Economy hard hit by long spell of inflation needs immediate reforms

Say experts as they seek policy cure in upcoming budget

FE REPORT | Wednesday, 3 April 2024

Former revenue board chairman Muhammad Abdul Mazid has said Bangladesh's economy needs to get rid of prolonged bouts of inflation through reforms and proper financial planning.
"Inflation has remained high for the past two years. If it continues for two or three years, the economy will eventually turn hypoglycemic," Mr Mazid said at a pre-budget discussion in Dhaka on Tuesday.
In his speech, he drew an analogy, suggesting that just as diabetes slowly weakens the body, inflation steadily erodes savings. Insulin is what fights diabetes; in Bangladesh's case, that "insulin" is reform and wise financial planning.
The discussion, titled 'Fiscal Year 2024-25 Budget: Seeking Directions for Addressing Key Challenges', identified four vital economic areas for reform in the next national budget and called for an all-out war on crushing inflation.
To tackle the ongoing economic challenges, the key areas for reforms are the tax regime, currency exchange rate management, banking and public expenditure.
The Research and Policy Integration for Development (RAPID) organised the programme at the Jatiya Press Club. Chaired by RAPID Chairman Dr MA Razzaque, State Minister for Planning Md Shahiduzzaman Sarker and Member of Parliament Md Nasser Shahrear Zahedee attended as chief guest and special guest, respectively.
Dr M Abu Eusuf, executive director of RAPID, identified several key challenges facing the Bangladeshi economy in his keynote paper.
These included sluggish global growth, high inflation, a low tax-to-GDP ratio, a foreign exchange crisis, high levels of non-performing loans (NPLs), rising external debt, a fiscal deficit, poor implementation of the Annual Development Programme (ADP), inadequate foreign direct investment (FDI) inflows and slow job creation.
"The upcoming budget holds heightened significance as it is the second-to-last budget that precedes the LDC graduation in 2026, a pivotal moment for the country," he noted.
To address these challenges, Dr Eusuf recommended developing strategies for a smooth transition from LDC status, rationalising tariffs, mobilising domestic resources and reviewing or replacing cash assistance programmes.
Besides, he advocated for a shift towards direct taxation to reduce income inequality, noting that the country has one of the world's lowest rates of direct tax collection.
Dr Eusuf also suggested stricter measures to deter loan defaults and recover outstanding loans.
He added that the banking sector has faced crises due to a high NPL ratio, low efficiency, unhealthy competition and liquidity shortages, ultimately leading to the decision to merge banks.
Terming policy reform as essential, RAPID Chairman Dr Razzaque said the current political stability, unexpected after the January 7 national elections, presents a unique opportunity for enacting comprehensive reforms.
He outlined a critical reform agenda encompassing key areas such as enhancing domestic resource mobilisation, rationalising tariffs, managing exchange rates and optimising public expenditure management.
The government's expenditure is between 14 per cent and 15 per cent, while other countries typically spend 24-25 per cent, said Dr Razzaque.
"The government needs to increase the tax-to-GDP ratio which would allow it to invest more in education, healthcare and infrastructure development, he said, adding, "Increased government investment would also encourage private investment."
Calling for reform in the currency exchange rate system, Dr Razzaque said the economy suffers due to the volatile exchange rate. The current system is not market-oriented and leads to different sectors receiving different exchange rates.
"A massive reform is needed in the banking sector to offset the defaulted loans and improve transparency in the sector," he noted.
"This is the best time for reforms in those areas," Dr Razzaque said, adding the economic success of Bangladesh is getting rusty because of rising income inequality and discrimination.
Ashraf Ahmed, president of the Dhaka Chamber of Commerce and Industry, cited the Covid-19 pandemic and Russia-Ukraine war to argue that businesses have suffered greatly. He urged the government to refrain from raising tax rates this year.
State Minister for Planning Mr Sarker described the national budget as a reflection of the government's political commitment and accountability to the people.
He said Bangladesh's economy has made significant improvement in the past one-and-a-half decades, but the country needs to achieve more.
In response to a question, Mr Sarker said Bangladesh has not fully adopted an open market economy. Instead, the government has pursued a mixed economic policy to promote public well-being.
MP Md Nasser Shahrear Zahedee criticised the revenue board's inefficiency in extending its tax net to rural areas, citing the tax authority's lack of infrastructure for communication beyond the district level.
He argued that public trust in the government's use of tax revenue would encourage greater tax compliance.
"Controlling inflation should be the utmost priority in the budget for the upcoming fiscal year," he added.
Prothom Alo's Head of online content Shawkat Hossain Masum and Economic Reporters Forum President Mohammad Refayet Ullah Mirdha also participated in the event as panellists.

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