Sacrifice some growth to ensure macroeconomic stability: Economists

The government should sacrifice some economic growth to ensure macroeconomic stability, experts and economists said Thursday.

Expressing their views at the opening session of the annual development conference of the Bangladesh Institute of Development Studies (BIDS) at a city hotel, they suggested a combination of flexible management of exchange rate, some tightening of credit growth, reducing barriers on imports, removing interest rate caps, and judicious use of tax and expenditure measures to ensure macroeconomic stability.

Sadiq Ahmed, vice-chairman of the Policy Research Institute (PRI), presented the keynote paper at the inaugural session of the three-day conference on the theme "Post-Covid challenges in an uncertain and divisive world". Planning Minister MA Mannan was present as chief guest.

Sadiq said sound macroeconomic management focusing on macroeconomic stability, private sector development, agriculture, trade openness, and human development have reduced the poverty rate significantly in Bangladesh and helped it to achieve the status of a developing country.

Covid-19 impacted economic activities, which led to an increase in short-term poverty by increasing unemployment, he mentioned, adding that even though the economy is recovering from the impact of Covid-19, the recovery has been prolonged due to the Ukraine war.

He also said the government imposed some measures in terms of fiscal and monetary policies, such as reducing imports, preventing aggregate demand, capping interest rates, and discriminating exchange rates. Such initiatives will reduce the pressure on the economy in the short term but will hurt macroeconomic stability in the long run.

In light of the local and global challenges, he urged the government to be satisfied with about 6% GDP growth in the current fiscal year, while the target set in the national budget is 7.5%.

He also expressed his concern over a 14% credit growth for the private sector and questioned the rationality of the growth at a time when the economy is facing several challenges, including high inflation.

The tax collection rate in Bangladesh has fallen to 7.6% of GDP, which is the lowest among all countries in the world, he mentioned, and stressed reform activities to accelerate tax revenue to meet the financing for health, education, and social safety net.

At the event, Minister MA Mannan wondered how the Bangladesh economy grew faster than that of many other countries even with the lowest tax-to-GDP ratio.

He anticipated that there are some other issues to offset the loss of lower tax collection and said that it is not possible to increase the ratio of tax collection overnight.

He also said the trend of economic activities in recent times is positive. Inflation is reducing as per BBS information.

State Minister of Planning Dr Shamsul Alam disagreed with the expectation of 6% economic growth in the current fiscal year and said that the rate will accelerate to over 7%.

The state minister also claimed that economic indicators were in a better position in the first four months of the current fiscal year when compared to the last fiscal.

The 6% interest rate cap for deposits and 9% for lending are hurting depositors, he observed and recommended that the caps be raised to 9% for deposits and 12% for lending.

Former principal secretary Nojibur Rahman, who has also served as chairman of the NBR, joined the event virtually and proposed a tax commission to increase revenue generation.

Dr Shamsul Alam disagreed with the proposal and said an increase in the number of public institutions will increase complexities.

"It should also be considered whether the National Board of Revenue can be made independent of the Internal Revenue Service without setting up a tax commission," he said.

Bangladesh Bank Governor Abdur Rouf Talukder said the government is waiting for a good time to raise or lift the interest rate caps.

He said that the currency supply from the Bangladesh Bank is not to be held liable for creating any inflation, adding that commodity prices are increasing because of higher import costs and higher costs of production.

He went on to say that the government is not preventing imports of necessary items.

Only imports of unnecessary and luxury goods were banned, he continued, adding that the Bangladesh Bank had blocked some LCs due to over-invoicing and under-invoicing.

Some of the LCs were over-invoiced by 20%-200% and more than a hundred of such LCs have been stopped.

He also said that Bangladesh has a huge potential of earning more remittance but the potential remains under-explored due to hundi. Policing is not the proper way to reduce hundi but reducing cost is, he observed.

He also presented some initiatives of the central bank in this regard.

Former Bangladesh Bank governor Salehuddin Ahmed said if inequality is to be removed, inequality should be brought against the rich people.

"We are talking about inclusive development, but we are not able to improve much here. Mainstream credit is not going to the small ones. The Covid package that was given – all of it went to the large ones (big institutions). Agent banking and MFS are good, however, the inclusive development that we talk about in the true sense is not happening."

Even though structural development is taking place, they are not well maintained, he added.

"Now is the time for us to take visible, swift, and practical action. Nothing is visible to us," he observed.

The noted economist also talked about the black hole of the economy, saying all the achievements that the country has achieved will be destroyed if they enter the black hole.

"We have not gotten that bad yet. We are still out of the ditch, but it will be dangerous if we fall."

Bad things spread like a contagion, he said, adding that wrong decisions at the macro (policy-making) level will lead to bad decisions at the micro (low level) level.

"If you make good decisions, the situation will gradually improve," he continued.

BIDS Director General Dr Binayak Sen said amid negative growth in the global economy, Bangladesh is one of the best performers in the developing world.

But the war between Russia and Ukraine has caused considerable uncertainty in the domestic sector through the pass-through mechanisms of inflation and trade and in the external sector as well. And achieving sustainable growth by defying uncertainty is very challenging during the post-Covid recovery period, he added.

Trends of inequality are increasing all over the world, considerable geopolitical tensions are rising among different interest groups from international forums, and economic and trade relations are being dominated by political powers, he noted, adding, "We have to discuss the implications of the emerging tensions for countries like Bangladesh and find a way to navigate through them."

He informed the audience that a total of 13 academic papers, five book discussions, and 12 keynote speeches from home and abroad will be presented at the conference.