Economy: Devising an effective response to the challenges
Saturday, 1 December 2007
Enayet Rasul
The greatest problem noted in the economy of Bangladesh is the slowdown. When the economy moves on or grows, all expectations such as jobs, income, standard of living, meeting basic needs of people, etc., all are addressed positively in greater or lesser degrees. Thus, it must be considered as not an oversimplification but as effective prescription the suggestion that the greatest challenge is to get the economy moving on high gears. Achieve or create conditions for the full cycles of the economy to turn and keep on turning and you will get economic growth and all the benefits associated with it. The economic crisis will dissipate.
Thus, governmental policies will have to be basically attuned to attaining this objective of resuming economic activities fully and to help economic growth. With this supreme target in clear view all subsidiary or related economic stratagems will have to be operated such as fiscal and monetary policies, extending of incentives on a case by case basis, planned increases in production, timely and cost-efficient imports, supports to the export sectors, balancing operations to control budget deficits without drastically reducing expenditures and so on. But the policy mechanisms notwithstanding, the singular emphasis on facilitating the growth of the economy must not be lost sight of but promoted with the greatest care and zeal. For this is the only way of coming out of the woods in the economic sense in the context of Bangladesh today.
The very worrying state of stagnancy of the economy was seen from the recent statistics of the Board of Investment (BOI). According to figures released by this body, investment operations in the economy are slowing down to a trickle. But economic growth or expansion is mainly the result of stepped up investment operations. But investment operations are not only not getting stepped up, these are seen to be in a reverse mode compared to past periods. For example, the BOI figures showed that foreign investments declined by some 96.56 per cent in the first quarter (July-September) of fiscal year 2007-8 compared to the same period in the previous fiscal year. The rate of decrease of local investments is some 68.70 per cent. Idle funds with the banks for not getting invested is some taka 150 billion.
The above figures are enough to establish irrevocably that the economy has slowed down alarmingly. It must be regenerated and all the tools at the command of the government must be applied to make this happen. Government must address effectively one by one all the reasons for the alarmingly slowed down investment operations. A major stumbling block to revving up the economy involves fully rehabilitating the confidence of the business community. That government aims to take steps in this regard, was signaled on and off for at least six months but nothing happened. But the issue is so vital that it cannot brook delay even by days. Only a few top business leaders have so far come out of jail while the fate of the rest remains uncertain.
But only an enthused business community through their full fledged doing of their business activities, specially their taking on of new investment operations, can generate economic growth which then beneficially results in poverty alleviation, creation of jobs and income. But more and more, the economy of the country is becoming sluggish from lack of confidence on the part of businesses and their consequent withdrawl mentality. Thus, reviving fully the vital business confidence remains a formidable problem to be resolved. It should be addressed with immediacy and prudence for the economy to get the instant benefits. Dithering in this task will prove to be seriously detrimental for the economy.
This is because the big business conglomerates of the country are suffering in many ways. Some 30 top businessmen are either staying abroad from fear or are in jail in the country. It would not matter if corruption charges against them were investigated while a mechanism was devised to keep their business enterprises fully functional. This is necessary to keep markets well supplied by goods produced by them, for their employees to keep their jobs without adding to unemployment, for the government to get revenues from these businesses as these are among the highest contributors to the government's coffers, for smooth conduct of export activities and unhindered export earnings, plus to satisfy many other needs not capable of full description within the confines of this column.
Specially, the banks and other financial organizations have an umbilical relationship with these business houses from extending huge credits to them. But these business houses and the enterprises under them, are failing to operate their accounts for a long time as their owners or members of their board of directors are either absconding or remain in jail. Thus, these organizations are on the brink of closure. In many cases, they are under producing and the employees have had no salaries for months.
Recently, Bangladesh Bank instructed the banks to deal with them so that their collapse can be avoided. But this instruction is proving fruitless really without the giving of detailed advice as regards how this is to be done. Company law does not allow banks to have dealings with these business organizations under the peculiar situation they are faced with. Thus, Bangladesh Bank should give detailed instruction to the banks such as the latter authorising the directors of these business houses who are in the country and not in jail or even senior officers of the enterprises to carry out dealings with banks. The same could be given legal cover by amending the company laws through ordinance. But nothing is being done and the conglomerates remain in a limbo like in the past. Meanwhile, the banks are failing to receive due repayment of loans from these institutions and the classified loan burden of the banks is shooting up. The position of the banks would soon come under a threat if this situation continues for some time since the greater part of their operations were with this big business houses.
Thus, government needs to shape up its policy in a constructive matter at the fastest. Why this has not happened in the last nine months is an enigma. But now, no further extension of this state of affairs is possible without paying a heavy economic price. In South Korea, the main proprietor of a world famous company, was arrested and jailed for corruption recently. But this has not resulted in a halt of the full functioning of this giant industrial conglomerate. Government there decided that it was too big a national asset to be sacrificed for the corruption of a single person. Government policies in that country has ensured the full functioning of the industrial empire while also punishing its owner in proportion to his crime. The same model should apply in case of the business conglomerates in Bangladesh. The contributions of these conglomerates to the national economy must not be turned off for the reason of punishing of some of their owners. The two must be dealt with as separate issues.
Fiscal and monetary policies of the government have a lot to do with boosting investment operations in any economy. Government in Bangladesh will have to take stock of its fiscal and monetary policies and determine in what ways the same can be significantly improved or made particularly hospitable for the investors. Tax breaks or concessions in some sectors will create incentives for many investors to come forward to invest in them. The greatest favourable response in investment operations can be expected if the present high lending rates of financial institutions are scaled down by at least 4 or 5 per cent from the present average of 12-15 per cent. Reduction in the lending rate occurring to such an extent will come as a big motivator for the investors to become enthusiastic in investing out of an expectation of good returns from their investments. The Bangladesh Bank Governor recently counseled the commercial banks that the should put on hold their profit mentality for a year and work for the economy's revival. This would go in the favour of their medium and longer term interests as well. The banks can scale down their lending rates and make lesser profits for a year or two. But that can be considered as a longer term investment in their own health.
The downward trend in the lending rate will stimulate bank borrowing and help the banks to dispose off their idle funds. The higher rate of borrowings and the consequent stepped up economic activities will result in high economic growth. When that happens, the banks will be in a position to once again increase the lending rate for raking in greater profits to compensate for the earlier lower lending rate. Besides, the higher lending rate at that time may also be necessary as a deflationary step against inflation. But for now, the banks and financial institutions must consider a substantial lowering of the lending rate for their own good and that of the economy. Bangladesh Bank (BB) cannot dictate to the commercial banks in this matter. But it can certainly influence them to settle for such a course. In setting its own monetary policies, BB can certainly opt for such policies as would lead to making borrowing cheaper for the entrepreneurs.
In the short term, all governmental policies will have to be geared to reviving fully production processes in the cyclone and flood affected districts. Nearly one fourth of the population and one-third of the country physically, have been devastated in varying degrees by the natural calamities. Government's aims should not only be one of helping the people of these areas to survive through dole. This dependency can prove to be unbearable for the economy even in the medium term. Thus, it should not be allowed to grow. People who suffered the calamities will have to be helped out in a planned manner so that that they can resume production activities at the soonest and can start living without dole. People in the affected territories will have to be aided to resume production in agriculture, fisheries, small manufacturing, trade, etc., for once again taking charge of their own life in the economic sense. This happening will take off pressures from the government and stop a big drain of public resources. The cyclone and flood afflicted areas once again entering the production mainstream will mean that the country's gross domestic product (GDP) can be prevented from sharply dropping as is feared now. Besides, government policies all over the country should be guided by the objective of maximizing of production. The current economic problems of Bangladesh are notably on the supply side. Under production of essential goods -- specially a range of edibles--leading to their scarcity and higher prices fed on by the escalating import costs of these goods, is spurring on inflation in Bangladesh. The solution lies in planned attempts to much increase their production in the country.
Government has done well by inviting foreign assistance unambiguously. Showing a brave face and hiding the real distresses, would be a senseless policy under the present circumstances. But now that foreign assistance has been sought formally, government should play its cards extremely well and do its best to sensitize the donors to make generous contributions. Foreign aid will have to play a big role in the coming year to make up for major resource shortfalls.
Government has no choice but to go on providing large subsidies in this exceptionally difficult year. Raising of fuel prices to match international prices can be too much for the economy at the moment. It was good to see a deal clinched for advanced buying of one year's supply of fuel oil at a fixed price. This will offer some hedge against further fuel oil price rise in international markets. Similar deals should be explored and firmed up in respect of foodgrains as prices of the same are also showing volatility in the international markets from scarcity. Foreign aid should be particularly sought and utilized to create short and mid term security in areas of food and fuel.
The budget deficit is likely to grow this year in view of the particularly stressful situation facing the economy. Government's revenue collection will be lower and the need for the government to borrow, will increase. But the borrowings and expenditure of the same can fuel inflation when the rate of inflation remains very high. Thus every effort must be made to keep this budget deficit under a control and ensure quality in the government's expenditure. The greater the public sector resources will be spent on productive activities, the best for the economy and for containing inflation.
The greatest problem noted in the economy of Bangladesh is the slowdown. When the economy moves on or grows, all expectations such as jobs, income, standard of living, meeting basic needs of people, etc., all are addressed positively in greater or lesser degrees. Thus, it must be considered as not an oversimplification but as effective prescription the suggestion that the greatest challenge is to get the economy moving on high gears. Achieve or create conditions for the full cycles of the economy to turn and keep on turning and you will get economic growth and all the benefits associated with it. The economic crisis will dissipate.
Thus, governmental policies will have to be basically attuned to attaining this objective of resuming economic activities fully and to help economic growth. With this supreme target in clear view all subsidiary or related economic stratagems will have to be operated such as fiscal and monetary policies, extending of incentives on a case by case basis, planned increases in production, timely and cost-efficient imports, supports to the export sectors, balancing operations to control budget deficits without drastically reducing expenditures and so on. But the policy mechanisms notwithstanding, the singular emphasis on facilitating the growth of the economy must not be lost sight of but promoted with the greatest care and zeal. For this is the only way of coming out of the woods in the economic sense in the context of Bangladesh today.
The very worrying state of stagnancy of the economy was seen from the recent statistics of the Board of Investment (BOI). According to figures released by this body, investment operations in the economy are slowing down to a trickle. But economic growth or expansion is mainly the result of stepped up investment operations. But investment operations are not only not getting stepped up, these are seen to be in a reverse mode compared to past periods. For example, the BOI figures showed that foreign investments declined by some 96.56 per cent in the first quarter (July-September) of fiscal year 2007-8 compared to the same period in the previous fiscal year. The rate of decrease of local investments is some 68.70 per cent. Idle funds with the banks for not getting invested is some taka 150 billion.
The above figures are enough to establish irrevocably that the economy has slowed down alarmingly. It must be regenerated and all the tools at the command of the government must be applied to make this happen. Government must address effectively one by one all the reasons for the alarmingly slowed down investment operations. A major stumbling block to revving up the economy involves fully rehabilitating the confidence of the business community. That government aims to take steps in this regard, was signaled on and off for at least six months but nothing happened. But the issue is so vital that it cannot brook delay even by days. Only a few top business leaders have so far come out of jail while the fate of the rest remains uncertain.
But only an enthused business community through their full fledged doing of their business activities, specially their taking on of new investment operations, can generate economic growth which then beneficially results in poverty alleviation, creation of jobs and income. But more and more, the economy of the country is becoming sluggish from lack of confidence on the part of businesses and their consequent withdrawl mentality. Thus, reviving fully the vital business confidence remains a formidable problem to be resolved. It should be addressed with immediacy and prudence for the economy to get the instant benefits. Dithering in this task will prove to be seriously detrimental for the economy.
This is because the big business conglomerates of the country are suffering in many ways. Some 30 top businessmen are either staying abroad from fear or are in jail in the country. It would not matter if corruption charges against them were investigated while a mechanism was devised to keep their business enterprises fully functional. This is necessary to keep markets well supplied by goods produced by them, for their employees to keep their jobs without adding to unemployment, for the government to get revenues from these businesses as these are among the highest contributors to the government's coffers, for smooth conduct of export activities and unhindered export earnings, plus to satisfy many other needs not capable of full description within the confines of this column.
Specially, the banks and other financial organizations have an umbilical relationship with these business houses from extending huge credits to them. But these business houses and the enterprises under them, are failing to operate their accounts for a long time as their owners or members of their board of directors are either absconding or remain in jail. Thus, these organizations are on the brink of closure. In many cases, they are under producing and the employees have had no salaries for months.
Recently, Bangladesh Bank instructed the banks to deal with them so that their collapse can be avoided. But this instruction is proving fruitless really without the giving of detailed advice as regards how this is to be done. Company law does not allow banks to have dealings with these business organizations under the peculiar situation they are faced with. Thus, Bangladesh Bank should give detailed instruction to the banks such as the latter authorising the directors of these business houses who are in the country and not in jail or even senior officers of the enterprises to carry out dealings with banks. The same could be given legal cover by amending the company laws through ordinance. But nothing is being done and the conglomerates remain in a limbo like in the past. Meanwhile, the banks are failing to receive due repayment of loans from these institutions and the classified loan burden of the banks is shooting up. The position of the banks would soon come under a threat if this situation continues for some time since the greater part of their operations were with this big business houses.
Thus, government needs to shape up its policy in a constructive matter at the fastest. Why this has not happened in the last nine months is an enigma. But now, no further extension of this state of affairs is possible without paying a heavy economic price. In South Korea, the main proprietor of a world famous company, was arrested and jailed for corruption recently. But this has not resulted in a halt of the full functioning of this giant industrial conglomerate. Government there decided that it was too big a national asset to be sacrificed for the corruption of a single person. Government policies in that country has ensured the full functioning of the industrial empire while also punishing its owner in proportion to his crime. The same model should apply in case of the business conglomerates in Bangladesh. The contributions of these conglomerates to the national economy must not be turned off for the reason of punishing of some of their owners. The two must be dealt with as separate issues.
Fiscal and monetary policies of the government have a lot to do with boosting investment operations in any economy. Government in Bangladesh will have to take stock of its fiscal and monetary policies and determine in what ways the same can be significantly improved or made particularly hospitable for the investors. Tax breaks or concessions in some sectors will create incentives for many investors to come forward to invest in them. The greatest favourable response in investment operations can be expected if the present high lending rates of financial institutions are scaled down by at least 4 or 5 per cent from the present average of 12-15 per cent. Reduction in the lending rate occurring to such an extent will come as a big motivator for the investors to become enthusiastic in investing out of an expectation of good returns from their investments. The Bangladesh Bank Governor recently counseled the commercial banks that the should put on hold their profit mentality for a year and work for the economy's revival. This would go in the favour of their medium and longer term interests as well. The banks can scale down their lending rates and make lesser profits for a year or two. But that can be considered as a longer term investment in their own health.
The downward trend in the lending rate will stimulate bank borrowing and help the banks to dispose off their idle funds. The higher rate of borrowings and the consequent stepped up economic activities will result in high economic growth. When that happens, the banks will be in a position to once again increase the lending rate for raking in greater profits to compensate for the earlier lower lending rate. Besides, the higher lending rate at that time may also be necessary as a deflationary step against inflation. But for now, the banks and financial institutions must consider a substantial lowering of the lending rate for their own good and that of the economy. Bangladesh Bank (BB) cannot dictate to the commercial banks in this matter. But it can certainly influence them to settle for such a course. In setting its own monetary policies, BB can certainly opt for such policies as would lead to making borrowing cheaper for the entrepreneurs.
In the short term, all governmental policies will have to be geared to reviving fully production processes in the cyclone and flood affected districts. Nearly one fourth of the population and one-third of the country physically, have been devastated in varying degrees by the natural calamities. Government's aims should not only be one of helping the people of these areas to survive through dole. This dependency can prove to be unbearable for the economy even in the medium term. Thus, it should not be allowed to grow. People who suffered the calamities will have to be helped out in a planned manner so that that they can resume production activities at the soonest and can start living without dole. People in the affected territories will have to be aided to resume production in agriculture, fisheries, small manufacturing, trade, etc., for once again taking charge of their own life in the economic sense. This happening will take off pressures from the government and stop a big drain of public resources. The cyclone and flood afflicted areas once again entering the production mainstream will mean that the country's gross domestic product (GDP) can be prevented from sharply dropping as is feared now. Besides, government policies all over the country should be guided by the objective of maximizing of production. The current economic problems of Bangladesh are notably on the supply side. Under production of essential goods -- specially a range of edibles--leading to their scarcity and higher prices fed on by the escalating import costs of these goods, is spurring on inflation in Bangladesh. The solution lies in planned attempts to much increase their production in the country.
Government has done well by inviting foreign assistance unambiguously. Showing a brave face and hiding the real distresses, would be a senseless policy under the present circumstances. But now that foreign assistance has been sought formally, government should play its cards extremely well and do its best to sensitize the donors to make generous contributions. Foreign aid will have to play a big role in the coming year to make up for major resource shortfalls.
Government has no choice but to go on providing large subsidies in this exceptionally difficult year. Raising of fuel prices to match international prices can be too much for the economy at the moment. It was good to see a deal clinched for advanced buying of one year's supply of fuel oil at a fixed price. This will offer some hedge against further fuel oil price rise in international markets. Similar deals should be explored and firmed up in respect of foodgrains as prices of the same are also showing volatility in the international markets from scarcity. Foreign aid should be particularly sought and utilized to create short and mid term security in areas of food and fuel.
The budget deficit is likely to grow this year in view of the particularly stressful situation facing the economy. Government's revenue collection will be lower and the need for the government to borrow, will increase. But the borrowings and expenditure of the same can fuel inflation when the rate of inflation remains very high. Thus every effort must be made to keep this budget deficit under a control and ensure quality in the government's expenditure. The greater the public sector resources will be spent on productive activities, the best for the economy and for containing inflation.