The new government – led by Awami League – is laser focused on tackling the persistent economic headwinds, treating the goal as its biggest challenge. To speed towards this goal, noted economists and business leaders recommended key short, medium and long-term steps.
As new faces are adorning the three major ministries – finance, commerce and planning – many believe implementation would become easier as the new ministers have no baggage. However, lack of experience could pose difficulties.
Experts however firmly believe that the end results would depend largely on political goodwill in the highest levels of the government.
Speaking to The Business Post, Policy Research Institute (PRI) Executive Director Ahsan H Mansur said, “First of all, the government should raise interest rates as much as necessary to rein in inflation and overcome the USD shortage.
“This will make the Taka more attractive, and then, the USD demand will decrease to some extent. This will stabilise the exchange rate, thereby reducing the cost of imports.”
Bangladesh has been facing skyrocketing inflation since last year. Average inflation was close to 10 per cent throughout 2023. The country had seen the highest food inflation of 12.5 per cent last year, which was the highest ever in a decade.
Economist Ahsan H Mansur believes that if the interest rates are increased based on the market, the price of goods may increase further, but this will be temporary.
“Since there is a problem in the economy, there is a price to be paid. But the price increase due to higher interest rates will come down in the following three to six months,”
Salehuddin Ahmed, former governor of Bangladesh Bank, thinks that it is not possible to curb high inflation by just increasing the interest rates. Instead, initiatives should be taken to increase the supply of products and commodities.
“A new monetary policy is going to be announced, and there should be a focus on how to increase credit to manufacturing-oriented medium and small industries. Along with this, the approval and recovery of loans must be monitored closely.”
Echoing the same, Federation of Bangladesh Chambers of Commerce & Industries (FBCCI) President Mahbubul Alam, said, “The business community is against raising interest rates further because this move hikes the cost of funds, which raises the cost of doing business.
“Instead of increasing interest rates, we need to boost exports and remittances to increase USD income. Besides, the tax system should be modernised and automated. There is no alternative to keeping the supply chain smooth to reduce inflation.”
A 9 per cent cap on lending rate was imposed in 2020 amid complaints by businessmen that the high interest rate was stifling investment.
However, the Bangladesh Bank lifted the cap last year as an initiative to increase interest rates to curb inflation. But instead of leaving the interest rate entirely to the market, the SMART [Six months Moving Average Rate of Treasury Bill] method was introduced.
Several economists criticised the move as SMART is not a market-based interest rate, and has little to no effect in tackling inflation, and reducing money flow in the market.
Ensure good governance
The amount of defaulted loans in banks exceeded Tk1.5 lakh crore last year. Economists say the volume of such loans would be close to Tk 4 lakh crore if the sector takes into account rescheduling, pending cases and write-offs.
Under such circumstances, economists and businesses are pressing the new government hard for steps to ensure good governance in the financial sector. They recommended reforms in other sectors as well.
Salehuddin pointed out, “For ensuring good governance in the financial sector, the Bangladesh Bank, Bangladesh Securities And Exchange Commission (BSEC) and other regulators need reforms.
“Key officials of these organisations should be brought under accountability. Export diversification should be achieved as part of these reforms. Tax reform has become quite necessary in boosting revenue.”
“The existing government enterprises should be reformed as well to make them more profitable,” said Ahsan H Mansur.
Mahbubul Alam said, “We hope that the new government will take initiatives to ensure good governance in financial institutions. Along with this, corruption should be reduced and business-friendly policies should be maintained.”
Reduce budget, curb money laundering
Economists have advised the new government to reduce the budget, saying that such a move will ease the implementation of monetary policy – which the central government is going to announce soon.
Ahsan H Mansur said, “The new finance minister should reduce the budget expenditure. In that case, if Tk1 lakh crore can be reduced from the budget of FY24, this budget will be able to support the monetary policy more easily.”
The Bangladesh Bank should not print money under any circumstances to meet the budget deficit.
The government has announced a budget of Tk 7.61 lakh crore for FY24. The budget deficit is Tk 2.61 lakh crore. To cover this shortfall, it has set a target of Tk 1.02 lakh crore from foreign sources and Tk 1.55 lakh crore from domestic sources, of which Tk 1.32 lakh crore from banks.
Former governor Saleh Uddin pointed out, “The government should reduce wastage. Emphasis should be placed on increasing foreign direct investments (FDIs). The cost of sending remittance and migration should be reduced.
“Along with these initiatives, money laundering should be stopped immediately. Otherwise, the depletion of reserves cannot be stopped in any way.”
During the last term of the current government, the country's reserves reached a maximum of $48 billion in 2021. It later fell to $20 billion this January 11.
Political goodwill a must
Former Foreign Minister Abul Hassan Mahmood Ali has been appointed as the finance minister. Ahasanul Islam Titu, the former president of Dhaka Stock Exchange, has been appointed as the State Minister of Commerce.
Former army officer Abdus Salam has been appointed as the planning minister.
Ahsan H Mansur said, “The country’s key economy-related ministries are a bit different this time, as the finance, planning and commerce ministries are new faces. The benefit is that they have no baggage, so they can show something new.
“But everything depends on the political goodwill of the highest level of the government.”
It could take three to five years to tackle the crisis this country currently is in, believes Mansur, also a former official of the International Monetary Fund (IMF).
