Economic policies should befit varying global situation

A period of quiet, for some reasons, precedes the unfolding of all crises – the calm before the storm, in other words. When we inaugurated the Padma Bridge in June, many of us did not imagine that a major crisis was upon us the very next month. 

When the IMF was working on its Global Economic Risk Assessment in 2007, no one thought that a subprime problem would turn into a global problem within a few days. Before the current crisis unfolded, Bangladesh's economy was doing rather well.

The IMF was forecasting a positive outlook for the entire world economy, not for Bangladesh alone. The market was doing very well, said the IMF. But, the healthy forecast proved to be wrong.

For Bangladesh, in particular, there was a sense of comfort that the economy was doing well and would continue to do well for the foreseeable days ahead. Many warnings, however, came from the professional circle at the time, but the government did not take those into account.

Our long-term problem is that the Tax-GDP ratio has been steadily declining and has come down to 8% this year. This rate is set to decrease further in the coming years.

In contrast, neighbouring India logs a tax collection rate of 19-20% and as a result their government's capacity to tackle any kind of shock is very high. In India, the currency exchange rates are constantly adjusted, which we have not done here. As a result, the devaluation of taka had to be steep – down 25% at one go. In India, they do not have such pressure.  

While other countries constantly adjust interest rates, we have it fixed between 6% to 9%. This will entail reparations, which the people of the country are paying.

Inflation rate is very low in India. Last month it was 5.4%, which is well below their target. This is because they have changed their policies in line with changing global situations. India's central bank has slashed its base interest rate by 0.3% even though inflation eased.

Other countries are also proactively changing their economic policies. And what are we doing? Are we outliers? Are we outside the global system? Well, there are scopes to be one, but certainly not in the wrong way.

The positive aspect ahead is that the prices of goods are decreasing in the global market. However, prices in the world market must fall at a greater rate for the prices of commodities to decrease in the local market because of the 25% depreciation of taka against the dollar. It is very unlikely.

As several problems persist in the export sector, growth in the sector is likely to remain within single digit. While many are migrating abroad, remittance inflow is not increasing. We fear that a large portion of the expats' earnings is not coming home. Then, with the election right around the corner, if the capital flight increases, there will be more problems in the foreign reserve management. Taking all these into account, the outlook is very cloudy.

The dollar crisis is unlikely to abate quickly due to the massive amount of short-term foreign loans in the private sector. Most of some $16-18 billion of such loans are being rolled over. Even if some of the borrowers are willing to repay the loans, they are unable to do so as they cannot buy dollars. Such loans have to be renewed under somewhat strict conditions. Although the government has promised to resolve the dollar crisis by January, I think it will take at least another six months. Most importantly, unless proper management is ensured, it may take even longer.

According to the IMF, the country has a reserve of $26 billion. As their assessment is accepted to be credible – this $26 billion is the gross reserve in Bangladesh. Excluding the liabilities of organisations including the IMF will further reduce our net reserves.

Currently, the main cause of the liquidity crisis in the banking sector is the negative net foreign asset. Due to this, there is no expansion of liquidity from the external sector. At the same time huge amounts of dollars were sold to maintain the value of the currency. In one and a half years time, some $12 billion was sold, which means liquidity reduced by one lakh crore taka. Due to some people's dwindling confidence in the banks, deposit growth at banks dropped to 6-8%. This is very unhealthy and not a sign of a sustainable economy. This must be increased in the future.

People are withdrawing money from banks and financial institutions, which are in poor condition, and depositing in financial institutions with good reputation. BRAC Bank saw a 36% increase in deposits last month. There is no problem when money goes from one bank to another bank. But the overall decline remains a cause for concern. The reason for this vulnerability in the sector needs to be figured out.

Our regulatory institutions have little or no initiative – even if they have some, those are weak. Tk5200 crores have been given to the struggling banks without any reform initiative on their part. So, it yielded no result. The money has gone through the bottomless basket.

Hundreds of crores have been given to Padma Bank in the past and because of that the ICB and Sonali Bank are in trouble. Such initiatives have yielded no outcome. Injecting funds for poor performing banks is a problem in itself.

The amount of subsidy in our budget is Tk82,000 crore, which is very high in overall consideration. Meanwhile, there is a proposal to revise up this figure to Tk1.80 lakh crore in the revised budget. I have no idea where this money will be managed from. If these payments are done through printing notes, a serious negative impact will be reflected on inflation and other economic indicators.

Our revenue collection is not increasing. So, a deficit in the budget is given. On top of that, if there is an additional deficit of one lakh crore taka, it will not be possible to deal with it.

Payments have started to turn due in several places, especially with power stations. There is a crisis to pay in dollars in the private sector. LC confirmation fees and charges are increasing, which needs to be tackled. However, to solve this issue, we hear no reform initiative to increase tax-GDP ratio.

The good news is, loan negotiations with the IMF have been concluded quickly. Under the same arrangement, major reform initiatives in the banking sector, exchange rate and overall fiscal management, especially the revenue collection, must be adopted.

Ahsan H Mansur is the executive director of Policy Research Institute

Disclaimer: Ahsan H Mansur shared his thoughts at the Centre for Policy Dialogue's (CPD) Independent Review of Bangladesh's Development (IRBD) programme