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Re-creating confidence within the economy
Contradictory signals and diverse reports continue to create headlines on a regular basis about the state of health of the Bangladesh economy. To say the least, it has been a mixed bag.
We are being put under severe pressure both on the external trading front as well as within the domestic consumer index. On the consumer front, fresh increases in prices have left housewives in tears over onion. It has been a similar story with other essential items like soyabean oil, flour, potato, fish, broiler chicken and powder milk. Consumers are unhappy about the persistent inflation. This phenomenon has become that much more controversial given the fact that India, or neighbour, continues to be able to contain inflation within the single digit.
On the external front, in recent weeks, we have read about the difficulties being faced by exporters in the RMG sector as well as in the fish export sector. It appears that China is emerging as a big threat in both these areas.
Ordinary citizens are also faced with the fear that, sooner than later, there is the possibility of a further hike in fertilizer, gas, power and fuel prices. Such a step is gradually becoming inevitable given the fact that the government can continue to subsidise only up to a point with regard to the demand and supply process of such commodities. The other day a report indicated that the overall loss of Bangladesh Petroleum Corporation for this fiscal year is likely to hit Taka 4,500 crore. This is on the assumption that the current upward trend in international fuel pricing will continue. It is also being anticipated that the overall annual import bill of this Corporation is likely to touch US dollar 3 billion for the first time. It is gradually becoming a Catch-22 situation.
As expected, the relevant authorities within the government are trying their best to put a lid on the situation by pointing out that suitable fiscal and monetary measures are being undertaken to maintain a tight control and to ensure that the recent flooding does not greatly affect our economic progression.
Two reports -- one issued by the Bangladesh Bank and the other by the Economist Intelligence Unit, have injected cautious optimism about the near future of the economy. From that point of view, they are being viewed as significant.
The Bangladesh Bank has observed that the near-term outlook for this fiscal year is not going to be as difficult as was earlier anticipated. Their quarterly analysis published recently has taken note of the current downside risks and the overall macro-economic impact of the flooding on agriculture and infrastructure. It has been suggested in this report that reallocation of resources within the existing Annual Development Programme and quicker disbursement of international assistance might eventually help us to avert any major crisis. The Bangladesh Bank is in fact claiming that it has already introduced the process of recovery by issuing directives with regard to allocation of credit in the agricultural sector. This has been a practical decision and if implemented properly will be of great help to the flood affected rural community. This measure will also eventually assist in sustaining growth of rural domestic consumption. This will be crucial in the coming months in the northern parts of Bangladesh.
The London-based Economist Intelligence Unit (EIU), widely respected for its analytical observations, has also pointed out a glimmer of hope despite the overcast economic landscape. It has projected that Bangladesh's economy, despite all its current travails, will continue to grow at about 6.5 per cent during the 2007-09 fiscal years. The composition of growth will apparently be similar to that of 2006-07. This has been based on the assumption of record inflows of workers' remittances that are currently not only underpinning activity in the services sector but also making a positive contribution in the manufacturing industry. It may be noted here that remittance inflow in the first quarter of the current fiscal year jumped by 16 per cent to US dollar 1542 million from US dollar 1350 million for the same period in last fiscal year. This has probably been helped by the Bangladesh Bank approving guidelines for drawing arrangements between banks operating in Bangladesh and exchange houses abroad.
The EIU report has however also highlighted that inflation will continue to entrench itself as the Bangladesh Bank does not appear to have any plans to tighten its monetary policy in the coming months. This connotes that there is a great possibility of combination of forces pushing the cost of living even further upwards. That is not good news.
Added to this spectre of inflation are several other factors that affect perception of our economic health. It is becoming clear that business confidence has fallen. Credit growth has slowed and net assets held by banks have also declined. This indicates slower activities in the banking and private sectors. Domestic credit grew by a meagre 0.76 per cent to Taka 1,556 crore in July. This means that businesses were reluctant to seek bank loans. Another worrying factor has been the fall in the figure for time deposits. Fear about queries by relevant anti-graft agencies might have scared off many depositors, but another reason might have been inflation. We all know that inflation eats into interest earnings and lessens the incentives of long-term depositors. When inflation is over 10 per cent (as it is currently), and the deposit rate is 7 or 8 per cent, depositors lose 2 to 3 per cent in real terms. It would be pertinent to note here that such downward trend in time deposits could have a negative future impact on the economy as the bBanks might eventually end up as avoiding long-term investments.
It is true that Letters of Credit have increased by 29 per cent during the first two months of the current fiscal year to US dollar 3,590 million. However, this has largely been due to the huge import of food items and fuel oil at enhanced prices. It would consequently be wrong to interpret this economic activity as a movement forward or stimulation of the economy in real terms.
In fact, there are worrying signs that domestic and foreign investments have also weakened over recent months despite the gradual upsurge in the stock market. Domestic investors are being reluctant in expanding capacity. This is probably also due to anxiety that such expansion might become the subject of inquiry by government agencies interested in seeking answers to unexplained wealth and in the scrutinising of financial instruments.
Fighting graft and making corruption an expensive alternative have been a success of this interim caretaker government. However time has come for greater flexibility within the accountability mechanism. This is particularly pertinent with regard to policy related areas where there is scope for effective re-adjustment pertaining to multi-dimensional aspects of many overlapping issues. Having a Truth Commission is hardly a solution. There is also need to focus more seriously on the inclusive process of divergent stakeholders.
We have already been informed that this government has decided to form a Policy Advisory Council under the Finance Adviser and a Better Business Forum under the direct supervision of the Chief of this government. This will be consistent with promises made recently during discussions with representatives from the business community. These are good ideas whose time has come. However, further delay in this regard might exacerbate the delicate situation and make it even more complex.
The economy is in dire need of coordinated policy decisions that will generate confidence among the economic operators. The early operationalisation of such institutions will provide valuable advisory services that are required to meet the challenges that Bangladesh business is currently facing within the external environment, particularly in its export markets to the USA and the Euro related area.
The government could also use such institutions to obtain more specific views with regard to difficult decisions on big foreign investment proposals. Specialised economists in these institutions could help to identify common ground on policies related to exploitation, management and ownership of the country's energy resources. The recommendations arrived at through consensus could then be placed before the next elected government for implementation.
We have to improve the outlook for our economy. Positive factors have to be identified and supported. This is necessary for stimulating growth of domestic consumption in areas other than food related items, in the rise in investment, in augmenting employment and in the increase in productivity of both labour and capital.
Muhammad Zamir is a former Secretary and Ambassador who can be reached at mzamir@dhaka.net
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