Downside risks facing the economy
Wednesday, 27 January 2010
THE country's central bank in its just-published annual report for fiscal year (FY), 2008-09, has expressed cautious optimism about the economy maintaining its usual growth path. While releasing the report last Sunday, the Bangladesh Bank (BB) governor said measures have already been taken to offset several 'near and medium term' risks and uncertainties, originating from the probable adverse effects of the global recession. Yet it is hard to ignore a few 'ifs' and 'buts' mentioned in the annual report while previewing growth prospects of the economy in the near and medium term. The downside and uncertainties, as noted by the BB, are not entirely unknown. Some of them are embedded in the overall economic management and a few others, though the recent ones, have the potential to hinder the economy's growth prospects.
As far as the domestic issues are concerned, the BB focused mainly on sluggish investment situation and the inflationary pressure. The trend in domestic private investment had been well below the expectation, at least, for the last three years. Despite availability of enough liquidity with the banks, the private entrepreneurs preferred to stay away for a host of factors, both internal and external. The actions against some businesspeople by the military-backed caretaker government, global financial meltdown and, more importantly, severe power and gas shortage, together, have all contributed, in one way or other, to an investment drought.
The central bank can minimise some downside risks of the economy but not all of them. It can increase or decrease money supply to influence inflationary trend or may try to facilitate, through its monetary policy tools, lowering the lending rate of banks, particularly for loaning out funds to investors. But many other "downside" factors are beyond its operational domain. For instance, ensuring adequate power and gas supply to mills and factories or carrying out of the long-awaited reforms in most important areas of the economy is the job of the government. In reality, it can at best, as it has suggested in the annual report, provide some indirect support to encourage the establishment of power plants, strengthening of power transmission and distribution system and corporatisation of power sector entities. It can offer its advice to the government to carry forward the related reformative actions. Since its coming to power a year back, the incumbent government has been involved in a flurry of activities aimed at increasing the level of power generation. But the situation, as of now, has not shown much of any noticeable improvement.
Despite the fact that Bangladesh could successfully weather the initial impact of the global recession, the second wave has already been taking its toll on its economy, mainly in terms of falling exports of merchandise and manpower. The central bank is now expecting the third wave to hurt the economy further. This may lead to downward revision of economic growth projections in the near and medium term. As far as the GDP growth prospects for the current fiscal are concerned, the finance minister the other day brushed aside the World Bank's latest projection, estimating the growth rate of the Bangladesh economy at 5.5 per cent. He expressed his robust optimism about the rate being, in no way, short of 6.0 per cent. But the revised medium-term macroeconomic framework (MTMF) has maintained a safe balance, projecting the GDP growth between 5.5 per cent and 6.0 per cent during the current fiscal.
Under the present circumstances, the priority task before the government is to help boost investment in productive sectors. Otherwise, available surplus funds within the banking system and outside would largely make their way into some unproductive sectors, giving rise to bubbles here and there. But investments in productive sectors are unlikely to see any surge without a major improvement in power and gas supply situation. Inflation is yet another area that must draw a keen attention of both government and the central bank. This will call for appropriate actions, being reflex in nature or otherwise, in response to the unfolding but yet unpredictable developments on the price front.
As far as the domestic issues are concerned, the BB focused mainly on sluggish investment situation and the inflationary pressure. The trend in domestic private investment had been well below the expectation, at least, for the last three years. Despite availability of enough liquidity with the banks, the private entrepreneurs preferred to stay away for a host of factors, both internal and external. The actions against some businesspeople by the military-backed caretaker government, global financial meltdown and, more importantly, severe power and gas shortage, together, have all contributed, in one way or other, to an investment drought.
The central bank can minimise some downside risks of the economy but not all of them. It can increase or decrease money supply to influence inflationary trend or may try to facilitate, through its monetary policy tools, lowering the lending rate of banks, particularly for loaning out funds to investors. But many other "downside" factors are beyond its operational domain. For instance, ensuring adequate power and gas supply to mills and factories or carrying out of the long-awaited reforms in most important areas of the economy is the job of the government. In reality, it can at best, as it has suggested in the annual report, provide some indirect support to encourage the establishment of power plants, strengthening of power transmission and distribution system and corporatisation of power sector entities. It can offer its advice to the government to carry forward the related reformative actions. Since its coming to power a year back, the incumbent government has been involved in a flurry of activities aimed at increasing the level of power generation. But the situation, as of now, has not shown much of any noticeable improvement.
Despite the fact that Bangladesh could successfully weather the initial impact of the global recession, the second wave has already been taking its toll on its economy, mainly in terms of falling exports of merchandise and manpower. The central bank is now expecting the third wave to hurt the economy further. This may lead to downward revision of economic growth projections in the near and medium term. As far as the GDP growth prospects for the current fiscal are concerned, the finance minister the other day brushed aside the World Bank's latest projection, estimating the growth rate of the Bangladesh economy at 5.5 per cent. He expressed his robust optimism about the rate being, in no way, short of 6.0 per cent. But the revised medium-term macroeconomic framework (MTMF) has maintained a safe balance, projecting the GDP growth between 5.5 per cent and 6.0 per cent during the current fiscal.
Under the present circumstances, the priority task before the government is to help boost investment in productive sectors. Otherwise, available surplus funds within the banking system and outside would largely make their way into some unproductive sectors, giving rise to bubbles here and there. But investments in productive sectors are unlikely to see any surge without a major improvement in power and gas supply situation. Inflation is yet another area that must draw a keen attention of both government and the central bank. This will call for appropriate actions, being reflex in nature or otherwise, in response to the unfolding but yet unpredictable developments on the price front.