Challenges that lie ahead of the economy
Sunday, 18 April 2010
Shahiduzzaman Khan
Bangladesh economy has shown signs of stagnation in recent times with marked slowdown in external trade and industrial investments. A belated impact of global recession caused the slowdown and the economy continues to face stagnation because of the ongoing power and energy crisis, according to some economists.
Sharp fall in exports and investments has apparently caused the slowdown. Overall exports declined by more than 6.0 per cent in July-January period of the current fiscal year and growth in imports also significantly slowed down during the period. Share of imports of industrial raw materials in overall imports came down to less than 36 per cent in July-December from around 41 per cent in the same period of the previous fiscal year. Imports of intermediary goods also came down to 8.5 per cent against 10.5 per cent.
Although steady inflow of remittance has helped maintain good foreign exchange reserve, it is of little significance because of stagnation in industrial investment and export. Even if the economy has not come to a clear stagnation yet, there has been worrisome slowdown. Gas and power crisis is hitting industries hard. It is worrying that although local entrepreneurs have the strength to set up new industries they are handicapped because of this problem.
On the other hand, the inflation trend is also disturbing as rising food prices and lack of infrastructure are affecting general people. Analysing food expenditures of different consumer groups, a Samunnaya study shows that point-to-point food price inflation for small traders was 9.4 per cent in September 2009 and it increased to 13.65 per cent in January 2010. Such inflation for RMG workers was 9.7 per cent and 13.58 per cent respectively, for rickshaw-pullers 9.9 per cent and 13.46 per cent and for day-labourers 9.7 per cent and 13.4 per cent.
However, the country has achieved reasonable successes in areas of human development, population control, food security, poverty reduction and disaster management. It has weathered several external financial shocks, debt crises, kept the rate of inflation at a reasonable level and achieved an average economic growth rate of over 5.0 per cent in the recent past and over 6.7 per cent in the last fiscal.
Against the backdrop of all these achievements, reduction in poverty level is still not satisfactory. Over 40 per cent of the population live below the poverty line. Poor governance, inadequate infrastructure, unbridled corruption and deteriorating law and order continue to be major deterrents to a private sector-led higher economic growth.
Overall weak revenue collection, despite increased income tax collection, and the higher levels of revenue expenditure have exposed fragility of the macro-economic framework in existence. Low ADP implementation, poor disbursement of foreign aid and higher levels of government borrowings were viewed as some of the major weaknesses in the economy. Low disbursement of foreign aid has been a major concern for the economy in the recent years.
Towards the end of 2009, it was clear that the 'recession-busting' Bangladeshi economy was experiencing a delayed downturn of its own. The second half of 2009 saw growth fading in exports and remittances. While total year-on-year exports grew by an average of 20 per cent in the first part of last fiscal, export performance dipped to a negative growth by December. Remittances also showed a similar pattern, with growth falling from 30.9 per cent in the first half of FY09 to 15.7 per cent during the second half.
Needless to mention, country's investment climate is less than healthy, which does not augur well for sustained growth. Concern about the volatile global economic and financial situation, and political uncertainty during the caretaker government's tenure may have restrained export-oriented industries from building capacity during FY09. But since the elections, other factors, including policy issues and non-availability of gas and electricity, are dampening the investment climate.
The weak investment climate is reflected by surplus liquidity in the banks. Bangladesh Bank data say surplus funds stood at Tk. 339.95 billion at the end of September. Although this was down by about 8.0 billion since June last year, analysts suggest the decrease may be due to purchase of government bonds by the scheduled banks, rather than any surge in commercial lending. There are major infrastructure issues, and the dismal situation in the power sector is probably the most critical. Power shortages are the most serious and immediate of the infrastructure constraints, with damaging impact on productivity and investment.
The country has, as of now, a shortage of 1500 MW to 1800 MW power. In order to ease the problem, the power plants that are near completion, including rental ones, must be made operational. Tender process for new plants should be rapid and transparent. Bangladesh's long-term energy policy must rely on rapid and efficient extraction of domestic coal reserves. Five good quality coal deposits, with proven reserves of more than 2.5 bn MT have been discovered in Bangladesh. The National Coal Policy needs to be finalised as soon as possible. There is a debate going on about the local environmental and social effects of mining, but there should be an open dialogue about this as soon as possible. Coal can be extracted in a responsible way by ensuring that the interests of the local inhabitants are taken care of. This is vital for sustainable development of the country. There is also a need for speeding up gas exploration in offshore blocks while maintaining transparency. The government should also actively resolve maritime boundary disputes with India and Myanmar to facilitate exploration.
Following a slew of negative data, economists are growing increasingly concerned about the sustainability of GDP growth in the years ahead. According to a report by the World Bank, if the energy situation stagnates or deteriorates and global recovery falters, then export growth cannot be sustained at FY09 levels and real investment growth could decline further. On this trajectory, GDP growth is unlikely to reach even 5.5 per cent, let alone the 6+ growth that Bangladesh has seen through much of the decade.
Indeed, the economy is turning sluggish at a time when most of the developed countries are getting rid of recession. Coupled with strong demand in countries like China and India, such recovery could drive up prices of commodities. The immediate challenge would be to containing inflation, and ensuring food security.
It is important for the government to go for substantial job creation. For this the investment climate needs to be boosted, and the government must also implement the Annual Development Programme (ADP) expeditiously and transparently. The government must take a number of quick steps to handle the macroeconomic situation. The economic stimulus package should be spent wisely, and it should be ensured that credit is available and affordable. Decisions need to be taken quickly regarding the power sector -- and this should be done in a transparent manner.
Addressing the weaknesses of the investment climate, complemented by appropriate policy reforms and good governance, should, therefore, be the government's top concern to enhance the economy's productivity and long-term growth, and contribute to eventual poverty reduction. The road ahead contains challenges that will test the government's resolve.
szkhan@dhaka.net
Bangladesh economy has shown signs of stagnation in recent times with marked slowdown in external trade and industrial investments. A belated impact of global recession caused the slowdown and the economy continues to face stagnation because of the ongoing power and energy crisis, according to some economists.
Sharp fall in exports and investments has apparently caused the slowdown. Overall exports declined by more than 6.0 per cent in July-January period of the current fiscal year and growth in imports also significantly slowed down during the period. Share of imports of industrial raw materials in overall imports came down to less than 36 per cent in July-December from around 41 per cent in the same period of the previous fiscal year. Imports of intermediary goods also came down to 8.5 per cent against 10.5 per cent.
Although steady inflow of remittance has helped maintain good foreign exchange reserve, it is of little significance because of stagnation in industrial investment and export. Even if the economy has not come to a clear stagnation yet, there has been worrisome slowdown. Gas and power crisis is hitting industries hard. It is worrying that although local entrepreneurs have the strength to set up new industries they are handicapped because of this problem.
On the other hand, the inflation trend is also disturbing as rising food prices and lack of infrastructure are affecting general people. Analysing food expenditures of different consumer groups, a Samunnaya study shows that point-to-point food price inflation for small traders was 9.4 per cent in September 2009 and it increased to 13.65 per cent in January 2010. Such inflation for RMG workers was 9.7 per cent and 13.58 per cent respectively, for rickshaw-pullers 9.9 per cent and 13.46 per cent and for day-labourers 9.7 per cent and 13.4 per cent.
However, the country has achieved reasonable successes in areas of human development, population control, food security, poverty reduction and disaster management. It has weathered several external financial shocks, debt crises, kept the rate of inflation at a reasonable level and achieved an average economic growth rate of over 5.0 per cent in the recent past and over 6.7 per cent in the last fiscal.
Against the backdrop of all these achievements, reduction in poverty level is still not satisfactory. Over 40 per cent of the population live below the poverty line. Poor governance, inadequate infrastructure, unbridled corruption and deteriorating law and order continue to be major deterrents to a private sector-led higher economic growth.
Overall weak revenue collection, despite increased income tax collection, and the higher levels of revenue expenditure have exposed fragility of the macro-economic framework in existence. Low ADP implementation, poor disbursement of foreign aid and higher levels of government borrowings were viewed as some of the major weaknesses in the economy. Low disbursement of foreign aid has been a major concern for the economy in the recent years.
Towards the end of 2009, it was clear that the 'recession-busting' Bangladeshi economy was experiencing a delayed downturn of its own. The second half of 2009 saw growth fading in exports and remittances. While total year-on-year exports grew by an average of 20 per cent in the first part of last fiscal, export performance dipped to a negative growth by December. Remittances also showed a similar pattern, with growth falling from 30.9 per cent in the first half of FY09 to 15.7 per cent during the second half.
Needless to mention, country's investment climate is less than healthy, which does not augur well for sustained growth. Concern about the volatile global economic and financial situation, and political uncertainty during the caretaker government's tenure may have restrained export-oriented industries from building capacity during FY09. But since the elections, other factors, including policy issues and non-availability of gas and electricity, are dampening the investment climate.
The weak investment climate is reflected by surplus liquidity in the banks. Bangladesh Bank data say surplus funds stood at Tk. 339.95 billion at the end of September. Although this was down by about 8.0 billion since June last year, analysts suggest the decrease may be due to purchase of government bonds by the scheduled banks, rather than any surge in commercial lending. There are major infrastructure issues, and the dismal situation in the power sector is probably the most critical. Power shortages are the most serious and immediate of the infrastructure constraints, with damaging impact on productivity and investment.
The country has, as of now, a shortage of 1500 MW to 1800 MW power. In order to ease the problem, the power plants that are near completion, including rental ones, must be made operational. Tender process for new plants should be rapid and transparent. Bangladesh's long-term energy policy must rely on rapid and efficient extraction of domestic coal reserves. Five good quality coal deposits, with proven reserves of more than 2.5 bn MT have been discovered in Bangladesh. The National Coal Policy needs to be finalised as soon as possible. There is a debate going on about the local environmental and social effects of mining, but there should be an open dialogue about this as soon as possible. Coal can be extracted in a responsible way by ensuring that the interests of the local inhabitants are taken care of. This is vital for sustainable development of the country. There is also a need for speeding up gas exploration in offshore blocks while maintaining transparency. The government should also actively resolve maritime boundary disputes with India and Myanmar to facilitate exploration.
Following a slew of negative data, economists are growing increasingly concerned about the sustainability of GDP growth in the years ahead. According to a report by the World Bank, if the energy situation stagnates or deteriorates and global recovery falters, then export growth cannot be sustained at FY09 levels and real investment growth could decline further. On this trajectory, GDP growth is unlikely to reach even 5.5 per cent, let alone the 6+ growth that Bangladesh has seen through much of the decade.
Indeed, the economy is turning sluggish at a time when most of the developed countries are getting rid of recession. Coupled with strong demand in countries like China and India, such recovery could drive up prices of commodities. The immediate challenge would be to containing inflation, and ensuring food security.
It is important for the government to go for substantial job creation. For this the investment climate needs to be boosted, and the government must also implement the Annual Development Programme (ADP) expeditiously and transparently. The government must take a number of quick steps to handle the macroeconomic situation. The economic stimulus package should be spent wisely, and it should be ensured that credit is available and affordable. Decisions need to be taken quickly regarding the power sector -- and this should be done in a transparent manner.
Addressing the weaknesses of the investment climate, complemented by appropriate policy reforms and good governance, should, therefore, be the government's top concern to enhance the economy's productivity and long-term growth, and contribute to eventual poverty reduction. The road ahead contains challenges that will test the government's resolve.
szkhan@dhaka.net