal adjustment of the exchange rate, and public expenditures control – this kind of partial intervention that doesn't touch the interest rate or look at the fiscal side of things, will not be enough to address the fundamental issues.

Whatever we do, dealing with inflation has to be the anchor of that package. If that be the case, what should be our choice of tools? Any economist will tell you there is no silver bullet. The relaxing of the interest rate and slowing down of credit growth may be one way forward. On the other hand, we will have to carry on with giving social aid programmes to the poor. Regardless, the unfortunate truth is that the middle-class will still have a very tough time.

Debapriya Bhattacharya is Distinguished Fellow at the Centre for Policy Dialogue (CPD).


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