Published in The Independent on Tuesday, 20 January 2015.
Challenges facing our economy in 2015
Print Edition
There were hartals on the last day of 2014 and again on the first day of 2015. It may be construed as symbolical of what one can expect during 2015. This has been followed by political attrition and sporadic clashes over the entire first half of January. It resulted in transport going off the roads and parts of the country losing their connectivity with Dhaka and Chittagong. This resurfacing of instability has affected normal trade, commerce, educational and economic activities. The pot is on the boil again. After a year of relative calm, political rivalry and violence have encroached into our daily lives once again. This has resulted in arson, police action and the destruction of private property. There has also been loss of life and many injuries to activists and also among innocent bystanders. The media- electronic, broadcast and print- have been busy covering the unfolding drama, almost a repeat of what transpired in the last quarter of 2013.
All of the above is the last thing that Bangladesh needs at this critical juncture as it attempts to break through the economic glass ceiling and move into the middle income group of countries. This latest trend is disappointing to say the least. The nation is again being pushed into a paradigm where the people, like the proverbial snail are able to climb the greased pole of economic success with their hard work and then lose their gains due to narrow interpretation of what is better- peace and stability, or violence.
The economic developments of 2014 conveyed mixed signals. Some financial indicators displayed progress but it was clear that opportunities for improving infrastructure and revenue mobilization still remained and will need to be addressed in 2015. Political turbulence, hartal, and blockades in 2013 took a heavy toll on the economy of the country. As a result, investment stagnancy was a highly discussed topic in the whole year of 2014. Investment began to accelerate around the end of 2014 but appears to have run into a stone wall again. Excess liquidity of the US Dollar and Taka in the local market began to evaporate towards the last quarter in 2014.
This suggested a revival of trade and commerce. The last period of 2014 marked a new momentum in consumer and business confidence. Imports and exports reflected an upward trend. So did remittances, and importantly, foreign currency reserves registered a new record. Per capita income rose from 1044 dollars in FY2013 to 1190 dollars in FY2014. Another important factor was inflation’s slow but steady decline. This helped expedite consumption and investment decisions. A cautious stance of the central bank in money supply also helped achieve these satisfactory numbers of growth and inflation.
It would be important here to refer to some of the findings as explained by the Governor of Bangladesh Bank- Dr. Atiur Rahman in his observations published in ‘The Financial Express’ on 4th January, 2015. Evaluating the recent macro-economic trends, he indicated that annual real GDP growth rate reached 6.12 per cent in FY 2014 from 5.14 per cent of FY 2009, averaging 6.14 per cent over the last five years. He believes that this growth rate for FY 2015 can be expected to exceed the 6.12 per cent level of FY 2014, subject to continuation of ‘the current stable environment’. One can only hope that this assumption does not end up being overly optimistic.
The Bangladesh Bank has also indicated that the twelve month average CPI (consumer price index) decreased from 7.7 per cent in end June 2013 to 7.4 per cent by end June 2014 and to 7.1 per cent by end November 2014. One wonders how political instability might affect this parameter. In this context it has also been outlined by the Governor that there has been an annual average growth in imports of around 10 per cent since 2009. It has been mentioned in this regard that import growth for FT 2015 could be over 10 per cent, with rising economic activity. It is also suggested that this will be due to growth in the import of capital machinery required for the strengthening export drive. In this context, it would be fitting to note that our export earnings have grown from around US Dollar 16 billion in FY 2009 to around US Dollar 30 billion in FY 2014. Realistically, one should expect movement forward in this area but it will probably be in single digital level- given the relatively sluggish demand in European and North American markets.
It will also be appropriate at this point to refer to certain other factors associated with this aspect of two-way trade. The Centre for Policy Dialogue (CPD) on 3 January 2015 drew the attention of our relevant authorities to certain worrying aspects casting a long shadow on our trade momentum. In addition to reiterating not only the need for increased private investment and institutional capacity within our economy, the CPD also pointed out certain areas that will need careful watch and supervision.
In this regard they referred to the practice of significant over-invoicing in import of a large number of goods associated with the domestic manufacturing industry. Apparently, declared prices of imported items such as base metal and articles of metal, electrical equipment parts, vehicles, aircraft, vessels and associated transport equipment are shown much higher in cost than their actual value.
It has been indicated in this regard that this dimension has acquired greater importance given the sudden increase in their imports- a growth of 595 per cent in July-November 2014 of base metal and articles of base metal; a growth of 134.8 per cent during the same period of electrical equipment parts and a growth of 44.3 per cent in the case of vessels and transport equipment. Such sudden increase in the import of capital machineries during this period has sent the bell ringing. The CPD has mentioned that such activities have moved in parallel with “higher growth of industrial term loan and high import of capital machineries and intermediate inputs” and that it does “not correspond with real investment on the ground”. Competent authorities have accordingly been advised to investigate “whether this is an issue of mis-declaration or mispricing or whether flight of capital is taking place”.
The CPD has also in this context referred to a recent report of Global Financial Integrity (GPI), a Washington based research and advocacy organization that has stated that nearly US Dollars 1.8 billion was taken out of Bangladesh in 2012 which was higher than the foreign aid received during this period. This activity was undertaken through manipulation of commercial invoices. The GPI has ranked Bangladesh 51st among 145 developing countries that lost huge amount of money through the illegal siphoning of funds.
Economists have referred to sustained worker’s remittance inflows and mentioned that this reached US Dollars 14 billion in FY 2014 against US Dollars 10 billion in FY 2009. They have also indicated that this has helped to increase our foreign exchange reserves to more than US Dollar 22 billion, enough to cover about seven months’ import requirements. It has also kept Taka strong and stable in exchange rate, at levels slightly below Taka 78 per US Dollar in the interbank market.
The CPD has however drawn the attention of the relevant authorities to a significant point. They have urged the formation of a Committee to investigate the large remittance outflows to India from Bangladesh. While expressing satisfaction about the growth of remittance to Bangladesh from different countries, they have noted that Bangladesh is now the fifth largest remittance source for India, with around US Dollar 3.7 billion remitted in 2013. Silicon India, a portal for professionals has suggested that this number will continue to increase. It would consequently be wise of the Bangladesh Bank to ascertain the reasons for this factor and to overcome the challenge this is creating.
The Bangladesh Bank also needs to seriously address certain other aspects of economic uneasiness. That includes non-performing loans, excess liquidity, and some irregularities at the branch level of banking. Most unfortunately, corruption and mis-governance led to this deplorable situation. Bangladesh Bank needs to be more firm in checking this negative trend and undertake corrective measures. We have witnessed a jump of default loans and that also needs to be brought down through improved supervision and closer monitoring. I believe that such a measure will lead to higher level of loan recovery. The banks which were responsible for default loans must embrace the culture of disbursing quality loans. Bangladesh Bank could extend some facilities to the credible borrowers now in trouble, but it should not hesitate to take stern measures against the bad borrowers. There are some other challenges that need to be addressed for achieving faster growth. In addition to political stability and legal safeguards, necessary measures also need to be undertaken to- identify inadequate infrastructure in the transport sector and take suitable steps in that regard, improve economic governance in the allotment of scarce land to prospective investors in the Special Economic Zones, increase efficiency in the energy sector, diversify our export basket and try to create an effective mechanism for an integrated South Asian economic paradigm.
The regulatory environment also needs to be digitalized not only to improve accountability but also to remove corruption. Similarly, foreign direct investment and foreign portfolio investment (participation) in our Stock Exchanges need to be facilitated by removing unnecessary encumbrances.
The pragmatic implementation of these steps should also be consistent with the already existing comprehensive development strategies of the government that include inclusive banking, SME loan, green banking, financial sector modernization, e-commerce, mobile banking, agri-credit expansion and liberalization in foreign exchange transactions. This will expand the growth base and also contribute towards much needed sustainable development.
The writer, a former ambassador, is an analyst specialised in foreign affairs, right to information and good governance.
He can be reached at mzamir@dhaka.net