Energy, the vital missing link
Enayet Rasul | Thursday, 24 July 2008
There is a an English idiom which says ' putting the cart before the horse.' It means essentially the doing of things in the wrong order. You put the horse before the cart so that the cart can be pulled. But if you put the horse at the rear of the cart, it cannot be pulled. This is simple logic as well as an all truism to guide the manner of doing things.
The governor of Bangladesh Bank (BB) declared the government's monetary policy last week. It was sought to be projected as a fearless initiative on the part of the government. Ignoring the advice of our mentors-- International Monetary Fund (IMF) and World Bank (WB)--- Bangladesh Bank prepared a monetary policy out of tune with their prescriptions. The IMF in particular had advised the government of Bangladesh (GOB) to settle for a contractionary monetary policy to tame inflation. But some analysts wrote glowingly about the independent-mindedness of Bangladesh Bank in not succumbing to such advice but retaining expansionary aspects in the policy.
The main expectation of BB's new monetary policy is that it would encourage fresh investment operations. Entrepreneurs are supposed to be inspired by it thinking that they would be able to have access to ample credits from the exercise of such a policy on softer terms and conditions. Thus, the simplistic deduction is that they would respond to it enthusiastically and come forward vigorously to set up new enterprises or add to the capacities of the existing ones to benefit from the availability of finance on easier terms.
Government adopted the national budget for the current fiscal year, 2008-9, last month. The same intent to stimulate investments was noted in fiscal policies stated in the budget : an array of policies involving tax and duty reductions, tax and duty exemptions, tax and duty concessions and getting rid of anomalies in taxes and duties that previously favoured foreign businesses over the local ones. Specially, import duties on capital equipment and industrial raw materials were lowered for a wide range of industries. All of these measures were taken-- as explained by the Finance Advise--with the aim of creating a proper motivational environment for entrepreneurs to invest more, to produce more.
The theoretical constructs of the government read and appear fine on paper. But what is the reality ? Investment operations are no doubt influenced in a major way by favourable fiscal and monetary policies. This is a simple economic rule. But many economic theories also carry an additional statement, other things remaining the same. This other things remaining the same clause stated with the theory is too vital. Its purport is that the theory can only apply if other things in the environment do not change. Thus, the economic law says that demand for a commodity will increase if its price falls. But the rule will not apply if other variables changes in the mean time such as income or purchasing power of consumers also fall or the price of a substitute product also falls by a comparatively bigger margin. In the latter event, the increase in demand for the substitute may be relatively higher.
Effectiveness of monetary and fiscal policies are also similarly dependent on the ' other things remaining the same' limitation. Stimuli given through fiscal and monetary policies will only work if other things in the investment environment remain favourable. Investments are not only helped by getting finance on easy terms or relief in the payment of taxes. In the Bangladesh context, these things have become secondary considerations while the primary consideration is the availability of energy. Many industrial operators in the Dhaka and Chittagong region are suffering very badly from not having proper supply of power and gas. Power in varying degrees is indispensable for running both manufacturing and servicing industries and gas is the raw materials of many industries. But a severe shortage of both is bedeviling the entrepreneurs. They are hard pressed as it is to maintain their normal level of production. Many are underutilizing capacities and have retrenched a large number of their workers.
Worse is the case of hundreds of new industries which have been set up in the Dhaka and Chittagong regions particularly. These industries could not go into production long after their establishment as they have not got power or gas connections to be able to operate them. But these enterprises have been accumulating losses and the same have become enormous in some cases. The owners of such industries are in deep worry about repaying the loans with interest to the institutional lenders from where they borrowed huge resources to set up the plants. The lending institutions are also sharing the worry as they extended huge loans to such enterprises which failed to take-off and the loans have turned into defaulted ones in most cases.
Meanwhile, government announced a month ago that no power or gas connections would be given to new industrial enterprises at Chittagong. This has been the unstated policy also in the Dhaka region for some time. So, what signals the potential investors are going to get from this message? Surely, they cannot be expected to be so foolish or reckless to try enterprising in this grim situation when there is no hope in the horizon that the supply of the basic requirement for operating their envisioned enterprises -- energy--will improve in the short or medium terms. They are very likely to sit in the fence doing nothing till they see convincing improvements in the supply situation of energy.
Therefore, government is expected to understand this bitter reality. All of its incentives through monetary and fiscal policies are bound to fall flat in the face of the crisis situation in respect of energy supply. The policies can be like whipping a dead horse that will not run. The policies will be useful or work as additional inducements when the energy supply improves for the better. Government needs to arrange its priorities in the right order. It should address the issue of energy with the greatest seriousness or very focused intent and improve the energy supply over the short and medium term leaving convincing proofs that there would be no reverses in this tend and that energy supply would be only increasing substantially over the longer term. If this is done, then that would be considered as the greatest input towards motivating the entrepreneurs and accelerating investment operations leading to the aspired rate of economic growth.
The governor of Bangladesh Bank (BB) declared the government's monetary policy last week. It was sought to be projected as a fearless initiative on the part of the government. Ignoring the advice of our mentors-- International Monetary Fund (IMF) and World Bank (WB)--- Bangladesh Bank prepared a monetary policy out of tune with their prescriptions. The IMF in particular had advised the government of Bangladesh (GOB) to settle for a contractionary monetary policy to tame inflation. But some analysts wrote glowingly about the independent-mindedness of Bangladesh Bank in not succumbing to such advice but retaining expansionary aspects in the policy.
The main expectation of BB's new monetary policy is that it would encourage fresh investment operations. Entrepreneurs are supposed to be inspired by it thinking that they would be able to have access to ample credits from the exercise of such a policy on softer terms and conditions. Thus, the simplistic deduction is that they would respond to it enthusiastically and come forward vigorously to set up new enterprises or add to the capacities of the existing ones to benefit from the availability of finance on easier terms.
Government adopted the national budget for the current fiscal year, 2008-9, last month. The same intent to stimulate investments was noted in fiscal policies stated in the budget : an array of policies involving tax and duty reductions, tax and duty exemptions, tax and duty concessions and getting rid of anomalies in taxes and duties that previously favoured foreign businesses over the local ones. Specially, import duties on capital equipment and industrial raw materials were lowered for a wide range of industries. All of these measures were taken-- as explained by the Finance Advise--with the aim of creating a proper motivational environment for entrepreneurs to invest more, to produce more.
The theoretical constructs of the government read and appear fine on paper. But what is the reality ? Investment operations are no doubt influenced in a major way by favourable fiscal and monetary policies. This is a simple economic rule. But many economic theories also carry an additional statement, other things remaining the same. This other things remaining the same clause stated with the theory is too vital. Its purport is that the theory can only apply if other things in the environment do not change. Thus, the economic law says that demand for a commodity will increase if its price falls. But the rule will not apply if other variables changes in the mean time such as income or purchasing power of consumers also fall or the price of a substitute product also falls by a comparatively bigger margin. In the latter event, the increase in demand for the substitute may be relatively higher.
Effectiveness of monetary and fiscal policies are also similarly dependent on the ' other things remaining the same' limitation. Stimuli given through fiscal and monetary policies will only work if other things in the investment environment remain favourable. Investments are not only helped by getting finance on easy terms or relief in the payment of taxes. In the Bangladesh context, these things have become secondary considerations while the primary consideration is the availability of energy. Many industrial operators in the Dhaka and Chittagong region are suffering very badly from not having proper supply of power and gas. Power in varying degrees is indispensable for running both manufacturing and servicing industries and gas is the raw materials of many industries. But a severe shortage of both is bedeviling the entrepreneurs. They are hard pressed as it is to maintain their normal level of production. Many are underutilizing capacities and have retrenched a large number of their workers.
Worse is the case of hundreds of new industries which have been set up in the Dhaka and Chittagong regions particularly. These industries could not go into production long after their establishment as they have not got power or gas connections to be able to operate them. But these enterprises have been accumulating losses and the same have become enormous in some cases. The owners of such industries are in deep worry about repaying the loans with interest to the institutional lenders from where they borrowed huge resources to set up the plants. The lending institutions are also sharing the worry as they extended huge loans to such enterprises which failed to take-off and the loans have turned into defaulted ones in most cases.
Meanwhile, government announced a month ago that no power or gas connections would be given to new industrial enterprises at Chittagong. This has been the unstated policy also in the Dhaka region for some time. So, what signals the potential investors are going to get from this message? Surely, they cannot be expected to be so foolish or reckless to try enterprising in this grim situation when there is no hope in the horizon that the supply of the basic requirement for operating their envisioned enterprises -- energy--will improve in the short or medium terms. They are very likely to sit in the fence doing nothing till they see convincing improvements in the supply situation of energy.
Therefore, government is expected to understand this bitter reality. All of its incentives through monetary and fiscal policies are bound to fall flat in the face of the crisis situation in respect of energy supply. The policies can be like whipping a dead horse that will not run. The policies will be useful or work as additional inducements when the energy supply improves for the better. Government needs to arrange its priorities in the right order. It should address the issue of energy with the greatest seriousness or very focused intent and improve the energy supply over the short and medium term leaving convincing proofs that there would be no reverses in this tend and that energy supply would be only increasing substantially over the longer term. If this is done, then that would be considered as the greatest input towards motivating the entrepreneurs and accelerating investment operations leading to the aspired rate of economic growth.