Laser-focus on key issues must for economic stability

Bangladesh’s economy is currently navigating troubled waters, so the government must formulate strategies laser-focused on key issues such as rampant inflation and reserve crunch, while ensuring better transparency to restore the country’s macroeconomic stability.

The Centre for Policy Dialogue (CPD) made the observation in its third review of the Bangladesh economy for FY23, presented on Saturday at a press conference at the think tank’s Dhanmondi office in Dhaka.

CPD recommends a more transparent, accountable and inclusive budget for FY24, while calling for caution against reducing subsidies. It supports not cutting subsidies in the agricultural sector to safeguard food security, and a gradual reduction in energy and other sectors.

The think tank says Bangladesh should reform in line with the International Monetary Fund (IMF) conditions, but should keep the country’s interests first in mind. Besides, the government should avoid falling under the influence of influential quarters while formulating policies.

CPD also recommended firm implementation of existing laws and policies to reduce default loans.

Presenting a keynote at the event, CPD Executive Director Fahmida Khatun said, “Bangladesh’s economy has never been in this situation before. So the policies in the upcoming year’s budget should be considered carefully.

“The country’s focus should be on increasing revenue income. For this, leakages must be stopped. Besides, ongoing austerity measures should be continued for non-productive and administrative sectors.”

Reduce fuel prices by Tk5-10/lt

The government should balance subsidies on the basis of overall economic situation, and be wary of the impact of subsidies for a sector suddenly withdrawn, CDP says.

In some cases, it may not be appropriate to cut subsidies in sectors such as agriculture. But for many other sectors, subsidies can be phased out gradually, such as incentives for exports and remittances.

The money saved on cutting such subsidies can be spent on social safety net programmes.

CPD pointed out that the Bangladesh Petroleum Corporation (BPC) is currently making profits, so there is an opportunity for the government to reduce fuel prices.

The country can prepare a formula-based periodic price adjustment mechanism for petroleum products, review the tariff and tax structure, and conduct an institutional audit of BPC to ensure transparency and accountability.

Diesel in the country is currently selling for Tk 109 per litre and octane Tk 130 per litre. The government collects about 17 per cent – 18 per cent as CD, VAT, AIT and AT. Withdrawal of 5 per cent AT may not have an impact on retail prices as it is adjusted with VAT.

BPC is likely making profits of about Tk 5 per litre from diesel sales and about Tk 13 per litre from octane sales under current prices.

“So, there may be an opportunity to reduce petroleum prices between Tk 5 – Tk10/litre,” said CPD Senior Research Fellow Towfiqul Islam Khan.

CDP pointed out that it is not good to increase prices to fulfill the conditions of the IMF, and these conditions can be met through internal reforms.

In this context, CPD Research Director Khondaker Golam Moazzem said, “The burden of price hikes can be passed onto the private sector without increasing pressure on consumers. For example, the capacity charge of electricity must be withdrawn entirely.

“The ‘No electricity No Pay’ policy should be the norm for every new contract, and existing contracts should be reviewed as well.”

Curb inflation

According to the Bangladesh Bureau of Statistics (BBS), inflation soared to 9.24 per cent in April this year, surpassing the government’s 5.6 per cent projected rate for FY23. Inflation target will be set to 6 per cent in the upcoming budget.

CPD, quoting an international comparative analysis, reveals that basic food product prices in Bangladesh exhibit no decline, despite a decrease in international prices. Furthermore, the data indicates that certain essential food items show a persistent tendency to exceed global prices.

Among these four commodities, rice and beef are primarily domestically produced, while soybean oil and sugar are predominantly imported.

The CPD recommended lifting the interest rate cap on loans to mitigate inflation. However, the rate should be under reasonable limits after lifting. Besides, the government’s borrowing from the Bangladesh Bank should be reduced in a bid to cut inflation.

Fahmida stated that all over the world, monetary policy is used to curb inflation by raising interest rates, but Bangladesh is walking in the opposite direction by capping the interest rate.

“Inflation is increasing due to direct borrowing from the central bank. There should be a standard on how much loan can be taken from the regulator,” she added.

External sector

Due to internal weaknesses, as well as external sector pressure, Bangladesh’s economy is now in a worse condition than ever before. In particular, the financial account deficit in balance of payments may worsen the crisis in the coming days.

Although exports are now good, it should be reviewed whether the import is being suppressed too much. The CPD warned that Bangladesh’s economy may come under more pressure if the imports continue to decrease.

The think tank has called for unraveling the mystery of why remittances have not increased in proportion to the highest export of manpower in the history of the country after Covid-19 pandemic.

Distinguished Fellow of CPD Prof Mustafizur Rahman said, “Our economic stability now depends on the external sector. It should be investigated why remittances are not increasing despite exporting so much manpower.

“Also, we should check whether the remittances are entering the country as gold?”

Regarding the exchange rate, this economist said, “The USD rate is now closer to the market price. We think it should be left to the market.”

Very high revenue shortfall

Targets of revenue mobilisation for FY23 will be missed by a large margin. Total revenue shortfall could be as high as Tk 75,000 crore in current FY. Considering potential shortfall, the likely tax revenue target will need to show around 37 per cent to 40 per cent growth.

Without new sources, the revenue shortfall will remain very high and will constrain the fiscal space significantly.

The policy related to the rationalisation of tax exemption provisions should not be left to the vested interest groups, and should prioritise small and medium businesses and the people, said the CPD executive director.