Govt faces uphill task to ‘heal’ economy

The Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka has identified a number of challenges including ensuring political stability, repairing and restoring damaged roads, highways, bridges and railways for aiding the country's economic growth.
"The new government has an uphill task to heal the economy from the destruction caused by the political unrest, restore the growth momentum, and rebuild the confidence of local industrialists and businessmen as well as foreign buyers and investors," the MCCI said reviewing the economic situation in the country during the second quarter (Q2) of the fiscal 2013-14.
The foremost task of the government was to ensure political stability in the country, it said suggesting making it clear that there was no compromise with security and law and order situation. It was also necessary to enhance the country's image abroad, it added.
The MCCI said there was already a long to-do list for the government, and the recent political unrest only lengthened it.
"Thus, the infrastructure like roads, highways, bridges and railways that were extensively damaged or destroyed during the days of strikes and blockades, disrupting transportation and supply chain, will need to be repaired and restored on a priority basis," the review said.
"This will call for a large increase in public expenditure, but it should not be much difficult as the budget deficit so far in this fiscal is well within the target," it added.
The review also said the government would need to meticulously implement its pledges to address all important economic issues, as outlined in the election manifesto announced in the run-up to the 5 January elections.
"Given, however, the shortage of resources caused by the slowdown in revenue collection and aid inflows, we would ask government to organise its expenditure priorities by concentrating on urgent projects and leaving aside the entirely new and costly ones of long gestation periods."
It said: "The government's best strategy at the moment should be to develop education and skills development programmes, improve the essential physical infrastructure, raise electricity generation, support agriculture, and promote investment in the industrial sector."
"To encourage investment and create jobs, a more prudent and effective monetary policy by the central bank is essential", it noted.
The review said industry and businesses would have to be given adequate policy support so that they could recoup their losses. Policy supports recently announced by government should be extended to all important sectors, including agro-based industries, transport and small businesses and entrepreneurs that were equally affected by the political unrest.
Poverty alleviation programmes should be among the top priorities on the government's policy agenda. The government would need to expand the social safety network but at the same time also ensure efficient use of resources and check leakage, it said.
The review also said active government interventions in favour of the poor would be needed to reduce inequalities in income. Increased emphasis should be given to improve the quality of primary and secondary education and primary health care, the major beneficiaries of which are generally the poor.
It further added that governance in the banking sector and capital markets must be improved. Growing debt defaults and recent loan scams and frauds at the state-owned banks depleted resources of the once strong banks and affected the banking sector. Strong measures would be needed to prevent recurrence of banking sector frauds and improve loan recovery.
"Very importantly, Bangladesh Bank should be made independent of government control, which is necessary for enhancing the quality of its supervisory and regulatory functions," the review said adding that the government should continue with its ongoing reform of the tax policy. Modernising the NBR and creating an effective and efficient revenue management system was now a national imperative.     
Regarding the export sector the review said strong efforts should be made to get the US GSP facility restored and avert the threat of GSP cancellation by the EU by addressing the compliance issues.
Bangladesh should work toward making regional cooperation (SAFTA) effective and also explore opportunities of exports to new markets in different regions, it said.
"In order to enhance remittances, the government should explore diplomatic efforts to persuade friendly countries to recruit more workers from Bangladesh. It would also be necessary to take steps to send more skilled workers abroad to enhance the flow of remittances," it noted.  
The MCCI said the tasks it mentioned in the review might appear daunting but achievable, given Bangladesh's resilience to different problems, and strong gains the country made in various economic and social indicators in the past.
"Fortunately, there are a number of favourable domestic conditions that will help government to overcome all impediments and move forward to regain the growth momentum and advance further," it said.
"Needless to mention, much will depend on how quickly the prevailing political stalemate can be resolved through dialogues among the feuding political parties," it added.
The MCCI also said the economy had been under stress in recent months because of the political unrest and its adverse impact on all major sectors of the economy.
There was virtual stoppage of all economic activity because of violent programmes like shutdown and blockade. The political unrest spared no sector, not even agriculture. The implementation of the ADP (Annual Development Programme) remained below the target.
There was a shortfall in revenue collection. Damages caused to national infrastructure and public and private properties during the unrest together with losses suffered by industry, agriculture, services, and businesses might exceed nearly Tk 500 billion as estimated by some think-tanks. The unrest had also created a lot of uncertainties for the future.
There was the fear of a serious decline in growth of export income, remittances, foreign aid, investment and fiscal revenue, it said.  
The review also said because of the political stalemate and escalating violence, the donor agencies - the IMF, World Bank and ADB - revised downward their earlier forecasts on Bangladesh's GDP growth to 5.5-5.8 per cent, as against the government's official target of 7.2 per cent for the current fiscal.
Bangladesh Bank also revised downward the growth outlook to between 5.7-6.0 per cent, and finally the government itself lowered its own target to 6.3 per cent for the present fiscal.
Despite various odds, it said, the crop agriculture performed reasonably well in the quarter under review despite the political stalemate. "With continuing policy support from the government to ensure easy and timely availability of agricultural inputs and fair price to farmers for their produce, the target set for food grain production in the present fiscal should not be difficult to achieve."
However, farmers suffered substantial losses because they could not procure necessary inputs nor could they easily market their produce owing to the countrywide disruption in the transportation network, it said.
The non-crop agriculture like livestock, poultry and fisheries, also suffered a serious setback due to continuous shutdowns and blockades during the entire period of the second quarter of the present fiscal.
On industrial front, the MCCI said, the performance of the industrial sector in the second quarter of the FY '14 was below that of the past fiscal year, particularly because of the political unrest, low disbursement of industrial term loans, slow growth in the settlement of import letters of credit (LCs) for industrial raw materials and capital machinery, a sharp decline in private sector credit growth, and infrastructural bottlenecks.
Moreover, the production and supply chain in most of the country's manufacturing industries broke down due to frequent countrywide shutdowns and blockades. Many industries had to cut production by as much as nearly 50 per cent to avoid congestions at warehouses. On the other hand, all industries were facing a serious problem due to disruption in supply of raw materials because of the blockades.
The political unrest badly affected construction activities, including major construction work under the ADP. Construction activities in the private sector were in a severe crisis. Investments by builders and developers remained virtually stuck up. The flat and plot sales declined by 60 per cent and new projects undertaken by developers dropped by 75 per cent. Nearly 23,000 ready apartments, worth Tk 21.5 billion, remained unsold due to the political unrest.
The performance of the power sector was below the expected level, though there was a significant addition to the generation capacity and a sizeable increase in actual power generation. The overall electricity generation is now hovering around 6,600 megawatts (mw) against the demand for over 7,500 mw. The installed capacity of power plants as of January 2014 is 10,241 mw.
The broad money (M2), during the period, recorded a 16.7 per cent increase year-on-year at the end of November 2013 compared to the increase of 18.6 per cent at the end of November 2012. Overall domestic credit recorded a slower growth of 10.8 per cent year-on-year at the end of November 2013 compared to 14.8 per cent growth at the end of November 2012.
The private sector credit registered a far lower growth of 11.1 per cent, compared to the 17.4 per cent recorded in the same period of 2012. Private sector credit growth slowed mainly because of the slowdown in import growth and the prolonged political unrest. Public sector credit, however, recorded a mild increase by 9.5 per cent at the end of November 2013 compared to 6.2 per cent at the end of November 2012.
It said the excess liquidity of scheduled banks stood at Tk 902 billion at the end of November 2013, higher by Tk 108 billion than that of five months back in June, 2013.
"The continuous increase in excess liquidity reflects weak private sector demand for bank credit because of the high cost of bank loans, shortage of energy supplies, weak infrastructure, and above all, the chaotic political situation, all of which have vitiated the business environment in the country," it noted.
The state of the capital market was disappointing in most of the time during the quarter. The market experienced a lot of volatility despite a positive ending of the broad share price index.
In July-December of the FY '14, the National Board of Revenue (NBR) missed its revenue collection target due to political trouble in most of the said months.
The rate of implementation of the ADP in the first half of current fiscal was 27 per cent, 3 percentage points below the implementation rate achieved in the corresponding period of the previous fiscal.
The implementing ministries and agencies utilised Tk 180.87 billion out of the total ADP outlay of Tk 658.72 billion. The recent political turmoil hit the development work of the government badly, which affected overall project implementation.
The export earnings recorded a lower growth of 11.9 per cent because of the political unrest. Nevertheless, in the present global context, the 11.9 per cent export growth in the October-December quarter could be treated as satisfactory, considering the adverse impact of the political unrest and recent incidents in the apparel sector that drew criticism from abroad.
Import payments during the July-November period increased by 11.6 per cent compared to the corresponding months of the previous fiscal despite the recent political unrest. Imports increased during the period mainly due to higher imports of food gains, particularly rice and wheat, and capital machinery and industrial raw materials, it added.
The MCCI review also said remittance inflow decreased by 8.7 per cent during October-December of the FY '14 over the same period of the FY `13. In December 2013, inward remittance was 5.5 per cent lower than that in the same month of the previous year.
Disbursement of foreign aid during the first half of the current fiscal was almost at the same level as in the corresponding period of the previous fiscal year. Disbursement did not increase mainly because of the lower implementation rate of foreign-aided projects under the ADP amid political unrest in past months.
A lacklustre situation prevailed relating to the country's investment, both local and foreign direct investment (FDI), mainly because of political uncertainties. Despite the country's cheap labour and attractive incentives offered by the government, weak infrastructure, shortage of power and energy and the political instability were discouraging local entrepreneurs as well as potential foreign investors to invest in the country, it noted.
During the period from end-June to end-December last year Taka appreciated by 0.01 per cent against the US dollar, showing stability in the foreign exchange market. The general point-to-point inflation rose to a 4-month high of 7.35 per cent in December 2013 as food prices soared due to supply chain disruption caused by the prolonged blockades and shutdowns.
The food inflation rose by 0.45 percentage points to 9.0 per cent in December 2013 from November's 8.55 per cent. The food inflation in December was the highest since July 2012 when it was 2.23 per cent. The supply side constraint was the major factor behind the rise in food inflation. Non-food inflation dropped slightly to 4.88 per cent in December from 5.08 per cent in November 2013, the noted added.