The economy faces enormous challenges
Sunday, 2 December 2007
Shahiduzzaman Khan
BANGLADESH economy is now passing through a difficult time with enormous challenges ahead. The spiralling prices of essential commodities and the rising food inflation are at present the biggest challenges before the economy. Two consecutive floods and the most recent devastating cyclone have dealt a severe blow to the fragile economy. The unabated price rise has put under threat the impressive achievements made after January 11, 2007 changeover.
On investment front, domestic investment proposals registered with the Board of Investment have plunged by over 62 percent in nine months since January, leading to the decline in GDP growth. The narrow-based industrial development has now pushed the country to the risk of export erosion. To compound the worries, the US economy is on a retreat and the hope that the emerging economies--China and India--will keep the global growth going is of little comfort for Bangladesh as its exports are not focused to those markets.
At present, income erosion and loss of purchasing power are the major issues to be concerned. And a political choice has to be made to spread the economic burden of the crisis. Devastating cyclone coming in the wake of floods has dealt a severe blow to livelihoods of a very large section of population. Even if food shortage is met by imports, people may still lack purchasing capability. There will be obviously some negative impacts on the GDP growth rate but that is not enough to explain the loss of purchasing capacity of people.
There has been a severe deterioration in Bangladesh's terms of trade with a decline in the country's price of our main export garments and manifolds increase in the prices of some main import items--food grains, fuel, edible oil and other commodities. This means the country can buy much less imports with its export earnings and remittances. In this respect the impact of global markets has been unusually severe on Bangladesh because of its dependence on food import and single-item export. Moreover, there is the usual seasonal economic distress related to agricultural lean season, the impact of which has been much more severe this year because of the recurring floods and cyclone.
The shortfall in Aman harvest will be too big to be recouped by even a bumper Boro harvest and there is little prospect for food grain prices to come down after the Aman harvest following the usual seasonal patterns. As such, the seasonal distress is likely to be prolonged particularly in the wake of the cyclone. Along with it, there is the adverse impact of rising essential food prices, which is most severe on casual wage labourers and other fixed income groups. In most parts of the country, particularly in the economically depressed north, the daily wage rates of agricultural workers have hardly increased with the increase in food prices.
There are adequate foreign exchange reserves for importing food and other items at least for the time being. Restoring livelihood of the affected people on a sustainable basis is much more of a challenge and will need multi-pronged innovative approach. In particular, there should be room for participation by NGOs and voluntary community-based organisations. Restoring the livelihoods of the affected people and economic structure of the severely hit areas should be the priority so that economic life can resume. Beyond immediate relief, the main concern should be creating employment opportunities, undertaking a massive programme of infrastructure rehabilitation, providing house building loans and replenishing working capital of traders and small entrepreneurs to revive the economy to some extent in those areas.
The higher fuel price will also lead to a greater pressure on foreign exchange reserves. The fuel price adjustment in April was done when oil was selling at $65 a barrel and now the price has increased by about 50 per cent. So, subsidy to Bangladesh Petroleum Corporation (BPC) will take a giant leap if domestic prices remain constant. But then, costlier diesel will hamper Boro production. Garment exports which suffered a severe blow and dropped by 24 percent in July has now recovered to some point but is still short by 5.0 percent from last year's.
The floods and cyclone had affected the food production, and that has affected the economy, as the agriculture is its most vital factor. Again, as the economy has slowed down business has also slowed. But slowing down does not mean the business is finished. The growth has been slow in the last one year, but it did not stop. During the 1974 famine, many thought that the country would be ruined. But it did not. Today the country is not even facing the 1974 situation. It is easy to make doom gloom prediction. But there is nothing to worry about. Country's vast multitude of people is very courageous and bold. They are resilient too. This is a difficult situation, but the people know how to overcome these problems.
Though the business community is now faced with multiple problems it is expected that the newly formed Better Business Forum will help them resolve their problems. Some of the reform programmes have backfired. Some steps earlier taken by the government had been good, but the way of implementing them had not been very fair. They government needs to be more careful and calculative.
As compared to other developing countries, Bangladesh -- being an LDC -- has substantially liberalised its economy at the cost of hardship of entrepreneurs and common people, even though under WTO umbrella Bangladesh could avail and follow more domestic support measures. During the past decade or so, some Asian countries, through appropriate economic policy measures within the framework of WTO, have achieved remarkable progress, transforming themselves from largely agrarian, underdeveloped economies into a dynamic export powerhouse.
Low disbursement of foreign aid has been a major concern for the economy in recent years. In fiscal 2007 one-third of the donors' committed assistance of US$2.28 billion have not been made available or disbursed putting the country's planned projection into uncertainty. On the other hand, an amount of US$710 million has been paid as interest out of the disbursed amount of US$1.57 billion leaving a net inflow of credit of US$860 million during FY 2007.
Bangladesh has achieved reasonable successes in areas of human development, population control, food security, poverty reduction and disaster management. It has weathered several external financial shocks, debt crises and achieved an average economic growth rate of over 6.0 per cent in recent past and over 6.7 per cent in the last fiscal. However, in spite of all these achievements, reduction in poverty level is still not satisfactory. Over 40 per cent of the population is still below the poverty line. Poor governance, inadequate infrastructure, systemic corruption and deteriorating law and order continued to be major deterrents to a private sector-led higher economic growth.
The steps now being taken would definitely contribute to forming a strong base for the future economy. The major actions so far taken by the government for separation of judiciary, reconstitution of the Election Commission, Public Service Commission and Anti-Corruption Commission as well as in curbing corruption will have a positive impact in the long run. The challenge for the government is, therefore, to win the confidence of the business community in particular and the public in general. Businessmen should be allowed to manage their affairs with ease and make their own investment decisions.
BANGLADESH economy is now passing through a difficult time with enormous challenges ahead. The spiralling prices of essential commodities and the rising food inflation are at present the biggest challenges before the economy. Two consecutive floods and the most recent devastating cyclone have dealt a severe blow to the fragile economy. The unabated price rise has put under threat the impressive achievements made after January 11, 2007 changeover.
On investment front, domestic investment proposals registered with the Board of Investment have plunged by over 62 percent in nine months since January, leading to the decline in GDP growth. The narrow-based industrial development has now pushed the country to the risk of export erosion. To compound the worries, the US economy is on a retreat and the hope that the emerging economies--China and India--will keep the global growth going is of little comfort for Bangladesh as its exports are not focused to those markets.
At present, income erosion and loss of purchasing power are the major issues to be concerned. And a political choice has to be made to spread the economic burden of the crisis. Devastating cyclone coming in the wake of floods has dealt a severe blow to livelihoods of a very large section of population. Even if food shortage is met by imports, people may still lack purchasing capability. There will be obviously some negative impacts on the GDP growth rate but that is not enough to explain the loss of purchasing capacity of people.
There has been a severe deterioration in Bangladesh's terms of trade with a decline in the country's price of our main export garments and manifolds increase in the prices of some main import items--food grains, fuel, edible oil and other commodities. This means the country can buy much less imports with its export earnings and remittances. In this respect the impact of global markets has been unusually severe on Bangladesh because of its dependence on food import and single-item export. Moreover, there is the usual seasonal economic distress related to agricultural lean season, the impact of which has been much more severe this year because of the recurring floods and cyclone.
The shortfall in Aman harvest will be too big to be recouped by even a bumper Boro harvest and there is little prospect for food grain prices to come down after the Aman harvest following the usual seasonal patterns. As such, the seasonal distress is likely to be prolonged particularly in the wake of the cyclone. Along with it, there is the adverse impact of rising essential food prices, which is most severe on casual wage labourers and other fixed income groups. In most parts of the country, particularly in the economically depressed north, the daily wage rates of agricultural workers have hardly increased with the increase in food prices.
There are adequate foreign exchange reserves for importing food and other items at least for the time being. Restoring livelihood of the affected people on a sustainable basis is much more of a challenge and will need multi-pronged innovative approach. In particular, there should be room for participation by NGOs and voluntary community-based organisations. Restoring the livelihoods of the affected people and economic structure of the severely hit areas should be the priority so that economic life can resume. Beyond immediate relief, the main concern should be creating employment opportunities, undertaking a massive programme of infrastructure rehabilitation, providing house building loans and replenishing working capital of traders and small entrepreneurs to revive the economy to some extent in those areas.
The higher fuel price will also lead to a greater pressure on foreign exchange reserves. The fuel price adjustment in April was done when oil was selling at $65 a barrel and now the price has increased by about 50 per cent. So, subsidy to Bangladesh Petroleum Corporation (BPC) will take a giant leap if domestic prices remain constant. But then, costlier diesel will hamper Boro production. Garment exports which suffered a severe blow and dropped by 24 percent in July has now recovered to some point but is still short by 5.0 percent from last year's.
The floods and cyclone had affected the food production, and that has affected the economy, as the agriculture is its most vital factor. Again, as the economy has slowed down business has also slowed. But slowing down does not mean the business is finished. The growth has been slow in the last one year, but it did not stop. During the 1974 famine, many thought that the country would be ruined. But it did not. Today the country is not even facing the 1974 situation. It is easy to make doom gloom prediction. But there is nothing to worry about. Country's vast multitude of people is very courageous and bold. They are resilient too. This is a difficult situation, but the people know how to overcome these problems.
Though the business community is now faced with multiple problems it is expected that the newly formed Better Business Forum will help them resolve their problems. Some of the reform programmes have backfired. Some steps earlier taken by the government had been good, but the way of implementing them had not been very fair. They government needs to be more careful and calculative.
As compared to other developing countries, Bangladesh -- being an LDC -- has substantially liberalised its economy at the cost of hardship of entrepreneurs and common people, even though under WTO umbrella Bangladesh could avail and follow more domestic support measures. During the past decade or so, some Asian countries, through appropriate economic policy measures within the framework of WTO, have achieved remarkable progress, transforming themselves from largely agrarian, underdeveloped economies into a dynamic export powerhouse.
Low disbursement of foreign aid has been a major concern for the economy in recent years. In fiscal 2007 one-third of the donors' committed assistance of US$2.28 billion have not been made available or disbursed putting the country's planned projection into uncertainty. On the other hand, an amount of US$710 million has been paid as interest out of the disbursed amount of US$1.57 billion leaving a net inflow of credit of US$860 million during FY 2007.
Bangladesh has achieved reasonable successes in areas of human development, population control, food security, poverty reduction and disaster management. It has weathered several external financial shocks, debt crises and achieved an average economic growth rate of over 6.0 per cent in recent past and over 6.7 per cent in the last fiscal. However, in spite of all these achievements, reduction in poverty level is still not satisfactory. Over 40 per cent of the population is still below the poverty line. Poor governance, inadequate infrastructure, systemic corruption and deteriorating law and order continued to be major deterrents to a private sector-led higher economic growth.
The steps now being taken would definitely contribute to forming a strong base for the future economy. The major actions so far taken by the government for separation of judiciary, reconstitution of the Election Commission, Public Service Commission and Anti-Corruption Commission as well as in curbing corruption will have a positive impact in the long run. The challenge for the government is, therefore, to win the confidence of the business community in particular and the public in general. Businessmen should be allowed to manage their affairs with ease and make their own investment decisions.