Citing Bangladesh's economic instability — marked by a fragile banking sector, taka devaluation against the US dollar, high interest rates, government borrowing, loan defaults and debt overhang, eminent economist Debapriya Bhattacharya, a distinguished fellow of the Centre for Policy Dialogue (CPD), has said that there is no silver bullet for dealing with inflation.
Attributing these issues to corruption and mismanagement by the ousted government, Debapriya has shared his views on the path ahead for the interim government in an interview with this correspondent of The Business Post.
What will be the fate of Bangladesh in terms of its economic outlook after the current shocks?
I think the government must address three sets of problems underpinning its priorities.
The first is mitigating the current shocks emanating from the recent youth-citizens’ movement. The second is stabilising the economy, with a particular focus on taming inflation and managing the exchange rate, which have been afflicting the economy for the last couple of years. The third is the much-needed structural reforms—whether in the banking sector or domestic revenue generation.
The length of the government’s tenure, which is not decided in many ways, will determine the level of ambition in terms of managing, stabilising, and undertaking structural reforms.
The government has to prioritise dealing with the shocks, getting the administration back in place, getting the supply chain functional, finding new leadership for public institutions, and keeping its external commitments and relationships—that is what it is currently doing.
As the government is only a week old, we should allow them time to gradually move on from dealing with the shocks to stabilising the economy, and finally to implementing reforms.
What steps can the interim government take to stabilise inflation, foreign debt, capital flight, loan defaults, etc.?
There is no silver bullet for dealing with inflation. So far, Bangladesh's approach has focused on contractionary monetary policy, devaluing the taka, and raising interest rates—steps that are necessary but not sufficient given the economy’s structural challenges.
The focus must now shift to the supply side, which involves enhancing production, improving the movement of goods, and ensuring a consistent supply of raw materials. Recent gains in improved transportation and reduced extortion have positively impacted supply, underscoring the effectiveness of such efforts.
Food security remains a critical issue in light of the ongoing Aman planting. The government must ensure that farmers receive the necessary inputs, including energy for irrigation, particularly in vulnerable regions like southern Bangladesh and haor areas. Proactive measures to prevent crop loss from floods and to ensure proper procurement at incentivised prices are essential.
Policymakers need accurate production data to make informed projections on the availability of key commodities, such as salt, sugar, and edible oil. Timely import arrangements are crucial to prevent mismatches that could harm both producers and consumers while benefiting privileged importers and hoarding syndicates.
Debt management also requires urgent attention. A task force should assess the country's external and internal debt sustainability and repayment capacity. This is particularly important with significant projects like the Rooppur Nuclear Power Plant (RNPP) already entering the repayment phase. Proper utilisation of pending disbursements from multilateral and bilateral sources must be ensured.
The energy sector, with its unused capacity despite installed infrastructure, presents a complex challenge. A reassessment of the contracts with the independent power producers (IPPs) and their payment structures is needed. Energy pricing impacts not just production and manufacturing, but also households and the broader service sector, making it a critical issue for the entire economy.
CPD has suggested a lot of reforms. Will they be continued, or will there be new recommendations with the interim government in place?
The banking sector demands priority attention. Reforms are needed across the entire financial sector, including the central bank, scheduled banks, non-banking financial institutions, and the capital market. It is critical to form a competent banking commission to chart the way forward.
Key reforms should focus on increasing transparency in estimates of non-performing loans (NPLs), capital adequacy, and compliance with standards. Political interference and the appointment of independent directors are critical areas of concern.
For example, the Banking Companies Act, 1991 needs review concerning term limitations and the tenure of directors, as well as provisions for appointing independent directors and executives. The competence and credibility of corporate governance are also issues.
We believe that the banking division, currently under the finance ministry, needs to be transferred to the central bank. Finding a competent and committed central bank governor is itself a big challenge at this moment for the institution.
Many more reform suggestions will come. It will all depend on the ability of this government to deliver. Ability is determined by, on the one hand, aspiration and ambition, and on the other hand, the reality on the ground and the capacity to deliver. Time will tell.
CPD and other colleagues have already suggested many ways forward, but the unfortunate part is that the ousted government did not bother to consider these suggestions. We hope and pray that the interim government is going to act on them and consider these suggestions as early as possible.
What structural reforms would you suggest?
Structural reforms must begin with addressing the resource generation capacity of the new administration. In this country, very few people pay taxes, and the tax system relies heavily on indirect taxes like value-added tax (VAT), which disproportionately affect those with limited means. Public finance management, particularly domestic resource mobilisation, is crucial. This involves expanding the taxpayer base without putting an extra burden on existing taxpayers.
Another pertinent area of reform is the effectiveness of public expenditure, including the Annual Development Programme (ADP) and revenue expenditures such as subsidies and transfers. The focus should be on improving impact through better allocation, delivery, and management, especially to benefit disadvantaged communities.
Local government also plays a vital role in improving the livelihoods of vulnerable citizens. Building capacity, devolving power, and ensuring corruption-free delivery of essential services like health, education, and social protection, free from political or elite interference, is another priority area for structural reforms.
