Published in The Daily Star on Wednesday, 1 January 2014.
The economy: Looking back and moving forward
Dr Fahmida Khatun
He year 2013 has been one of the extraordinary years for Bangladesh in the recent past. As was the case during the last year of most of the democratically elected governments, this year also has experienced intense political unrest combined with intense violence that aims to oust the government. The party in power has been stubborn not to give in to the pressure of the opposition party and continue till the last day of its tenure.
As the present government abolished the system of caretaker government, the opposition party objected to it as it apprehends that election results may be influenced if elections are held under the ruling party. The political situation took a different turn with more violence when the ruling party decided to go ahead with the election without the biggest opposition party. Hence hartals were turned into “Oborodh” so that connectivity among all districts collapses, suffering of people increases and the pressure on the government mounts so much so that the government gives in to the demand of the opposition party. However, it seems that the old formula did not work well this time.
Political analysts can outline details on the tactics of the two big political parties. A common citizen however, observes with much despair and frustration that some of the wounds caused during political violence are irrecoverable while others will take long time to heal. Lives that have been lost are gone forever and livelihoods that have been destroyed will take a while to be in place.
As we are usher in yet another new year with new hopes we could revisit major economic implications of some significant domestic and global episodes and of the ongoing political unrest in the country.
Rana Plaza Tragedy
The Ready Made Garments (RMG) sector of Bangladesh faced another test after the collapse of the Savar Rana Plaza on 24 April 2013 that killed more than eleven hundred people. The western buyers put serious thoughts on sourcing clothes from Bangladesh, an increasingly unsafe place for the workers and their business. On the other hand, following the Rana Plaza tragedy there have been commitments of support from the various sections including government, NGOs, private sector, associations, global organisations and even individuals.
While the Rana Plaza is one of the worst man-made disasters in Bangladesh it was also an eye opener on several counts:
* First, the collapse of the Rana Plaza epitomizes the collapse of governance in the RMG sector and indicates how the responsible people at various stages had shown utter negligence in performing their duties by taking advantage of the culture of impunity in a country where criminals can walk out clean under the blessings of the powerful.
* Second, the overall compliance issue of the RMG sector including workers’ and building safety caught the attention of the local and global stakeholders. Collaborative efforts have been launched to improve the RMG sector. Larger interest of both global consumers and retailers in establishing enforceable standards for fire and building safety has been manifested through initiatives such as the Alliance signed by buyers and retailers of North American countries and the Accord by retailers and buyers of the European Union (EU) markets. A National Tripartite Committee comprising the key stakeholders in the RMG and knitwear industry, including key government agencies, employers and trade unions is also on board to ensure that health and safety measures in the industry.
* Third, the engagement of the international labor organizations, non-governmental organizations, and retailers engaged in the textile industry of Bangladesh is a recognition of the fact that there was a need for overall development of the sector. Buyers who also flourished their business by taking advantage of cheap Bangladeshi workers could not brush aside their responsibilities in the name of ethical buying.
*Fourth, these initiatives are expected to make qualitative changes in the RMG sector as this would give a positive signal in the international market. If the manufacturers can take it forward through workers’ skills development that would not only increase the potential of higher exports but also increase the ability of exporters to pay higher wages to their workers. This will in turn have a multiplier impact on the economy in the positive sense.
US GSP
Suspension of the Generalized System of Preferences (GSP) of the USA to Bangladesh was another blow to the Bangladeshi exporters. The American Federation of Labour and Congress of Industrial Organisations (AFL-CIO) made a submission to the GSP sub-committee expressing concerns about GSP eligibility criteria related to workers’ rights in Bangladesh’s RMG sector. On 27 June 2013 the US government finally took the decision to suspend the GSP privilege to Bangladesh. The Rana Plaza tragedy has supposedly expedited the decision. It was made clear that such GSP would be re-instated only if Bangladesh can ensure rights and workplace safety of workers. Though the suspension of GSP is not likely to affect RMG export from Bangladesh to the US market, since Bangladeshi garments are not eligible for duty free access under the GSP programme, it is of grave concern for Bangladesh since such suspension could transmit a negative signal not only to US importers from Bangladesh, but also to the potential US investors in Bangladesh.
It is apprehended that the US GSP suspension might influence other RMG importers from Bangladesh such as the EU and Canada to take similar actions against Bangladesh in case they are not happy with Bangladeshi standards of workers’ safety. This would obviously have a much larger impact on exports from Bangladesh since the EU buys more than sixty percent of the country’s total RMG exports. Thankfully, despite the suspension of GSP, exports to the USA have not reduced so far indicating steady demand for non-RMG products of Bangladesh. Given that the labour rights issues are being addressed along with efforts to improve workers’ safety and wages in the RMG sector, Bangladesh should now request for withdrawal of the US GSP suspension.
TICFA
After almost a decade long debate within the country, Bangladesh has finally signed the Trade and Investment Cooperation Framework Agreement (TICFA) with the USA. Previous governments in Bangladesh took time to decide on such an agreement as there was major opposition among various stakeholders regarding the nature of various clauses which are deemed to be contradictory to the interest of the country.
At the official levels TICFA agreement is expected to establish a forum for Bangladesh and the USA to discuss opportunities and interests of bilateral trade and investment for creating jobs, improving technology and enhancing development. According to the agreement, Bangladesh will have to take clear position against corruption and enforce domestic labour laws effectively. However, concerns have been expressed by many as regards the submissiveness of Bangladesh towards a big power. Issues such as enforcement of intellectual property rights (IPR) and opening up of Bangladesh’s service sector to the US investors have raised concerns.
Understandably, if the two countries can identify and work together to remove impediments in the trade and investment sectors through effective discussions there could be mutual opportunities. However, there should be clarity on issues which are debated including the IPR. Interestingly, at least on one occasion the big opposition party supported the decision by welcoming the TICFA. Many, however, wonder why towards the end of the present term the government had to sign this agreement which it withheld during its previous tenure.
Ninth WTO Ministerial
The ninth Ministerial Conference of the World Trade Organisation (WTO) held during 3-6 December 2013 in Bali, Indonesia, has been a landmark occasion since the initiation of the Doha Round negotiation of the WTO in November 2001. The Members of the WTO adopted a declaration that included three issues such as trade facilitation, some agricultural issues and a few developmental and least developed country-related proposals. The detail roadmap for operationalisation of the Bali package will be devised during the next twelve months by the WTO Members in Geneva. Since all these three issues have implications for Bangladesh it is important that policymakers identify interests and concerns of Bangladesh and articulate the need for technical and financial support to implement the decisions of the WTO. Bangladesh should also continue its urge for duty free quota free market (DFQF) access for 100 percent tariff lines of its export items into the US market. The Bali declaration neither made it legally binding for countries to grant DFQF access for the rest 3 percent tariff lines nor did it give any time line to those counties.
Political Unrest
Calendar year 2013 comprised of two fiscal years (FY) – last half of FY 2013 and first half of FY 2014. If one looks at some of the major indicators of the economy it is observed that most indicators are yet to catch up with the pace that is required to meet the target. The growth of Gross Domestic Product (GDP) has been declining since FY 2011 and reached 6 percent in FY2013. The growth statistics has however, been an issue of discussion as it is projected to be less than 6 percent against the target of 7.2 percent set by the government at the beginning of the fiscal year. Lower GDP growth will be the chain effect of less than satisfactory performance of the agriculture, manufacturing and service sectors.
Despite continued policy support and no incidences of major natural disasters in the recent past, agricultural production, particularly non-crop production is feared to be affected due to lack of demand during the period of political violence. Industry and service sectors are also going through difficult times though export performance has so far been above the target of FY2014. However, continued violence can change such positive trend.
Bangladesh cannot afford a slower growth rate at this juncture of its economic journey since the country wants to become a middle income country through achieving higher income and reducing poverty. This is possible by energising investment that would create employment.
The investment scenario is not promising as it is still far below the required level of 35 to 40 percent of GDP in order to achieve a GDP growth of 8 to 10 percent. Dampened investment situation is reflected through lower flow of credit to the private sector which has been on the decline since FY 2011. During the first three months of FY2014 credit to the private sector has only been 11 percent against the target of 16.5 percent for FY2014 indicting that the credit flow to the private sector has to gain momentum to meet the target. This is unlikely during the current fiscal year given that the appetite for credit by the private sector will not pick up due to political unrest that may continue in the coming months. Lack of infrastructure, power and gas has been one of the deterrent factors to investment; political instability is only worsening that. This is also discouraging foreign investment into the country.
Common people have started to feel the pinch of high inflation which has already sneaked into their day to day lives. Inflationary pressure was supposed to be relaxed in FY2014 and range from 6 to 6.5 percent went as high as 7.5 percent in November 2013 with the likelihood to go higher. Due to strikes essential commodities cannot be transported to markets. On the one hand, this increases the price of commodities in the urban areas. On the other hand, producers are being deprived of the market prices for their products that could discourage them to produce the same amount next year.
The imbalance between expenditure and revenue is a perennial phenomenon which leads to government borrowing. The budget deficit projected to be 5 percent in FY2014 will be financed by resources from domestic and external sources. Though the need for deficit financing arises from the inadequacy in mobilising resources actual deficit has mostly been lower than the projected rate due to the inability to spend on projects. Since FY2009 implementation of the Annual Development Programme (ADP) has been steadily increasing which probably has encouraged the government to increase the ADP target in FY2014 by 31.7 percent over the actual expenditure of FY2013. The implementation rate of ADP has however been slower during the first four months of FY2014 compared to the same period of the previous fiscal year. In view of declining growth rate of revenue mobilisation by the National Board of Revenue since FY2011 the target for growth in FY2014 was set at 25 percent. In order to achieve this target, efforts for revenue collection need to be expedited which seems to be difficult since business is passing through a dull period during the politically turbulent times.
Conclusion
In the backdrop of intense political violence the macroeconomic situation of the country is faced with challenges which need to be addressed in the coming months with utmost priority. These include achieving higher growth, stimulating the investment scenario, protecting the external sector, dampening the inflationary pressure and accelerating domestic resource mobilization. No effort, however, will bear any fruit unless the country settles down for a politically stable situation. The sooner we get there, the lesser we suffer.
The writer is Research Director, Centre for Policy Dialogue (CPD).