Business confidence low as govt 'lacks vision for economic reforms'
Highlights:
- Govt's VAT hike on certain products, services "inconsiderate," says Debapriya
- Warns energy situation in the country likely to worsen
- Says government structure spending, including revenue and subsidy expenditures, remains unclear
- Warns of reform fatigue amid economic challenges
- Criticises the interim government for not presenting a clear economic manifesto, lack of transparency regarding development projects
Businesses say confidence among both themselves and consumers has hit a new low, a situation unseen for years, while economists point to the interim government's lack of a clear vision or roadmap to tackle the mounting economic challenges to bring back macroeconomic stability.
These concerns were voiced at a symposium titled "White Paper and Thereafter: Economic Management, Reforms, and National Budget," organised today by the White Paper Committee 2024 in collaboration with the Citizen's Platform for SDGs, Bangladesh. The event brought together leading economists and business leaders to discuss the country's economic state.
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Speakers lament absence of economic reforms
Speakers noted that while institutional and administrative sectors have received some kind of attention, economic reform has been conspicuously absent. Some even criticised the interim government for operating in a manner similar to the previous government, leaving critical questions unanswered.
Concerns were raised about the looming energy crisis as summer approaches, alongside challenges related to inflation, stagnant investment flows, hurdles surrounding LDC graduation, and uncertainty over budget spending and revenue collection.
'No clear economic vision'
Economist Debapriya Bhattacharya, who heads the White Paper Committee 2024, criticised the interim government for failing to present a clear economic manifesto to navigate the ongoing crisis, pointing out the absence of a cohesive plan to establish a balanced and inclusive economic framework.
This lack of clarity makes it difficult to evaluate the country's economic trajectory, he said, pointing to a slowdown in economic growth reflected in data from the first quarter of the fiscal year.
"No new development vision has been articulated. This government lacks a clear development agenda. The pathways for achieving SDG implementation, graduation from LDC status, and reducing inequality remain undefined," said the eminent economist.
He also warned about the country's energy crisis, which he said is likely to deteriorate in the coming months. He raised concerns over the government spending, particularly regarding revenue allocation, subsidies, education, and healthcare.
'Investor confidence very low, negative'
The confidence of both investors and consumers is currently very low and negative, a situation not witnessed in recent years, said Syed Nasim Manzur, managing director of Apex Footwear and one of the country's leading businessmen.
"I have never experienced such a difficult time in my 34-year business career," he remarked.
Zaved Akhtar, former president of the Foreign Investors' Chamber of Commerce and Industry (FICCI), attributed the low confidence to the uncertainty surrounding the longevity of the interim government's reforms.
"Investors are hesitant because they are unsure if the policies introduced by this government will be sustained in the future."
Ferdous Ara Begum, CEO of Business Initiative Leading Development (BUILD), raised the issue of prolonged stagnation in both domestic and foreign investments, blaming on structural inefficiencies, including inaccessible services, the absence of commercial courts, and a weak arbitration act.
M Masrur Reaz, chairman of Policy Exchange Bangladesh, stressed the need for stabilising inflation, the balance of payments, and foreign exchange rates to rebuild investor confidence.
To control inflation, Reaz recommended normalising imports and strengthening market monitoring. He also emphasised ensuring uninterrupted power and energy supplies and implementing a clear investment strategy to support sustainable growth.
Kazi Iqbal, research director at Bangladesh Institute of Development Studies, urged investments in skills development to address labour market challenges. He also called for reevaluating existing programmes to align them with market demands.
No quick solution
Professor Rehman Sobhan, chairman of CPD, said the government would make some attempt to bring about more disciplined macroeconomic management.
"But even over here, I do not see them being able to effectively take care of the problem of inflation within the tenure which is actually available to them," he added.
He also said the government can introduce some discipline into the regulatory system of the banking sector. "But here again, the structural reforms which are needed in the banking system to be operationalised and to be made effective are going to take place over a period of time."
VAT hike criticised
Debapriya criticised the recent hike in value-added tax (VAT), calling it an "inconsiderate" move.
"The government is relying heavily on increasing indirect taxes like VAT instead of focusing on direct taxes, which shifts the burden disproportionately onto consumers," he said.
Ferdous Ara Begum of BUILD said over 83% of tax revenue is collected at the source, which is supposed to be refundable but it rarely happens.
"This disrupts investments and creates working capital shortages," she said. She also urged changes in the upcoming budget to address similar issues with VAT collection, where 63% is collected at the source.
Professor Mohammad Abu Yusuf from the University of Dhaka said that tax revenue amounts to only 7.5% of GDP, while tax exemptions account for 6%, often granted under political influence.
"If exemptions are halved, the health budget could be tripled, and the education budget doubled," he said, emphasising the need to reduce the gap between direct and indirect taxes.
Prof Yusuf argued that addressing VAT collection inefficiencies could triple current revenues without increasing rates, provided NBR's capacity is enhanced.
On White Paper
Debapriya said many people ask what happens after the white paper is published.
"When we, the drafters, face this question, we feel a sense of helplessness because there is uncertainty. In such a situation, it seems important to highlight the analyses presented in the white paper, focusing on the upcoming medium-term plans and the next budget."
Prof Rehman Sobhan said the white paper's findings will benefit the elected government most. He noted that many issues faced by the interim government are long-standing, particularly the escalating public debt crisis, which has worsened in recent years.
Reform fatigue amid economic challenges
Debapriya warned that support for reforms could diminish if the interim government fails to expedite its reform agenda. He highlighted the importance of addressing growth, employment, poverty, and social security, noting that the country is currently divided over elections and reforms.
He called for wide-ranging discussions on the upcoming budget, pointing to slowing growth, a lack of private sector investment, and employment challenges as pressing issues. "Especially, the growth rate is slowing down, no investment in the private sector and problems in employment are there."
The economist noted that the interim government is working with a budget set by the previous Awami League government. He pointed out that since no revised budget has been introduced, the indicators tied to the old budget are now irrelevant.
Debapriya also criticised the lack of transparency regarding development projects. "Without a published policy for scrutinising these projects, it becomes challenging to assess their impact and feasibility."
Energy expert Mohammad Tamim stressed on the need for a long-term proactive energy policy to reduce import dependency and ensure consistent gas extraction.
Poor governance and reforms
Selim Raihan, executive director of South Asian Network on Economic Modelling (Sanem), said that over the last decade and a half, flawed elections have weakened institutions, enabling the same groups accused of loan defaults, fraud, and money laundering to thrive.
Professor Raunaq Jahan emphasised that strengthening institutions requires more than political will.
"Overcoming vested interests and transitioning from exploitative practices to a rule-based framework is essential," she said, urging initiatives to repatriate laundered funds.
World Bank official Syed Amir Ahmed said reforms are necessary, some critically so, but they must come with ownership.
"Informal institutions involved in debt management, foreign policy, and development policy must be curtailed to ensure progress," he added.
Call for bold decisions
Commerce Adviser Sk Bashir Uddin called for bold government decisions to avoid repeating past mistakes. He proposed reconsidering subsidy structures, such as the unsustainable oil price sales by the Trading Corporation of Bangladesh, suggesting a slight price increase to benefit more people.
On tax reform, he emphasised increasing direct taxes and tackling tax evasion. He also criticized the banking sector for making excessive profits despite stagnation in loans and a challenging business climate.
Umama Fatema, spokesperson for the Anti-Discrimination Student Movement, called for the government to disclose the terms of Bangladesh's agreements with India, Russia, and China to the public.
She also pointed out that the government has not yet addressed these concerns with the seriousness they deserve.
What Bida chief says
Bangladesh Investment Development Authority (Bida) Executive Chairman Chowdhury Ashiq Mahmud Bin Harun noted that the primary challenge lies not in understanding problems but in the lack of efficient problem-solving.
He recommended that the upcoming budget provide equitable incentives for promising sectors. Efforts are also underway to ensure that investors can access all necessary services from a single platform, streamlining the investment process and fostering a more conducive business environment.
