The Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) has suggested that management of state owned banks should be improved along with enhancing the quality of Bangladesh Bank's supervisory and regulatory functions.
"In order to improve governance in the banking system, the management of state owned banks need to be improved, and the quality of Bangladesh Bank's supervisory and regulatory functions should be enhanced by making it truly autonomous and independent of government control," the leading chamber of the country said in its editorial of the latest issue of 'Chamber News'.
The editorial titled 'suggestions for government on national economic issues' said stern measures will be needed to reduce corruption, the major cause of which is poor governance in both public and private sectors. Some of the dominant state owned commercial banks of the country provide a stark example of poor governance, which has resulted in seriously infected portfolios. Largely because of corruption, a large portion of bank loans has become non performing.
Insisting the government to continue ongoing reforms of tax policy, the MCCI said Bangladesh's tax effort is generally very low, but yet the statutory tax rates, particularly the corporate income tax (CIT) rates applied to non listed companies and financial institutions are significantly above the CIT rates in comparable countries.
In order to shore up business and investor confidence, some tax adjustments ought to be given serious consideration. There is in fact some fiscal space for considering tax cuts because budget deficit for the current fiscal remains below 5 per cent of GDP.
The private sector's appetite for investment is now low because of political instability, but high interest rates are also considered a major negative factor.
"In such situation, an expansionary monetary policy by the central bank would be appropriate at the moment for propping up private sector investment," the MCCI editorial said.
Suggestions of IMF and conservative economists to adopt policies of tight money and higher interest rates in the name of keeping inflation in check will choke off private investment, which already faced a setback during political disturbances in the country.
Poverty reduction already occupies a high priority on the government's agenda. Apart from efforts to achieve a high rate of economic growth, which is necessary to trigger an exit from poverty, government will need to address other causes of poverty, such as the falling public expenditure on social sectors, growing inequality in income distribution, unequal access to productive assets, and poor access to public services. A greater attention should be given to increasing the quality of social services, particularly primary and secondary education and primary health care, the benefits of which largely accrue to the poor. Government's social safety net programs would also need to be expanded to help the extreme poor who suffered badly due to the political unrest.
Government should, however, keep in mind that safety net measures, though important, cannot alone eradicate poverty. Poverty can be reduced only by creating opportunities for new employment, including opportunities for self employment. The creation of such opportunities will require access to credit on concessional terms and easier repayment schedules. The small sizes of credit offered by NGOs and microcredit institutions at high interest rates and also for short gestation periods can hardly be utilized for productive purposes and creation of jobs. To create employment opportunities, government will need to undertake effective policy measures to stimulate micro and small enterprises (MSEs) and expand financing to these firms through national development banks or commercial banks.
Roads, highways, bridges and railways that were extensively damaged or destroyed during the days of shutdowns and blockades will need to be repaired on a priority basis. Government has rightly given a high priority to the development of the energy sector.
Besides exploring new export markets in emerging countries, Bangladesh will need to make regional cooperation in South Asia more effective. Most importantly, government and the garments industry must address compliance issues in order to regain the GSP facility in the US and avert the fear of cancellation of GSP by the EU. Garment industry must be asked to ensure strict compliance in order to come out of the crisis. In the present day world, there is no alternative to fully complying with global production standards, if Bangladesh were seriously willing to raise exports and enhance its global image as a successful and reliable exporting nation.
In order to arrest the decline in remittances, government should intensify diplomatic efforts to persuade friendly Middle Eastern countries to recruit more workers from Bangladesh. Similar to the recently agreed government to government deal with Malaysia to send migrant workers, agreements may be struck with other major manpower importing countries as well. It is also necessary for Bangladesh to take steps to send more skilled workers abroad to enhance the inflow of remittances.
For achieving accelerated economic growth, resource mobilization for investment is crucially important. Such resources should come through mobilizing domestic savings (both private and public), which will call for appropriate monetary and fiscal policies, or should be obtained in the form of foreign direct investment, which in turn will require appropriate, and internationally comparable, incentives.
Gross investment in the country is low, not just because of the low level of savings but also due to the slack in public investment. Since public development expenditure on physical infrastructure and human resource development is universally acknowledged to have a significant crowding in effect on private sector investment, raising public investment should be a top priority for the new government.
To fulfill various pledges announced by government prior to the recent national elections, government's expenditure is bound to increase. However, with budget deficit remaining within limit thus far in the present fiscal, government has room to increase its spending. Nevertheless, given the anticipated declines in revenue collection and foreign aid inflow, government will need to reorganize its expenditure priorities. It should not take up too many projects at the moment but concentrate mainly on the completion of the urgent projects and refrain from undertaking entirely new, costly, ones like building a second bridge over the Padma in addition to the one under construction, a second Jamuna bridge, or a modem international airport, all of which have long gestation periods.
The traditional belief that macroeconomic stability, by which is meant low budget deficit and low inflation rate, is a necessary condition for economic growth does not gain much ground in the unusual situation currently prevailing in the economy. Revenue collection is projected to remain below target in the present fiscal, and hence the increase in government spending may cause the budget deficit to rise, making additional government borrowing from the banking sector inevitable. However, since the budget deficit and government's borrowing so far in the present fiscal is within the target set in the budget, and the private sector credit growth, too, remains significantly below the central bank's programmed credit growth, fresh government borrowing from banks to finance essential development spending is unlikely to have any significant crowding out effect on private sector credit. Instead, increased public expenditure on infrastructure facilities will increase cash flow to the economy, stimulate aggregate demand, and at the same time remove the physical impediments to growth. Concerns over budget deficit should not therefore deter government from raising its expenditure on infrastructure development as well as on social sectors, such as education, health and safety net programs.
Bangladesh is failing to consolidate its past achievements in human resources development although in the immediate past it outperformed many developing countries in this area. The sole reason is the country's limited, and also declining, public spending in terms of GDP on social sectors. Public spending on health at only 1.2 percent of GDP, and on education at 2.2 percent of GDP, is grossly inadequate.
In order to promote human development, government should expand public spending on human development to at least 6 7 percent of GDP in the next as well as future budgets.
To promote exports, government will need to create adequate trade infrastructure and congenial investment environment and formulate sound policies to diversify the country's export basket as well as export markets instead of merely relying on cheap garments and a handful of traditional destination countries. Within the garments sector, the country would need to concentrate on producing high value items instead of depending on the limited range of low value products.
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