Published in The Daily Star on Monday, 20 January 2014.
Economic implications of political instability
Fahmida Khatun
THE outgoing year has been one of the most disturbing years for Bangladesh in the recent past in terms of domestic political instability caused by hartals, oborodhs and deadly violence for months. As a result, the economy had to bear the brunt in many ways. The World Bank International Monetary Fund, Bangladesh Bank (BB) and many experts have projected the gross domestic product (GDP) to be lower than 6%, which is much below the target of 7.2% for FY2014. Some even apprehend it may be lower than 5%.
It will be a blow to the growth momentum which is considered to be promising by the international community because of its ‘development surprise,’ despite being caught in a plethora of constraints. During the last three decades the country has increased its growth by 1% per decade. Therefore, it will face difficulty in increasing the growth rate by 1% and graduate to the 7% mark, a natural expectation based on previous decade’s experience. Reduced growth will have ramifications that will boil down to lower efforts for poverty reduction.
It is evident that political instability has contributed to this situation. Investment has been insufficient for the projected growth as it is struggling to cross even 30% of GDP. Though public investment has increased, private, domestic and foreign investments continue to be disappointingly low. Infrastructural bottlenecks, slow decision making, corruption and low skills of human resources are some factors that discourage higher investment in the country. Prolonged political crisis could only make it worse. Credit to the private sector is lower than the target and banks are sitting with excess liquidity as investment demand has been slowing. This is also reflected through industrial loan, which was negative during July-September 2013. Low investment implies less employment generation and low income, which in turn has poverty implications.
It is also frustrating that while there is dampened demand for credit the amount of non-performing loans (NPL) is soaring at an alarming rate that tells upon the health of the banking sector. As of September 2013, NPL reached 12.79% compared to 10.03% in FY2012 and 6.12% in FY 2011. Though this is partly due to a number of large financial scams that misappropriated thousands of crores of Takas from banks, it is also due to the inability of many genuine borrowers to service their loans given the dull business due to political turmoil. Reduction of NPL and bringing discipline in the banking sector will thus be most challenging tasks for the concerned quarters in the coming months.
Government expenditure during political unrest also gets affected, which is evident from low implementation of the Annual Development Plan (ADP) during the first few months of the current fiscal year. This is mainly because of low disbursement of foreign aid due to political instability. During July-September 2013 only Tk. 6 crores had been disbursed as foreign aid as opposed to Tk. 36 crores during the same period of FY 2012. Foreign aid fell to $41.8 million in July 2013 from $156.8 million in July 2012.
As for revenue generation, there is still shortfall in meeting the target. During July-October 2013 revenue generation by the National Board of Revenue (NBR) was only 16.4%, while the target is 25.3% for FY2014. This has been due to losses suffered by most businesses. Additionally, NPL and excess liquidity have been increasing and profitability of banks is on the decline. Thus lower corporate tax has been a major reason for the revenue target of NBR to go off-track. Low domestic resource mobilisation efforts coupled with slow aid disbursement will jeopardise both development and non-development expenditures of the government. This will in turn force the government to rely on bank borrowing. Though there is low demand for credit by the private sector, high government borrowing will only add to the interest burden of the government.
A consequence of depressed business is unemployment. Many employees who lost their jobs have returned to their villages in search of work while others are haunted by the fear of uncertain future in cities. A large section of the low income group, such as workers in hotels, restaurants, shops, transport sector and the like, rickshaw pullers and day labourers have suffered huge loss of income.
The industrial sector has been affected as the products could not be distributed across the country. The exporters could transport their products with much difficulty, not only at higher transport costs but also at high risk of getting them burnt during political violence. Though exports are still showing high performance, buyers of readymade garments (RMG) have alerted Bangladeshi manufacturers about shifting their orders from Bangladesh to other sources such as Cambodia, Vietnam and even India if political violence continues. Any such move will mean unemployment of a large number of workers, who will create pressure on the already pressured economy in terms of employment generation capacity. This will also create social problems as a majority of RMG workers are women who have been empowered through economic independence by way of working in the RMG sector.
The agriculture sector is vulnerable during times of political turmoil as the whole supply chain is disrupted. The media reported that producers of agricultural commodities had to give away their commodities at a minimal price as those were perishable and could not be transported to cities regularly. Milk producers literally threw milk on the streets out of frustration as they could not fetch the right price. Disruption of the supply chain pushed prices up in cities. Food inflation went up to 9% in December 2013 as opposed to 5.28% in December 2012. Notably, the target for inflation during FY2014 has been set at between 6% and 6.5% by BB, which seems to be difficult to achieve in view of the emerging situation.
On the whole, political unrest has affected the production process both directly and indirectly. The direct impact is through lower economic activity and indirect effect is through disruption of various channels and means of production. With the political unrest cooling down gradually, many economic activities have started to get back on track. However, it will take some time and require high expenditures to get some of the damaged establishments functioning.
All the effects of political unrest on the economy are in fact intertwined as they all lead to lower economic growth that leads to high unemployment, high income erosion and high poverty. If such a situation persists for a long period it can give rise to social problems as well. If politics is for the betterment of the people, then how can such economic and social problems bring any good for them? All of us should give fresh thought to this as we aspire to graduate to a middle income country in the near future.
The writer is Research Director, Centre for Policy Dialogue (CPD).