Budget should focus on tackling inflation, wooing foreign fund

With rising import costs jacking up inflationary pressure, the government should keep devaluing taka as needed, raise interest rates, and undertake foreign aid-based projects in the upcoming budget to rein in inflation and keep the foreign exchange market stable, former lead economist at the World Bank’s Dhaka office Dr Zahid Hussain told The Business Post’s Ibrahim Hossain Ovi and Talukder Farhad in an exclusive interview

What are the ways to reduce inflationary pressure?

An analysis of the causes of inflation and the imbalance of foreign trade shows the two are closely linked. As a result of rising commodity prices in the international market and growing domestic demand, import costs have gone up while inflation and the imbalance of foreign trade are increasing.

The solution is to reduce import costs.

We need to see whether the initiatives taken by the government so far to reduce imports and save dollars are being implemented. Taka needs to be devalued more. Attempts to stabilise taka by supplying dollar to the market will only make the problem worse.

The cap on interest rates should be made slightly flexible. This will reduce the flow of credit, which will have an overall impact on consumer demand. In addition, the budget deficit needs to be decreased to some extent, which will also reduce the government’s debt burden. These two measures can help handle the situation to some degree.

However, reducing imports by devaluing taka will increase inflation, which is something we have to accept. That is why the amount and scope of social protection for the poor should be increased. We also need to intensify social safety measures both in cities and villages. The question is where this money will come from.

The simple answer is to reduce the cost of imports, and the savings can be used to increase assistance for the poor. The 2 per cent remittance incentive can also be cancelled, and the money can then be used for that purpose.

Now the government is spending about Tk 4,000-5,000 crore from the budget on remittance incentives. But as dollar rates have risen (and perhaps will rise more in the future), remittance receivers are getting more money than before. So there is no point in continuing incentives. On the other hand, families that receive remittances are not poor. Hence, helping the poor should be prioritised over them.

Which source needs more emphasis to cover budget deficit?

Foreign exchange reserves are volatile, and stabilising them should be emphasised. Besides, foreign sources need more focus to meet deficits this year. Doing this will kill two birds with one stone – the budget deficit will be filled and forex reserves will increase.

The government needs some structural reforms to increase fund inflow from foreign sources. Bangladesh will receive direct cash assistance for these reform projects, which will increase foreign exchange reserves.

Some reforms are underway in the areas of finance, energy, taxes, and the development of a one-stop service for improving the ease of doing business. If these are further strengthened, the amount of cash received will also increase. On the other hand, there will also be post-reform benefits.

In addition, more new foreign aid-based projects are needed, which can also help increase reserves. Apart from this, there should be an emphasis on utilising the promised foreign aid. There should be measures for quick disbursement of the aid that is in the pipeline.

The reliance on domestic sources will reduce if money can be raised from foreign ones. This will also reduce the government’s expenditures, and the savings can then be spent on other purposes.

Is it possible to increase domestic and foreign investments by reducing corporate taxes?

As I said before, necessary reforms need to be implemented to increase investment. Economic zones need to be completed quickly. Foreign investment will not increase overnight; it will grow gradually.

Our current challenge is to keep foreign exchange reserves stable, which needs more attention. Foreign funds will grow if we can implement the structural reforms that I mentioned earlier.

We also need to see if we are ready to deal with any major setbacks in exports. The budget should identify the problems in export diversification and also explain the steps needed to resolve those.

Bangladesh may impose a carbon tax as part of export reforms, which will widen the export market in Europe as many countries in that region are very serious about climate change. These countries will consider such initiatives in the future.

Europe has already included some matters in its trade policy. They consider the carbon emission rates of the products they import. They also consider the initiatives taken by the exporting countries to reduce carbon emissions.

The European Union has not yet considered our garment industry that way. But when it will, the exports of environment-friendly factories will rise. On the other hand, the exports of non-compliant factories could be at risk.

It is necessary to assess whether export subsidies are yielding the desired results. If subsidies do not increase export destinations and products, it means the problem lies elsewhere. We have to identify the problem and take initiatives to solve that.

What initiatives can be taken in the budget to increase employment?

Employment will depend on our improvements in private sector investment. Investment growth depends on appropriate reforms. Without those, investment will not increase.

The economic zones getting more attention from investors should be completed fast. Otherwise, investment will not increase. Employment will not rise if investment does not grow.