Signs of economic doom
Mahfuzul Haque analyses the reasons behind the dwindling state of our economy
While unveiling the third budget of the current government for fiscal year 2011-12, finance minister Abul Maal Abdul Muhith rolled out a Tk 1.64 trillion budget boasting a record 7 per cent growth rate while subsequently anticipating to keep the inflation at 7.5 per cent. In his budget speech, the finance minister highlighted the measures spelt out in his financial plan to be in the shape of 'protection and incentives' provided to the export sector as part of its strategy to tide over the impact of recession.
That, he claimed, helped to 'offset the negative pressure of global recession and achieve a growth of 5.7 per cent in 2009, 6.1 per cent in 2010 and about 6.7 per cent till date. However, the policy think tank Centre for Policy Dialogue (CPD) had immediately warned that financing, institutional, macroeconomic and political risks may block the government from achieving budgetary targets.
Now, after a quarter of the current fiscal year, the economy is yet to show prospects of growth due to high inflations, unstable exchange rates, government's dependency on bank loans and a volatile world market situation.
Experts point out that a healthy economy consists of primarily, growth and stability followed by distribution. However, the stability indexes of Bangladesh economy are now negative as the inflation rate has crossed double digits and the food price inflation is higher than the general inflation.
According to Bangladesh Bureau of Statistics (BBS), the overall inflation was 11.97 per cent in September and it slightly decreased to 11.42 per cent in October. But still the inflation figure is a 13-year high.
The International Monetary Fund (IMF) on November 21 pointed at the government's bank borrowing as one of the major factors that are fuelling inflation. In a press conference at the Bangladesh Bank, it also warned that inflation would rise further if the government continued with borrowing heavily from the banks, according to a New Age report.
However, to face the uncertainties of the economy the government has already increased fuel pricethree times this year to cut subsidy in the sector. The last time was on November 10 when the government raised the prices of octane, diesel, petrol, kerosene and furnace oil by Tk 5 per litre.
The price hike of September 18 saw price of furnace oil go up by Tk 8 per litre. It was Tk 5 for other kinds of fuel. That round of price hike was preceded by another one on May 5.
Economists feel that while the increase in fuel prices was required, its increase three times in a year has added to the economic problems of the country.
Moreover, the staff committee of the Bangladesh Energy Regulatory Commission on November 17 recommended that the commission should increase the retail rate of the electricity supplied by the Power Development Board by 12.86 per cent, to cut subsidy.
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Ever since the beginning of 2011, there has been some signs of negative impacts on the country's economy through increasing inflation, slowness in implementation of Annual Development Programme (ADP), pressure on subsidy, depleting foreign currency reserve and share market instability.
Adding to these is the global economic situation with the GDP of the USA and Euro zone decreasing besides increase in unemployment. As a result, Bangladesh's major foreign currency earning sectors, including export, foreign investment and foreign labour market is under threat.
Thousands of Bangladeshi workers are being sent back from Malaysia, Singapore, United Arab Emirates and other Middle Eastern countries, causing tremendous negative impact on country's foreign exchange earnings.
Another undesirable trend is the government's tendency to borrow from the domestic banking system which is already under pressure. The government has few alternatives as the foreign aid is extremely low.
The government has already borrowed over Tk 15,000 crore in four months till October, already approaching the fiscal target of around Tk 18,000 crore. 'If the government takes loan from the central bank and if the central bank cannot pay the money from its reserve, then it would collect money by printing new notes thus increasing the inflationary effect, says MM Akash, a professor of economics department under University of Dhaka.
Trade deficit is also growing, fuelled by a rising oil demand, and the gap is likely to increase since export growth prospects are poor. The central bank's balance of payment table says that during the first quarter of this fiscal, the trade gap was $1.81 billion, 23.48 per cent larger than the corresponding period last year. In this period, imports grew 24.79 per cent and exports 22.56 per cent.
Also, Bangladesh's foreign exchange reserve has slipped below $10 billion mark. On November 10, the central bank's reserves stood at $9.64 billion, which would not be sufficient for paying off three months' imports, according to economists, who believe that this is the 'direct result of an increasing trade gapas imports are rising faster than exports.'
The size of estimated subsidy was Tk 20,000 crore for the current fiscal year. 'But according to the government it has to be increased up to Tk 46,000 crore, which will create an extra pressure on the budget,' says professor Akash.
'This will create a gap between government's income and expenditure. The level of inflation will depend on how the deficit will be handled,' he adds.
On the other hand, the government's main concern with petroleum prices is that it has been incurring heavy losses by selling all types of petroleum products which are imported from international market, thus draining out billions of dollars every year and affecting the country's foreign currency reserves.
However, some experts believe that the government's stake in the petroleum sector has increased in the last three years due to its short term power policy of setting up petroleum-based rental and peaking power plants. As these plants begin generating power depending on liquid fuel, the import of fuel has doubled to 7 million tonnes this year from 3.5 million tonnes in 2009.
'Although the government had initially said that the quick rental policy would be very temporary, it is still sticking to it,' says professor Akash adding that the government should have sought on alternatives besides these from the time it assumed power.
He points out that until the government increases the price of electricity, it would not bear any benefit from the fuel price hike as it is still subsidising the power stations.
The government will save approximately Tk 1,000 crore only, from outside the quick rental plants through the fuel price hike at the cost of adverse economic effects on the people, says Akash.
'It is not right to adopt any such policy,' Akash observes.
Hazards remain in the energy policy as well. Although the present government prioritised to solve the power crisis in its election manifesto, the government resorted to short term policies for addressing the issue by establishing liquid fuel based quick rental power plants which absorb added fuels with the government paying subsidy in the sector.
The government again buys electricity costing Tk 14 to 15 per unit, which is sold to consumers at Tk 5. Here the government faces more loss as the price of electricity has not been increased.
'It is a haemorrhage of the economy,' says Dr Mahbub Ullah, a professor of development studies department from University of Dhaka. He adds that it has claimed that 2,250 MW of electricity has been added to the national grid so far.
'But if the existing power plants are repaired, it would be possible to add an additional 700 MW of power as the existing power plants run by gas which would cost less,' he says.
'We did say earlier, when the government was trying to decide on quick rental power plants for mitigating power crisis, that the quick rental process would hamper the country's overall economy,' says professor Anu Muhammad of economics department from Jahangirnagar University. 'Now we see the consequences of the government's wrong decision,' he adds.
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Experts also assume that during the share market scam, a large amount of dollars went abroad. 'Despite taking any steps against the people who were involved in this scam, the government is trying to save them,' alleges Anu Muhammad adding that the government's recent decision to involve banks in share market could be another threat for the capital market.
Moreover there are widespread allegations of corruption in different sectors. According to Transparency International, 87 per cent of our GDP is black money which is in the country due to weak governance.
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All is still not lost. 'If the rich pay 25 per cent taxes, then there would be no problem,' says Akash. 'However, they do not pay taxes as the law is not implemented against them,' he says.
He feels that to cut subsidy is also not a politically correct decision. 'It also does not go with the political cycle as the government has already passed almost two and a half years. At the end of the period the governments generally adopt some popular schemes,' he says.
'To face the situation the government has to change its mentality,' says Debapriya Bhattacharya, distinguished fellow of CPD. He also suggests that the government needs to borrow less from banks while paying more attention on earning revenue from sectors not covered by National Board of Revenue.
He also suggests that the government should spend more money, which will come from squeezing subsidy to the programmes, on the income generating sectors for the benefit for the people.
Professor Akash also feels that if the government is able to adopt strong fiscal measures and manage expenditure efficiently, then it would not need to adopt unpopular policies like decreasing subsidy and taking loans.
Where to from here?
Experts share with Xtra their apprehensions about the economy following the different measures the government has taken to stabilise the economy amidst crisis in the foreign exchange reserve, a high inflation rate and a struggling capital market
MM Akash
Professor of economics department, University of Dhaka
There has been a gap in income and expenditure of the government due to which the government had to take more loans. To reduce the pressure, the government has increased fuel price. The price hike will be a cause of inflation and will increase costs of production.
Cost of export products will also increase, thus making these non-competitive in the global market, earning less foreign currency and agricultural production. As a result there will a crisis in balance of payments. The government's welfare oriented steps to education, health etc. will also face crises. The flow of remittance is low and the rate of imports is higher than exports and a huge amount of dollars is being spent to buy fuel.
The government could take strong fiscal measures and rational expenditure policy. No steps have been taken against those involved in share market scam and against widespread corruption.
Again the government said that black money could be invested in share market. This is again giving a leeway to those involved in the share market manipulation.
The political leaders take percentage in governmental activities. If the government is able to adopt strong fiscal measures and efficiently manage the expenditure, it would not need not to adopt such unpopular policies.
Anu Muhammad
Professor of economics department under Jahangirnagar University
The economy is now in crisis because of high inflation, government's much dependency on bank loans and lower foreign currency reserve. The government is spending more money in less important sectors such as buying new vehicles and for the luxury of the administration. Moreover, costs are increased for massive corruption. The government is now providing a large amount of liquid fuel in the quick rental power plants which needs a large amount of subsidy result in fuel price hike.
Although the government allocates money in Annual Development Programme (ADP), we can not see the desired outcome. Furthermore, the government did not take any strict step against those who were allegedly involved in share market scam. Rather the government is trying to save them. As a result, a huge amount of money has already been channelled abroad. Albeit an investigation report from the enquiry committee, no steps have been taken yet.
I do not think that the policy government is now adopting to face the situation is appropriate. Again, the government asking banks to involve themselves in share market may prove to be another threat. If this goes on, there will be massive inflation, adding to the people's sufferings.
Mahbub Ullah
Professor of development studies department from University of Dhaka
The state is now facing fiscal and monetary crisis including the share market instability. Five per cent of GDP will come from financing from local and foreign borrowing. Between this two, three per cent will come from local borrowing and two per cent will come from foreign borrowing. The estimated local borrowing for the entire year from both central and commercial banks has almost exceeded though almost eight months remain in this fiscal. As a result the economy is facing a decline. The government received foreign assistance only almost net eight to nine crore dollars which was earlier anticipated at gross foreign aid flow of 3.3 billion dollars. This is the crises.
Our budgetary financing is not possible from tax revenues. More than fifty per cent of our budget depends on foreign assistance. The government has also adopted short term policy of quick rental power plants to face the power crisis. Generally these short term policies are adopted for not more than a year.
As these plants are liquid fuel-based, as the import of fuel has increased more foreign currency is lost creating a deficit. Pakistan and Srilanka also took similar initiatives but they have failed. If the government took initiatives to repair the existing major power plants, this would reduce the costs as these are gas-based, and also meet the need of almost 700 MW of electricity. Moreover the government could not come to a decision regarding coal policy. The government has also adopted a suicidal policy as it has decreased interest rate of saving certificatesfrom where the government could draw safe borrowing as it is a non-inflationary source. As a result general people are now facing the brunt as they are being forced to reduce their consumptions. This is an all-out crisis.
Debapriya Bhattacharya
Distinguished fellow of Centre for Policy Dialogue (CPD)
It is difficult to operate an economy of a less developed country like Bangladesh. The expenditure of the government is more than income and imports is larger than exports. Majority of the people are dependent on agriculture. Moreover the country is dependent on global economy. In the last four months, an imbalance in income-expenditure of government has been seen. There is also a pressure on foreign exchange. In recent times, the inflation rate is the highest because of the high food prices. Moreover the house rent, transport cost and cost of fuel, education and health service have increased. If the initiative, of establishing large power plants go on, accordingly, then it will not be able to go into operation before June 2014. As a result, the country has to depend on expensive quick rental plants till then. The government now should pay attention to decrease expenditure and also should have focus on how the income would increase. Besides the government has to pay attention on how the income level of people can increase. If the income of general people does not increase, then the low income people will face severe hardships. The government also has to continue on the initiative of additional food production.
http://www.newagebd.com/newspaper1/magazine/content.php?date=2011-11-25
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