In recent times, the macroeconomic stability of Bangladesh has been facing various challenges originating from both domestic and external fronts, especially owing to the consequences of the COVID-19 pandemic and the Russia-Ukraine war. Measures taken to address the challenges seem to be inadequate. In order to deal with the concerns, it is important to take short- and medium-term measures to address both macro and micro issues. Moreover, the government needs to adopt effective policies on austerity measures which would help achieve macroeconomic stability.
The above-mentioned observations emerged at a media briefing and sector-based discussion titled ‘Recent Challenges Facing the Bangladesh Economy: A Brief Overview’ on 24 July 2022, organised by the Centre for Policy Dialogue (CPD) under its flagship programme Independent Review of Bangladesh Development (IRBD). Dr Fahmida Khatun, Executive Director of CPD, gave her welcome remarks and delivered the keynote presentation. Dr Khondaker Golam Moazzem, Research Director of CPD, moderated the panel discussion.
In her keynote presentation, Dr Fahmida said that the macroeconomic crisis is affecting four critical areas of current policy discourse: (i) inflation, (ii) public finance management, (iii) external sector, and (iv) power and energy sector. Although, short-term measures have been undertaken to overcome the crisis in these respective sectors, these measures are not enough and, therefore, medium-term measures are required to steer clear of long-term crisis. Effective and long-term measures should be adopted to ensure macroeconomic stability. Dr Fahmida presented a set of recommendations for these four areas.
For inflation, CPD recommends that the money supply has to be controlled through increasing lending rate. Monetary policy should be made more effective through a market-determined interest rate regime. Additionally, poor households should be provided with support. Micro and small businesses should also be provided stimulus. Welcoming the austerity measures announced by the government, CPD hopes that they should be continued.
For public finance management, the already introduced austerity measures such as stoppage in vehicle purchase by government entities, reduction in foreign travels by government employees, stoppage in providing honorarium for attending meetings, pause in the implementation of C-category ADP projects (i.e., low priority projects) and reduction in expenditure (by 20–25 per cent) owing to fuel and electricity by government agencies should be continued. CPD recommends that the subsidy on fuel, power and agriculture should be continued for the next few months. And tax evasion should be restrained by all means to generate resources for the priority sectors. Transfer Pricing Cell (TPC) should work closely with Bangladesh Financial Intelligence Unit (BFIU) and Customs Intelligence and Investigation Directorate (CIID) to curb trade-based money laundering.
For external sector, CPD welcomes the initiatives already undertaken by the government, and urges that these will not be adequate. In the short term, tightening the imports should be the main strategy. Priority should be given to the import of essential commodities and inputs for production, and trade misinvoicing should be restrained at any cost.
For the energy sector, necessary forex needs to be arranged for energy import. Depending on imported LNG alone would be too burdensome and would be too uncertain to ensure uninterrupted gas supply for domestic industry and power sector. Also, immediate measures in exploring gas in old gas exploration sites are required. Moreover, the government should realise that renewable energy can play a vital role in energy diversification in the current fossil-fuel based energy crisis.
Dr A B Mirza Azizul Islam, former advisor to a caretaker government, said, “It is easy to diagnose a problem but difficult to prescribe a proper solution.” He highlighted that the policymakers need to pay attention to the trade-offs that occur when initiatives are taken, since an initiative can impact one indicator positively while creating negative impact for another. He also mentioned that the banking sector is currently fragile and expressed doubt if it is logical to limit the interest rate. Dr Mirza Aziz mentioned that it is necessary to give efforts to increase remittances which can help resolve the forex crisis. And the remittance inflow can be increased if the market is diversified and if expatriates develop more skills. He questioned whether the growth in import has been caused by genuine import or because of overpricing. He stressed the need to increase the social safety net.
Dr Salehuddin Ahmed, Former Governor, Bangladesh Bank, mentioned that there were several existing problems in the banking sector, such as problems with inflation, foreign exchange, corruption, wastage, money laundering, and these were not entirely solved. Global problems have now added to the woes. The weaknesses in the markets, banks, and regulatory offices need to be addressed to overcome the challenges. It will be difficult to overcome the current economic crisis if mismanagement, corruption and noncompliance continue. The old policies need to be re-visited and improved instead of creating new policies. He also said that it is inappropriate to create annual monetary policies. He recommended that the central bank should take firm steps to ensure that the international standards are met; wasting public investment and money laundering should be brought to a halt; corrupt employees should be brought to justice; and civic participation must be ensured to overcome the current challenges.
Professor Mustafizur Rahman, Distinguished Fellow, CPD, underscored the emergent problems in the external sector that originated due to the way the economy is being managed. The major reasons behind capital flight are either over-invoicing or under-invoicing and no initiatives have been taken to overcome this problem. To counter the trade deficits, either foreign direct investments (FDIs) or loans need to be taken, but the current net FDI is quite low. The exports are volume-driven and the import is price-driven, and this is creating a negative trend. He appreciated the short-term steps by the government to improve the external sector. He also said that the country will be able to increase its savings if there is a zero-tolerance policy for capital flights. It should be acknowledged that the debt servicing should be managed as it can also have an impact on the foreign exchange reserves. He called for initiatives to increase value retention. He emphasised both short- and medium-term measures, and recommended that consultations with IMF and the World Bank should be continued to avoid panic. “Bangladesh Bank should continue the floating exchange rate of taka,” he said.
Dr M Tamim, Professor, Department of Petroleum and Mineral Resources Engineering, BUET, said that the macroeconomic crisis has increased substantially as Bangladesh is highly reliant on imported fuels. He discussed issues including lack of investment in exploring natural gas and coal and the need to explore domestic gas and coal reserves. The energy expert placed emphasis on the following factors—coal-based power production, renewable energy sources, and energy conservation—to cope with the energy crisis.
Mr Mostofa Azad Chowdhury Babu, Vice President, FBCCI, said that the current macroeconomic crisis has created a significant amount of pressure in the business sector. He requested the government to keep the export-oriented industries free of power cuts, otherwise the factories would have to purchase diesel to operate during the load shedding and this will increase the industrial cost and reduce forex reserves. He said that the new income tax law might be able to increase the revenue collection. He also requested for an industrial bank, where long-term loan facilities can be given to businesses.
Dr Hossain Zillur Rahman, Executive Chairman, Power and Participation Research Centre (PPRC), said that an “iron triangle” is prevailing in the country’s economic governance, based on a connection between politicians, lobbyists, and bureaucrats. Unidimensional development philosophy of the government, policies on the basis of conflict of interest, and lax governance are three properties of the iron triangle, he added. He noted that the common people are suffering due to lax governance, and a big push is required to remove the triangle. He opined that a place of injustice has been created in the social sphere. New poor have been created. He said, the emergent situation should not hamper our journey towards attainment of the Sustainable Development Goals (SDGs) and becoming a middle-income country. To this end, the trend of injustice against people needs to be eliminated. Major achievements of the SDGs such as health, nutrition and housing are being affected due to the economic crisis. This will have a negative impact in the long run ranging from job market to demographic dividend. He recommended that effective measures should be taken to control the inflation before any social instability occurs.
The discussion was followed by an open-floor Q&A session with journalists from print and electronic media.