Macro economic challenges
Friday, 28 December 2007
THE annual report of the Bangladesh Bank (BB) released on Wednesday outlined the economic challenges to be faced by the economy in the current fiscal. The bank's report devoted to these aspects are mainly related to the macro economic environment to be confronted in fiscal year (FY) 2007-2008. The country is under a growing inflationary pressure from higher prices of imported food and fuel oils. Pressures on these scores will either deepen or remain unchanged in the year. The expiry of restrictions on garments export by major buyers from early 2008, will create difficulties for the pivotal readymade garments (RMG) sector of Bangladesh.
The budget deficit will continue to be a sizeable one or on the higher side notwithstanding that higher trends have lately been noted in revenue collection. But for the momentum in revenue collection to sustain, economic growth will have to be yet higher. Meanwhile, possibilities of reducing governmental expenditures in the post floods and cyclone period are considered to be low while the higher targets of revenue collection in the coming months are uncertain. More revenue yield in the past few months may have been like the one season swallows -- the outcome of greater zeal by the collectors prompted by stern governmental directives and the consequent scare effects. But the same cannot happen every year. Rising revenues must be the result of an economy growing healthily leading to both willingness and ability on the part of the taxpayers to meet their tax payment obligations. But whether the economy will grow, as desired, will hinge crucially on improving business confidence, a still unfinished task from the outgoing year. The BB report has stressed on this factor and it must be addressed realistically and effectively in the months ahead for the economy to rebound.
The significance of balancing the budget between income and expenditures is obvious. Inflation is proving to be an unchecked menace for the economy. There is no denying that inflation is partly caused by higher costs of imported goods. But government's accelerated spending in a situation of uncertain or insufficient revenue growth, is also likely to fuel inflation further. In this situation, it is all the more important to make efforts for raising productivity or the overall economic growth as an antidote to inflation. And this aspired higher growth will depend on the government successfully operating a blend of policies, economic as well as non economic ones, to spur this growth. Fiscal and monetary policies of a well thought-out variety and steps taken in time to fully rehabilitate business confidence, would be the measures with chances of succeeding against inflation as well as increasing the opportunities for income and employment.
The BB has recommended automatic readjustment of domestic oil prices with international market prices. But opting for this course is also not without risks, though the economic rationale for such readjustment remains strong. The risks are there because budget deficit sought to be reduced by such a move, may backfire and could lead to the worst case scenario of fast rising cost-push inflation. Thus, striking a balance will be a major challenge. Furthermore, it is to be pointed out here that subsidies do entail a huge budgetary cost. None would like continuation of subsidies. But subsidies cannot also be avoided in all cases particularly to protect the interests of the disadvantaged groups under different socio-economic conditions. And in some situations such subsidies, if properly targeted, are to be considered a lesser evil.
Meanwhile, the anticipated decline in garments export from the withdrawal of the cushion against Chinese exports, warrants policies and actions participated by both the government and the RMG producers. The producers will have to be innovative to cut costs to the bone without carrying out such cuts on wages. They should bring about helpful changes in production methods and in other spheres expressly designed to improve their competitiveness. The government can help this process by its pro-active policies to support reduction of costs of doing business, where possible.
The budget deficit will continue to be a sizeable one or on the higher side notwithstanding that higher trends have lately been noted in revenue collection. But for the momentum in revenue collection to sustain, economic growth will have to be yet higher. Meanwhile, possibilities of reducing governmental expenditures in the post floods and cyclone period are considered to be low while the higher targets of revenue collection in the coming months are uncertain. More revenue yield in the past few months may have been like the one season swallows -- the outcome of greater zeal by the collectors prompted by stern governmental directives and the consequent scare effects. But the same cannot happen every year. Rising revenues must be the result of an economy growing healthily leading to both willingness and ability on the part of the taxpayers to meet their tax payment obligations. But whether the economy will grow, as desired, will hinge crucially on improving business confidence, a still unfinished task from the outgoing year. The BB report has stressed on this factor and it must be addressed realistically and effectively in the months ahead for the economy to rebound.
The significance of balancing the budget between income and expenditures is obvious. Inflation is proving to be an unchecked menace for the economy. There is no denying that inflation is partly caused by higher costs of imported goods. But government's accelerated spending in a situation of uncertain or insufficient revenue growth, is also likely to fuel inflation further. In this situation, it is all the more important to make efforts for raising productivity or the overall economic growth as an antidote to inflation. And this aspired higher growth will depend on the government successfully operating a blend of policies, economic as well as non economic ones, to spur this growth. Fiscal and monetary policies of a well thought-out variety and steps taken in time to fully rehabilitate business confidence, would be the measures with chances of succeeding against inflation as well as increasing the opportunities for income and employment.
The BB has recommended automatic readjustment of domestic oil prices with international market prices. But opting for this course is also not without risks, though the economic rationale for such readjustment remains strong. The risks are there because budget deficit sought to be reduced by such a move, may backfire and could lead to the worst case scenario of fast rising cost-push inflation. Thus, striking a balance will be a major challenge. Furthermore, it is to be pointed out here that subsidies do entail a huge budgetary cost. None would like continuation of subsidies. But subsidies cannot also be avoided in all cases particularly to protect the interests of the disadvantaged groups under different socio-economic conditions. And in some situations such subsidies, if properly targeted, are to be considered a lesser evil.
Meanwhile, the anticipated decline in garments export from the withdrawal of the cushion against Chinese exports, warrants policies and actions participated by both the government and the RMG producers. The producers will have to be innovative to cut costs to the bone without carrying out such cuts on wages. They should bring about helpful changes in production methods and in other spheres expressly designed to improve their competitiveness. The government can help this process by its pro-active policies to support reduction of costs of doing business, where possible.