New govt needs 'shock therapy' for economy: Prof Mustafizur
The new government in Bangladesh has to undertake a shock therapy plan, such as making the exchange and interest rates market-based, to bring back stability in the economy, said Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD).
"This shock therapy could be painful for the people, but it is necessary to stabilise the economy, and we have to accept it," said Professor Mustafizur at a dialogue titled "Conversation with Professor Mustafizur Rahman," organised by the Economic Reporters Forum (ERF) on Tuesday.
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Establishing good governance in the banking sector would be another imperative task for the upcoming government post the January 7 elections, he said.
Once these initiatives are implemented, the price level of daily commodities will further increase. Afterward, the rate of inflation will decrease, he said.
However, due to the increase in the price level, even if inflation drops, the purchasing power of people decreases. To address this problem, the government has to take initiatives to increase people's income, he said.
He explained that the exchange rate is currently determined by crawling pegs. If set in this manner, the market assumes that the exchange rate will further increase. The interest rate is fixed in coordination with the interest rate on Treasury bills. According to him, it should be moved away from this method and left it to the market.
"The results of these initiatives will be painful. The purchasing power of the common people will decrease, and savers will suffer. However, for the sake of a stable economy, everyone should accept it. Initiatives should be taken to increase income and purchasing power by embracing the new adjustment," the economist added.
He said the results of shock therapy will not only be painful but, in some cases, will also have positive effects. A rise in the exchange rate will increase the flow of remittances through legitimate channels. In this scenario, the incentives provided by the government may not be needed. Also, it will enhance competitiveness in the export sector, leading to a balanced economy within two years.
Bangladesh faces the second generation challenge
Professor Mustafizur mentioned that in the 1990s, Bangladesh transitioned from a debt-based economy to a trade-based economy. At that time, the ratio of foreign trade to foreign credit was 1:1, which has now grown to 8:1 – a significant achievement. This success is attributed not only to the role of the private sector but also to substantial contributions from government policy support and incentives.
He said the challenge faced by the first generation in Bangladesh was the lack of natural resources for trade. Despite this, Bangladesh entered major trade in sectors such as the labour-intensive garment industry, successfully overcoming the challenges of the first generation.
Now, the second generation has to face new challenges, one of which is the tariff challenge that will arise after the country's transition from least developed country (LDC) status. Additionally, ensuring decent employment and environmental compliance requires capacity-building.
Of course, diversification of exports is necessary, both within and outside the garment industry. The ready-made garment sector, in particular, holds great potential, considering the global market for ready-made garments is $700 billion, and Bangladesh currently controls only 7% of it.
He mentioned that the global market for the leather and pharmaceutical industry is about $1 trillion, presenting an opportunity to increase Bangladesh's participation in this market. Foreign direct investment (FDI) should be encouraged, and the current discouragement of FDI in the domestic tariff area in Bangladesh needs to be reconsidered. Despite significant investments in setting up API Park and Tannery Industrial Park, the reason why Effluent Treatment Plants (ETP) are not being established there, even after spending Tk100-150 crore for a decade, needs to be addressed.
"If ETP is established in API and Tannery Industrial Park, foreign investment will likely increase. However, influential industrial owners in these sectors, who may be affected by foreign investment, are reportedly hindering the establishment of ETP. There are political and economic issues behind this," he explained.
Bangladesh is passing through a golden opportunity
Large-scale infrastructure development has created new opportunities for the economy. To capitalise on this, transport corridors need to be transformed into economic corridors.
Even if maintenance of these infrastructures can be sustained with tolls, it will not be sufficient to attract investment. Investment in economic zones is essential to generate returns, and the revenue collected from there can contribute to the investment cycle.
Emphasising sub-regional cooperation, he pointed out that Bangladesh is currently conducting only 12% of its global trade in Asia, despite the ongoing Asian century. To fully leverage opportunities, it needs to extend its presence into South and East Asia and ASEAN markets. Synergies between investment, communication, and trade must be fostered.
To maintain people's trust in politicians, affidavits should be scrutinised
Professor Mustafizur Rahman remarked that the affidavits of candidates participating in the general elections reveal a significant increase in wealth. The ruling party, the Anti-Corruption Commission, and the Bangladesh Financial Intelligence Unit should investigate whether the assets of ruling party MPs, particularly those whose wealth has noticeably increased, have done so legally or not. This scrutiny will provide common people with a clear understanding, and without it, trust in politicians may be difficult to maintain.
No fear of famine
In response to a question from journalists, he said, considering the production and storage situation of food grains, it can be said that there is no risk of famine in the country in February-March 2024. However, he pointed out that, despite sufficient production and reserves, famine can occur if people lack purchasing power. This is why the government has increased the coverage of social safety nets.
"The prime minister has a lot of information that I don't have. She can make any comments based on that information. However, I believe there is no risk of famine," said Professor Mostafizur Rahman.
Suggestion to move along with people to deal with the foreign pressure
In response to the positions of India, China, the United States, and Russia surrounding the upcoming national elections, the CPD distinguished fellow suggested, "We engage in trade with various countries, and many of them provide loans, so there might be pressure from them. However, we should prioritise it according to our needs."
He advised political parties to align themselves with the people to effectively counter foreign pressure.
Ministers' remarks about CPD are 'unfortunate'
Professor Mustafizur Rahman expressed disappointment over the comments made by two ministers about the report published by the CPD on banking sector irregularities and financial scams.
In a press briefing on 24 December, the think tank stated that the amount of money stolen from the banking sector through 24 major scams since the fiscal 2008-09 was Tk92,261 crore.
Following this, Awami League General Secretary and Road Transport and Bridges Minister Obaidul Quader said, "The CPD should substantiate its allegation of financial irregularities in the banking sector. It should provide information about where the money is. If they give detailed information, we will bring that money back to the country."
In a separate development, Information and Broadcasting Minister and AL Joint General Secretary Hasan Mahmud remarked, "The CPD did not carry out any research. They gathered cuttings from some newspapers, made a report, and held a press conference based on that. Their statements are nothing but falsehood."
When asked about CPD's position in this regard, the distinguished fellow said they were observing who stated a problem and the reasons behind their statements. He clarified, "We are not paying attention to what is being said. The way the reactions are being shown is very unfortunate."
He explained that the CPD prepared the report based on articles published in newspapers, and there were no objections to those reports. He emphasised that when there is a problem, it should be considered as such rather than as a campaign against the government. Initiatives should be taken to address and resolve the issue, and he urged for a departure from the culture of denial.
"We believed that discussing the issue before the elections would prompt political parties to pledge resolutions in their affidavits. However, many are focused on who said it and for what purpose, rather than addressing the substance of the issue. There is a need to focus on the truth of the matter, how accurate it is, and what steps will be taken to solve the problem," he added.
The dialogue was presided over by ERF President Refayet Ullah Mirdha and conducted by the organisation's General Secretary Abul Kashem.
