FE Today Logo

Financial sector belies real economy's growth

Senior economist Mohammed Farashuddin tells FE in an interview

SIDDIQUE ISLAM | March 26, 2021 12:00:00

Dr. Mohammed Farashuddin

Bangladesh's real economy has grown significantly, though the financial sector has not performed up to the desired level after 50 years of independence, senior economist Dr. Mohammed Farashuddin has said.

"The real sector of economy has grown, but the financial sector in terms of size, strength, training and efficiency has not grown that much," Bangladesh Bank's former governor Dr. Farashuddin has told The Financial Express (FE) in an exclusive interview amid celebration of the golden jubilee of Bangladesh's independence.

The overall size of Bangladesh's economy stood at US$334 billion in the fiscal year (FY) 2020-21, up from only $9.0 billion in FY '70, according to Dr. Farashuddin.

The senior economist urged the government to form a financial sector reforms commission, instead of banking reforms, on a permanent basis, maybe, for three years to look into both monetary and fiscal policy issues in a comprehensive manner.

He also recommended constituting a coordination council, chaired by the finance minister, aiming to ensure synergy between monetary and fiscal policies.

The commerce minister, BB governor, finance secretary and chairman of the National Board of Revenue (NBR) will be members of the council.

"This is high time I think to have a reforms commission perhaps or strengthen the finance ministry more than what it is now so that it can work for the reforms," the economist said while replying to a query.

He also said many people in the country looked well-versed on financial and banking matters, one of them should be given the charge of the reforms, in terms of rational well-thought-out superior-type policies so the financial sector could get rid of the ills, devise better investment policy, interest rate policy, exchange rate policy and help ensure an export-import balance.

"Investable capital and loanable funds should mainly come from the capital market but we are not being able to bring them. People still do not have confidence on the capital market," Dr. Farashuddin said while explaining the urgency to form the commission.

He also said the financial sector remained a very important segment of the national life, not only economically but also in a broader perspective of life.

The most difficult equation to solve for the financial managers including the finance minister and the governor of the central bank is to make the real sector of the economy and the financial sector harmonious, according to the economist.

"Because if there is a discord between the financial sector and the real sector, then either there will be deep depression or there will be a super impression," he noted.

Mr. Farashuddin is a professional who had served the nations since 1996 in different fields including administration. At the height of his career, he finally became the chief monetary custodian.

As a member of the elite erstwhile Civil Service of Pakistan (CSP), Dr. Farashuddin worked in the field of administration as a Sub Divisional Officer (SDO), Additional Deputy Commissioner (ADC), Additional Commissioner as well as Deputy Secretary and Joint Secretary during 1966-1975.

As a field level officer, he discharged responsibilities including maintaining law order, mobilising revenue as well as planning, managing and monitoring administration.

In the interview, Mr. Farashuddin shared his long professional experiences, particularly relating to socio-economic issues during the pre- and post-liberation period of Bangladesh.

After the independence, when Father of the Nation Bangabandhu Sheikh Mujibur Rahman returned home from imprisonment in Pakistan in January 1972 he found the economic condition in a critical state, Dr. Farashuddin said.

"….love for the people, particularly the downtrodden, was the main consideration of the Father of the Nation," he said while describing the philosophy of Bangabandhu Sheikh Mujibur Rahman.

To revamp the economy, Dr. Farashuddin said, Bangabandhu turned to the public sector, setting up the Trading Corporation of Bangladesh (TCB). There were 18,000 employees then. The TCB quickly imported rice, wheat, sugar, edible oil, onion and kerosene. Kerosene at that time was lighting 85 per cent households of Bangladesh.

"Alongside, he managed an enormous amount of grants because of the goodwill that Bangabandhu had earned in the world," he noted.

He also said the grants and supplies had been sent to the villages across the country through another public sector entity -Consumers Supply Corporation (COSCOR). The rationing system had also been modified.

"Immediately Bangabandhu rejuvenated the productive sector and put emphasis on agriculture, started industrial activities like producing fertilizer and electricity," Dr. Farashuddin explained.

He also said the United States had provided food grants under its Public Law (PL)-480 to the newly-independent food-deficit country. "When the food reached the people, the government got a handsome fund that is called counterpart funds." The fund was used to set up poultry industry and ensure rural electrification, he added. "So, the economy got off to a fantastic start under very difficult circumstances."

It was necessary because the whole world was suffering from an economic turmoil in 1972-74, the former governor said. The price of wheat increased two and a half times and the oil price went up from $4.0 a barrel to $12 a barrel. Everything was like this.

The World Bank published an assessment report in September 1972 putting the per capita income in Bangladesh at only $85 and the GDP (gross domestic product) at $9.0 billion.

"We had started in a very bad shape. But because of Bangabandhu's charisma and hard work, innovative and leadership policy, the economy started to turn around, crop production went up and industries were being set up, particularly in the rural areas," he mentioned.

Bangabandhu set up 17 industrial estates under Bangladesh Small and Cottage Industry Corporation (BSCIC) in 17 districts.

"In the year 1974-75, the last year in Bangabandhu's life, the economy recorded a growth rate of 7.3 per cent," Dr. Farashuddin said while describing the upward trend of economic activities.

But one of the problems was that the owners of banks and insurance companies had gone back to Pakistan, he said. "So, Bangabandhu had to nationalise all the banks and insurance companies."

"All the scheduled banks were grouped into six-Sonali, Janata, Agrani, Rupali, Uttara and Pubali-and the six nationalised banks started operations as public sector entities. Similarly measures were taken for the insurance sector. And Bangabandhu had the central bank of Bangladesh under very difficult circumstances."

So inflation was very high in the first year after independence, but production started going up and inflation started moderating, according to the economist.

After the sad and heinous incident on August 15, 1975 in which Bangabandhu was assassinated along with his family members, the economy and national polity both underwent changes very negatively.

After the Liberation War in 1971, Dr. Farashuddin got appointed as Private Secretary of Father of the Nation Bangabandhu Sheikh Mujibur Rahman. He worked very close to him and oversaw the socio-economic and cultural advancement, formulation, planning, and implementation of the pro-poor and anti-poverty economic policies of the war-ravaged country.

"The killers wanted to bury the ideology of Bangabandhu," he said. The ideology was to ensure food, clothing, shelter and education for all people of Bangladesh.

So, they (killers) wanted to reverse the dream of building a Sonar Bangla. Socialism was abandoned and, instead, they started a free enterprise system that was capitalistic.

Giving some credit, he also said that they had started industrialisation with establishment of Bangladesh Shilpa Rin Sangstha (BSRS) and Bangladesh Shilpa Bank (BSB). But that also started disparity severely in the society.

In 1996, the people voted Sheikh Hasina, daughter of Bangabandhu Sheikh Mujibur Rahman, to power. And Sheikh Hasina started again pro-poor policies in economic management.

"Among many things, she started the social security benefit, she started tremendous investment in agriculture and strengthened the central bank and also strengthened the financial system," Mr. Farashuddin described.

He also said that he had been at the helm of the central bank but the then prime minister had never interfered in his work.

"But then unfortunately because of inexperience of the government, the capital market crashed in 1996. But the government was trying to recover from that and the production went up. Credit goes to that government," the economist explained.

Dr. Farashuddin was the 7th governor of the BB for the term of 1998-2001 and enforced major reforms towards a healthy, sound, transparent and default-free banking system.

In 2000, inflation was only at about 1.70 per cent, GDP growth was 5.5 per cent and unemployment was at a minimum level, according to the former governor.

"But several things happened in 2002 and 2003 first of all, duty structure, particularly import duty with India, was revised drastically making Indian products very cheap in Bangladesh but India never reciprocated at that time. So it had a very adverse impact on the economic situation of Bangladesh," the economist noted.

And then the most serious thing was that at the advice of the World Bank, the scheduled banks were forced to give long-term project lending, he said. It was a disaster because the commercial banks are a source of very short-term funds.

"Only one-third of bank deposits are fixed deposits ranging for one to five years, the remaining two-thirds are very short-term funds. So the inevitable happened. It was a recipe for disaster."

So bank loans started deflating and the resources started going out of the country through money laundering, he said.

All these led to a very difficult situation in financing when the government of Sheikh Hasina again came to power in 2009. The government then actually condoned the bank defaulters and problems arose at that time, according to the former central bank chief.

Regarding the capital market, he said investable funds in the capital market were coming from the mutual funds and provident funds of various types in many countries but in Bangladesh these sectors were remaining almost inoperative.

The central bank was doing a good job striking a balance between the credit flows of public and private sectors. But the private sector had been feeling shy for the last two years and the public sector investment could have been raised to compensate for the shyness of the private sector.

"The economy thanks to the policies of Sheikh Hasina has already been in a good shape in terms of infrastructure investment in the public sector. The economy is growing along with the agriculture sector that has fared very well," he observed.

The economy was growing until the Covid-19 outbreak. It was growing at the rate of 8.0 per cent and so. Even at the beginning, the International Monetary Fund (IMF) said Bangladesh was among the 90 countries which had positive growth in GDP and Bangladesh for the first time had gone ahead of India in terms of GDP per capita.

"….because of the ongoing Covid-19 pandemic some segments of the economy got stimulus packages, announced by Prime Minister Sheikh Hasina. The amount reached Tk 1.06 trillion. But the problem is the stimulus funds for large scale industries and medium industries are flowing as the banking sector is processing them. But funds from the stimulus package amounting to Tk 270 billion for cottage, micro and small enterprises are not moving," the former BB governor observed.

It was very urgent that the government undertook some institutional reforms either through the SME Foundation or Palli Karma-Sahayak Foundation (PKSF), for channeling the stimulus funds to the cottage, micro and small industries, he said. But his preference is BSCIC for the purpose.

Quoting an estimate, he also said there were 2.3 million cottage, micro and small entrepreneurs. Not all of them were eligible for bank loans. "But it is quite important that one hundred thousand or two hundred thousands of them should be selected for training on project formulation so they can get to the basic. In countries like Japan and the USA, 63 per cent of the jobs are created in the small and medium enterprise segment," he suggested.

He also emphasized employment opportunities particularly for those who lost jobs in the informal and non-governmental organisation (NGO) sectors.

"Most urgently we need to strengthen these sectors and have the funds flow to right entrepreneurs in this respect," he noted.

He also said the government should consider introducing a 'venture capital fund' so that it could provide resources to some people with promise of being entrepreneurs, even knowing well that some of them might not be able to return the money. "Even then it is targeted to create entrepreneurship."

Mentioning the High Court's two recent observations about the central bank, the former governor said it was important that the High Court stuck two very negative stickers on the BB. The officials including deputy general manager (DMG), general manager (GM) and executive director (ED) of the central bank were not doing their job.

In another case, a person said that a retired deputy governor and an ED had taken money from PK Halder and others, he added. "So the central bank needs to be strengthened immediately."

[Mr. Farashuddin was born at Madhabpur in Habiganj in 1942. He began teaching after obtaining his master's in economics from Dhaka University in 1964. He completed his PhD at Boston University in the US in 1979. He was also a member of Bangladesh's first Planning Commission. Currently, Dr. Farashuddin is chairman of the Board of Trustees at East West University.]

[email protected]

Share if you like