Go for reforms as Five-Year Plan goes off track: Report

Infographics: TBS

Key 8th FYP targets have remained off track since the unforeseen global inflationary pressures of the Ukraine War period, a planning commission review says. The balance of payment targets were derailed in the first half of the current 8th Five-Year Plan, the review reveals and adds that the government has to implement urgent economic and administrative reforms including the agreed ones in the three-year IMF programme to avoid disruption in growth momentum.

Among the few achievements, decline in extreme poverty is one, though growing inequality remains a concern.

"Solid implementation of the government's reform programme agreed under the IMF program will help recover GDP growth and restore macroeconomic stability in the next two years of the 8FYP," hopes the Mid-term Implementation Review done by the  General Economics Division of the planning commission.

Macroeconomic reform programmes must be carried out to address concerns about inflation, banking and fiscal fronts to put the GDP back on rapid growth track.

"All out efforts are needed to restore the health of the banking sector and to increase tax revenues through comprehensive tax reforms.

"Inflation is hurting and must be brought down to the 5-6% range through a judicious use of monetary and fiscal policies," it says, calling for flexible management of the exchange rate and interest rate to restore macroeconomic stability.

Import controls must be removed to enable a resumption of the growth momentum. FDI flows must be boosted to provide necessary financing of investments and the balance of payments, it stresses.

Though GDP growth decelerated in FY23 owing to adverse effects of import controls and foreign exchange shortage on the supply of energy and industrial raw materials, the 6% rate remains "a solid growth performance", the report says.

The private investment rate fell and actual foreign direct investment inflows have been much below the 8FYP targets. Indeed, actual FDI inflows in FY22 are still lower than in FY19, says the report published in October.

"Although some of the shortfalls can be explained by Covid impact, the performance has also been adversely affected by slower progress with improving the investment climate," the government report reveals.

Besides war and Covid, internal factors are there

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told TBS that the Russia-Ukraine war and the Covid situation alone cannot be blamed for the failure to achieve the goals set out in the 8th Five Year Plan. Internal factors also were in effect.

He said policy support is essential for achieving the 8th Five-Year Plan goals. The government needs to take proactive measures to address both internal and external challenges.

Mansur criticised the government's inaction in implementing the fiscal and policy reforms outlined in the five-year plan for 2020-25. He pointed out that despite numerous recommendations for policy changes, the government has failed to take any meaningful action.

The government's persistent adherence to lending rates between 9% and 6% has fuelled inflationary pressures. Additionally, flawed policy decisions have hindered revenue collection and export growth, he added.

Balance of Payment needs careful management

"Despite the better-than-expected export performance, the overall BoP situation has worsened relative to the targets of the 8FYP. While this is largely the consequence of the unanticipated global inflationary pressures emerging from supply disruptions of Covid-19 and the Ukraine War, the situation signals the need for careful management of the BoP situation," reads the report published in October this year. 

The BoP targets were set in terms of three indicators: exports, imports and remittances as percentage of GDP. "The unanticipated global inflationary pressures of the post Ukraine War period, derailed these targets." The report suggests that the export target will be substantially exceeded, remittance target will be better but import to GDP ratio will much exceed the target.

The 8th FYP is one of the series of four such medium term plans that are intended to help implement the long-term Perspective Plan of Bangladesh: 2021-41 (PP2041). The mid-term review assesses the performance in 15 national priority areas and 104 indicators.

Chart: TBS

The first half of the plan's period was marred by twin shocks of pandemic and war, which left most of its key targets off track.

The biggest adverse effect of the pandemic was on GDP growth that plunged to a historic low of 3.5% in FY20. However, GDP growth climbed to 7.1% in FY22. 

The balance of payments was comfortable and the domestic economy was stable with a moderate inflation rate of 6.2% during FY22, it adds. 

The report blamed the Ukraine war hurting economic recovery. It said that the impact from the war destabilised the macroeconomy.

A decline in inflow of remittances and a resort to short term debt financing for imports created substantial pressure on reserves, posing a new challenge for the government. 

Total external debt as a share of GDP increased to almost 25% of GDP in FY2023 as compared with only 18% in the base year (FY20). The review termed the sharp rise in short-term debt "a matter of concern."

Export outcome remains positive from growth in RMG earnings while non-RMG export earnings dipped in FY23.

The report says diversification of exports is "an area of concern".

Financial policy targets

The review finds the actual inflation rate went off track in FY22 and worsened in FY23.

Both food and non-food inflation are on the rise, although non-food inflation has spiked considerably after July 2022 initially due to global commodity price hikes.

"As rising global energy product prices were passed on to consumers, non-food inflation started climbing up," the GED review says. 

It identifies a major problem in the policy of keeping interest rates capped, which accelerated post-Covid recovery but its relevance has increasingly come under pressure from the post-Ukraine War inflationary hike.

It states how governance problems weakened the quality of the loan portfolio for both public and several private banks and the share of non-performing loans (NPLs) increased.

Revenue targets off track

The tax to GDP ratio was projected to increase by 4.4% of GDP, while non-tax revenues were projected to grow by 0.8% of GDP over the 8FYP. In the first three years the tax to GDP ratio increased by only 0.6 percentage points, while non-tax revenue to GDP actually fell by 0.2 percentage points. 

The 8FYP revenue targets are considerably off track and huge efforts will be needed in the remaining period of the 8FYP to bring them on track, the review report says.

It says the reforms underlying the tax mobilisation strategy of the 8FYP are yet to be fully implemented.

Extreme poverty drops, inequality grows

The GED review highlights the 8FYP's progress with poverty reduction, finding it "extremely solid so far," with substantial reduction in moderate and extreme poverty to 18.7% and 5.6% respectively in 2022. 

The report credits the inclusiveness of rural female labour to reduction of extreme poverty.

It also cites how near-universal access to electricity, improved access to tap water and sanitary facilities brought improvements in living standards.

Lack of progress in reducing inequality remains an area of concern, it says. "The inequality targets of the 8FYP are substantially off track. The main reason for this is the inability to implement the Plan's redistributive fiscal policy strategy."

Health care is becoming more expensive and out of pocket expenses for non-communicable diseases have soared. It identifies health expenses as a major source of economic vulnerability of the poor and low-income group.

The review calls for additional resources and swift introduction of health insurance.

"Per capita gross national income (GNI) soared to $2793 in FY2022," it says.

The macroeconomic framework of the PP2041 projected that Bangladesh needs to reach a per capita GNI of at least $6000 by 2031 and $12,500 by 2041. To secure these income-based development, an average annual GDP growth target of 8.5% has been set for FY21-FY31 and 9% for FY31-41.