Pragmatism key to absorbing economic shocks, recovery

The government needs to play a more active and pragmatic role in creating a fiscal space capable of absorbing economic shocks and recovery, so that the local economy and social security measures can be strengthened further.

For Bangladesh, the USD crisis, high inflationary pressure, and debt burden are visible shocks during the ongoing economic crisis. Meanwhile, poverty, inequality and declining employment opportunities are invisible shocks, and the government should focus on these segments.

Economists made the remarks in the 6th SANEM Annual Economists’ Conference (SAEC) 2023 in the capital’s BRAC Centre Inn on Saturday, organised by the South Asian Network on Economic Modeling (SANEM).

Addressing the event, eminent economist Wahiduddin Mahmud said, “We need more coping power in terms of having sufficient foreign exchange reserves to avoid the balance of payment (BoP) crisis, and need more fiscal space to be able to stimulate the economy.

“I also recommend an active, capable and pragmatic government with sufficient institutional capabilities to overcome the crisis. There must be at least some key government agencies that are well-resourced and professionally competent enough to identify problems, work out solutions and act promptly.”

In the inaugural session, SANEM’s Executive Director Selim Raihan presented the keynote, mentioning that the Bangladesh paradox – development even under weak formal institutions – does not seem to be helpful in building resilience.

He added, “Despite the macroeconomic success, Bangladesh is confronting several long-standing challenges that are undermining resilience such as a very low tax-GDP ratio, high amount of nonperforming loans, and weak governance in the banking sector.

“Besides low level of foreign direct investment, misalignment of exchange rate hurting export promotion and diversification, a large amount of illicit outward money transfers, and high amount of subsidies are also lingering challenges.”

Experts for banking sector reform

One of the top issues in the conference discussion session was the banking sector. Experts made a strong recommendation in favour of reforming this sector.

Economists warn that a weak banking system has become a vehicle for the capital fight.

Wahiduddin Mahmud, a former adviser to the caretaker government, said, “A weakly governed financial system is unable to prevent illegal capital flight abroad, which is likely to take place at times of economic uncertainty.”

Centre for Policy Dialogue (CDP) Chairman Rehman Sobhan said, “The Bangladesh Bank is providing a rescheduling facility to defaulters, which seems like a waste of resources. Such loans are not getting repaid despite such facilities.

“This trend is harmful not only to banks, but to the entire economy, country and society. When someone is taking this facility, he is not repaying. This has been going on for over ten years in many cases. It damages competitiveness, as well as the economy.”

Need special attention on IMF conditions

The IMF has given several conditions against lending $4.7 billion to Bangladesh for mitigating the ongoing USD shortage, including a reduction in defaulted loans, amendment to the Bank Company Act, increase in tax-GDP ratio, and removal of interest rate cap.

Economists however believe that political decisions are necessary to meet these conditions and the amount will help Bangladesh only slightly.

Wahiduddin Mahmud said, “IMF has not imposed tough conditions. It has been said that defaulted loans should be reduced. Can the IMF reduce defaulted loans? I have decades of experience in the industry, and I know it is a purely political decision.

“The situation is the same regarding the IMF recommendation of increasing the tax-GDP ratio increase.”

At the programme, State Minister of Planning Shamsul Alam said, “The international lender did not impose any condition on Bangladesh, instead it gave some recommendations. The government will follow these suggestions.”

Policy Research Institute (PRI) Executive Director Ahsan H Mansur said, “The IMF didn’t impose any tough conditions, it is very easy to meet by the government. But the county’s main problem now is the negative financial account.

“Bangladesh needs to collect more foreign direct investment to meet the gap.”

Debt burden and mega projects

Economists say even if the current debt-GDP ratio is yet to cross the red line, a debt repayment crisis may be in the offing.

They added that a crisis will hit Bangladesh if there are too many mega-infrastructure projects taken up through foreign funding without an understanding of whether such projects will attract enough private

investment, especially in export-oriented industries.

At the same time, any mega project needs to be completed in time once started, since a delay in implementation is significantly costly to the economy. That is why mega projects need very careful scrutiny in terms of timing, financial commitments, cost recovery and prioritisation.

“Just going for any project just because it looks prestigious and for which suppliers’ credit is available irrespective of priorities and future debt financing obligation, is simply not the way to go,” said Wahiduddin Mahmud.

Declining reserves

Experts say, instead of thinking about the amount of reserves in Bangladesh, the country should look at why the reserves are decreasing so rapidly.

Wahiduddin said, “One decade ago, the reserves stood at $3 billion, but there was no such crisis then. It will not be possible to deal with the crisis in a chaotic manner by controlling imports. In this case, good management should be ensured considering all aspects.”

There is confusion about the amount of reserves Bangladesh has.

Bangladesh will have to calculate reserves under the IMF formula from next June, which will decrease the amount by $8 billion or more.

Wahiduddin said exporters have a quota account, known as ERQ. The USD in this account has been spent. But it is being calculated in the foreign exchange reserves. He thinks that the severity of the banks’ USD crisis was triggered by the spending of greenbacks in the ERQ.