Concern for macro-economic stability
Saturday, 31 December 2011
The third Awami League (AL)-led government is presiding over the country. The foreign currency reserve -- pivotal in determining a country's macro economic stability -- fell below even US$1.0 billion in the nineties under the second AL government.
Under the present one, the reserve rose to its highest level at over $11 billion. After that it declined and came down to a little over $10 billion. The reserve now stands at over $9.0 billion and is no more in a comfortable position as it was last year. But there is noted, probably, much media hype about the state of the reserve.
It is overlooked that unlike in the nineties, the reserve is in a significantly better position and that despite confronting an adverse situation in respect of remittance earnings and facing hazards in exporting more to recession-afflicted countries, the replenishment of the reserve has been not so bad. Besides, the government seems to be pro-actively engaged now in getting an International Monetary Fund (IMF) loan to further strengthen the reserve.
But macro economic stability has a dimension in time. What is showing up as rather not so bad about some macro economic indicators, may not be a complete picture of the overall macro economy. The latter could be otherwise accumulating ills to strain the macro economic conditions in the medium- and longer-terms.
For the apparent picture of bearable conditions in the macro economy could look remarkably the opposite with serious adverse effects on its conditions if the negative trends are not detected early and acted upon with the seriousness the same should deserve.
For example, it has been noted that increasing the rate of investments is a big and persisting challenge in recent years. Creating economic growth which in turn would create jobs and income and help alleviate poverty, depends as a precondition on a stepped-up rate of investments in the economy. But such investments have been lagging under the immediate past caretaker government. The investment climate has not improved notably under the present elected government.
The rate of private investments in the economy during the last two and a half years has not accelerated for different reasons, ranging from energy insufficiency to even government's lackadaisical attitude in introducing guidelines for private investors, specially in the realm of infrastructures. In a situation where private investments are seen as not up to the mark, the need for public sector investments needs to be especially good as a compensatory mechanism.
The annual development programme (ADP) is mainly depended upon for such public sector investments. But the rate of ADP implementation is expected to remain this fiscal well below one hundred per cent, as was the case in yester years. The rate of ADP implementation has otherwise shown some acceleration in recent months. But that rate is not so high as to compensate for the big drop in investments in the private sector or earlier sluggish public investments in the first quarter for the current fiscal.
Nor is foreign aid proving to be a source of ample support for the economy. The flow of foreign aid during the current fiscal year appears to be substantially less in comparison to the corresponding period of the previous one. In fact, the receipt of foreign aid in this period has been notably lower than the amount the country had to pay to even service its old debts. During July-September 2011, Bangladesh received $246.2 million in aid, while amortisation accounted for $171.8 million, resulting in net flow of only $74.4 million.
Revenue earnings have not far trailed targets but even then a big budget deficit is likely to show up in the end from the growth of government's unforeseen expenditures and the heavier payment of subsidies, depending on its pe5rformance about ADP implementation. How the government will bridge such deficit specially in the backdrop of its heavy pubic borrowing and insufficient receipt of external aid and if the ADP not go through yet another downsizing, is a big unknown.
Reports are also appearing about deceleration in export earnings in the current year after robust export growth in the neighbourhood of 41 per cent last year. However, the rate of export growth has slowed down in the recent months because of depressed state of the situation in the recession about economics, particularly in Europe. The rate of receipt of remittances from our overseas workers has otherwise been still positive on the whole. But problems are expected in the mid-term because there is no glimmer of hope showing up that the falling trends of marked drops in export of our manpower to their traditional destinations in the middle eastern countries and Malaysia, will reverse for the better.
Thus, the picture is one of a dissatisfactory rate of investment, declining export growth performance, prospects of a wider budget deficit, lower than expected flow of foreign aid and possibilities of loss of markets for manpower export . It should be obvious that allowing the deepening of such trends will surely lead to taking a toll on the economy on the mid-term, if not earlier.
Thus, each of these areas needs focused attention from the government. Bureaucrats are at the heart of proper ADP implementation. They need to be whipped up to deliver their best under firm supervision and enforcement of accountability. Private investments can be encouraged by ensuring that the confidence of the businesses is pro-actively sustained, bureaucratic hurdles are removed, costs of doing business are lowered, funding facilities from institutional sources like banks is ensured, fear about policy flip-flops and negative politics are removed, law and order situation is improved, infrastructural facilities are strengthened and overall state of economic governance is improved. The government must also send signals through deeds to potential investors that improved energy supply is around the corner and engage in effective talks with donors to get committed amounts disbursed at the fastest. All-out efforts must be made to help boost the export of manpower to the traditionally big markets of our manpower and explore and exploit new such markets.
It is also imperative on the part of the government to set up a task force at the fastest comprising representatives from the government and the private sector. Its agenda should be devising strategies to cope with the situation which has developed from deepening of the recession in the rich western economies. Bangladesh's exports go mainly to such countries. Policies need to be there to ensure reasonable flow of our export goods to these countries even under their recession-affected conditions. The government must be prepared to offer concessions in different areas to exporters to help the latter to maintain their competitiveness. Search for alternative markets should be taken up with zest.
Recent developments in Bangladesh government's relationship with the major development partners indicate that this trend may not improve readily. For example, large part of the programmed foreign aid inflow was attributable to release of early trenches of the foreign fund earmarked for the Padma Multipurpose Bridge which is currently facing a stand-off.
The reported postponement of the meeting of the Bangladesh Development forum (BDF) signals the complexity currently afflicting the government's relationship with its international development partners. It may be safely underscored that without substantial increase in foreign aid flow, macroeconomic stability will remain under serious threats.
What are the options for the government in this regard? First, the government should put its best foot forward to get the committed foreign funds disbursed for the ongoing projects. Indeed, this will require project-by-project intensive monitoring jointly with the partners. A number of useful operational suggestions are available in this regard. These need to be acted upon with utmost urgency and sincerity.
Under the present one, the reserve rose to its highest level at over $11 billion. After that it declined and came down to a little over $10 billion. The reserve now stands at over $9.0 billion and is no more in a comfortable position as it was last year. But there is noted, probably, much media hype about the state of the reserve.
It is overlooked that unlike in the nineties, the reserve is in a significantly better position and that despite confronting an adverse situation in respect of remittance earnings and facing hazards in exporting more to recession-afflicted countries, the replenishment of the reserve has been not so bad. Besides, the government seems to be pro-actively engaged now in getting an International Monetary Fund (IMF) loan to further strengthen the reserve.
But macro economic stability has a dimension in time. What is showing up as rather not so bad about some macro economic indicators, may not be a complete picture of the overall macro economy. The latter could be otherwise accumulating ills to strain the macro economic conditions in the medium- and longer-terms.
For the apparent picture of bearable conditions in the macro economy could look remarkably the opposite with serious adverse effects on its conditions if the negative trends are not detected early and acted upon with the seriousness the same should deserve.
For example, it has been noted that increasing the rate of investments is a big and persisting challenge in recent years. Creating economic growth which in turn would create jobs and income and help alleviate poverty, depends as a precondition on a stepped-up rate of investments in the economy. But such investments have been lagging under the immediate past caretaker government. The investment climate has not improved notably under the present elected government.
The rate of private investments in the economy during the last two and a half years has not accelerated for different reasons, ranging from energy insufficiency to even government's lackadaisical attitude in introducing guidelines for private investors, specially in the realm of infrastructures. In a situation where private investments are seen as not up to the mark, the need for public sector investments needs to be especially good as a compensatory mechanism.
The annual development programme (ADP) is mainly depended upon for such public sector investments. But the rate of ADP implementation is expected to remain this fiscal well below one hundred per cent, as was the case in yester years. The rate of ADP implementation has otherwise shown some acceleration in recent months. But that rate is not so high as to compensate for the big drop in investments in the private sector or earlier sluggish public investments in the first quarter for the current fiscal.
Nor is foreign aid proving to be a source of ample support for the economy. The flow of foreign aid during the current fiscal year appears to be substantially less in comparison to the corresponding period of the previous one. In fact, the receipt of foreign aid in this period has been notably lower than the amount the country had to pay to even service its old debts. During July-September 2011, Bangladesh received $246.2 million in aid, while amortisation accounted for $171.8 million, resulting in net flow of only $74.4 million.
Revenue earnings have not far trailed targets but even then a big budget deficit is likely to show up in the end from the growth of government's unforeseen expenditures and the heavier payment of subsidies, depending on its pe5rformance about ADP implementation. How the government will bridge such deficit specially in the backdrop of its heavy pubic borrowing and insufficient receipt of external aid and if the ADP not go through yet another downsizing, is a big unknown.
Reports are also appearing about deceleration in export earnings in the current year after robust export growth in the neighbourhood of 41 per cent last year. However, the rate of export growth has slowed down in the recent months because of depressed state of the situation in the recession about economics, particularly in Europe. The rate of receipt of remittances from our overseas workers has otherwise been still positive on the whole. But problems are expected in the mid-term because there is no glimmer of hope showing up that the falling trends of marked drops in export of our manpower to their traditional destinations in the middle eastern countries and Malaysia, will reverse for the better.
Thus, the picture is one of a dissatisfactory rate of investment, declining export growth performance, prospects of a wider budget deficit, lower than expected flow of foreign aid and possibilities of loss of markets for manpower export . It should be obvious that allowing the deepening of such trends will surely lead to taking a toll on the economy on the mid-term, if not earlier.
Thus, each of these areas needs focused attention from the government. Bureaucrats are at the heart of proper ADP implementation. They need to be whipped up to deliver their best under firm supervision and enforcement of accountability. Private investments can be encouraged by ensuring that the confidence of the businesses is pro-actively sustained, bureaucratic hurdles are removed, costs of doing business are lowered, funding facilities from institutional sources like banks is ensured, fear about policy flip-flops and negative politics are removed, law and order situation is improved, infrastructural facilities are strengthened and overall state of economic governance is improved. The government must also send signals through deeds to potential investors that improved energy supply is around the corner and engage in effective talks with donors to get committed amounts disbursed at the fastest. All-out efforts must be made to help boost the export of manpower to the traditionally big markets of our manpower and explore and exploit new such markets.
It is also imperative on the part of the government to set up a task force at the fastest comprising representatives from the government and the private sector. Its agenda should be devising strategies to cope with the situation which has developed from deepening of the recession in the rich western economies. Bangladesh's exports go mainly to such countries. Policies need to be there to ensure reasonable flow of our export goods to these countries even under their recession-affected conditions. The government must be prepared to offer concessions in different areas to exporters to help the latter to maintain their competitiveness. Search for alternative markets should be taken up with zest.
Recent developments in Bangladesh government's relationship with the major development partners indicate that this trend may not improve readily. For example, large part of the programmed foreign aid inflow was attributable to release of early trenches of the foreign fund earmarked for the Padma Multipurpose Bridge which is currently facing a stand-off.
The reported postponement of the meeting of the Bangladesh Development forum (BDF) signals the complexity currently afflicting the government's relationship with its international development partners. It may be safely underscored that without substantial increase in foreign aid flow, macroeconomic stability will remain under serious threats.
What are the options for the government in this regard? First, the government should put its best foot forward to get the committed foreign funds disbursed for the ongoing projects. Indeed, this will require project-by-project intensive monitoring jointly with the partners. A number of useful operational suggestions are available in this regard. These need to be acted upon with utmost urgency and sincerity.