Bangladesh is one of the most densely populated countries in the world having a population of around 160 million. The economy is rapidly transforming from agriculture based to industry and service based one. Despite, achieving significant landmarks in the fight against poverty especially through transformation of agriculture (increased yield), microcredit expansion and readymade RMG export, poverty remains still a daunting problem for a vast majority of the population.
The paper deals with trends in major fields of economic development and challenges for faster growth and equitable development for the common people. The paper does not include the most recent data and issues because it provides a historical perspective.
Poverty- Growth Nexus
During the decades starting from 1990s, faster growth rate has been identified as one of the causes in reducing poverty.
Bangladesh experienced two devastating natural disasters (flood, cyclone) in 2007 and the subsequent food price shock in 2008. However, the country’s real GDP growth was greater in the period 2005-2010 relative with previous periods. Poverty estimates based on the 2010 HIES show that proportions of poor people declined from 48.9 in 2000 to 40 in 2005 and then to 31.5 in 2010. The declines in extremely poor people were from 34.3 in 2000, to 25.1 in 2005 and then to 17.6 in 2010 (The World Bank, 2013). Around 12.4 million non-poor also remained highly vulnerable to poverty in 2010, so it is not just the poor but also those on the margins who are also susceptible (The World Bank, 2012).
During the period, growths in income and consumption expenditure were the main drivers of poverty reduction. In fact, growth during the first part of the decade (2000-2010) was more prominent than redistribution, for poverty reduction. The faster reduction of poverty due to growth only, in the first half of the decade has been accompanied by a worsening of income distribution.
Data also shows the situation of inflation and unemployment rates outside agriculture and emergence of increasing rate of informal sector employment, the full benefits of faster growth and transformation of economy did not benefit a vast section of poor. The official figure of unemployment rate shows an increasing trend, but the labor force survey (LFS) data do not include the under employed, self-employed unpaid family helpers to calculate the official rate of unemployment. In reality, the unemployment rate is higher than what depicted.
Estimation of historical changes in monetary policy (MP) stance and their subsequent impact on the economy, raise the difficult question.
The commitment to a nominal anchor like inflation rate itself says nothing about what economic variables are best suited to play that role. Should it be money supply, exchange rate, or CPI or combination of all? With the emergence of floating exchange rate, many emerging economies including Bangladesh have chosen inflation rate as a nominal anchor for MP.
In Bangladesh, the major issues are:
1.Inflation accelerated in 2011-2012 led by food prices.
- Inflation is affected by global prices of food commodities and prices of fuel, raw materials and intermediate goods (used for our manufacturing industries).
- Growth of reserve money, broad money, credit to private sector and to the government have been on the high side growth and inflation rates. Government borrowing from the banking sector and the Bangladesh Bank (which is alarmingly high) has not only created “crowding out effect” for private sector investment, but also has created inflationary pressure because government expenditures are not used for “real sectors”.
Over the last two decades, inflation is somewhat contained. Recently global prices of fuel & commodities have fallen which may attribute to contain inflation.
Private Sector Credit Growth
Conventional wisdom says that there is negative correlation between real rate of interest and credit growth.
These processes to be effective macroeconomic policy have to focus on both demand side arid the supply side. For example, monetary policy should create the conditions for investment and consumption demand to boost the production which will in turn result in the increase of employment leading to increase purchasing power of the poor. On the supply side, monetary policy can remove the impediments of the access of finance by the poor people. So, the role of SME enterprises, expansion of agriculture credit and financial inclusion to be duly emphasized.
The effect of the global financial crisis of 2007 on Bangladesh has been insignificant due to prudent policies of the Bangladesh Bank and steady performance of the external sector. Graph 4 shows the growth of import and export. The negative balance of trade is offset by steady inflow of foreign remittances from migrant people. Remittance steadily grew for US$10.9 billion in November 2009 to US $14 billion in FY 2014.Foreign exchange reserve also grew steadily from US $10.7 billion in November 2009 to around US $22 billion in March 2015. Deficit in current account emerged as US $ 1.3 billion in July- January FY 2015 compared to a US $ 2.5 billion surplus during the same period in FY 2014.
The deficit results due to weak export growth of 2.1% and a strong import growth of 16.4%. Slow export growth reflected the adjustment of the garment industry to stricter labor and safety standards (especially after suspension of GSP by USA and Rana Plaza Tragedy) and slowdown in demand from importing countries. The nominal taka/dollar exchange rate has been relatively stable, mainly because of interventions by the Bangladesh Bank, though real effective exchange rate(REER) has appreciated by about 33% since its trough in 2011.
Challenges in Fiscal Management
Despite increasing budgets from One year to the next year, very little has been done regarding the control of unsustainable government spending, borrowing and the need to increase revenue sources. The government is having budgetary constraints and running up increasing deficits- total borrowing from the financial system as of fiscal year 2011 was US $3 billion, of which $2.2 billion was from the domestic banking system. This amount represents a 40 per cent increase over 2010.
A significant portion of the government budget has been allocated to subsidies, which could put a dent to fiscal sustainability efforts if there are no price adjustments.
Revenue mobilization has also been inadequate- tax revenue mobilization in this case is very low. The tax system despite recent reforms is still poor. Mobilization of revenues is one of the lowest in the world and old policies and rigid administrative practices mean that the system has been very slow to bring in new income-generating activities within the tax net. Such weakness mean that a significant portion of activities remain untaxed in addition to rampant tax evasion. Bangladesh has the lowest tax —revenues to GDP ratios in South Asia- tax revenues have exhibited a very slow upward trend over the period 2004-2009. Compared to the world average of 13.5 percent, Bangladesh can collect revenues amounting to only 8.6percent of GDP.
Massive leakage in the form of wasteful public expenditures and corruption also pose significant challenges for fiscal sustainability in Bangladesh. The Hall Mark incident of Sonali Bank and massive irregularities in Basic Bank both state owned banks deserve special attention with respect to fiscal mismanagement. In the medium term at least, the government needs to commit to a budget which excludes certain forms of unnecessary spending and transfers. Revenue mobilization has to take greater precedence, both from tax and non-tax sources. Total domestic savings as a percentage of GDP have remained stagnant, which means that not enough savings are being generated for investment- one of the few alternatives against is to resort to public financing through borrowing. A more effective financial regulation has to be put in place to ensure whether credit/funds are being channeled into the productive sectors of the economy and are not concentrated in the hands of the select few.
Millennium Development Goals (MDGs)
The global poverty reduction efforts now rest on onto interrelated aspects.
(a) Achieving MDGs by 2015 and
(b) Moving forward with social protection and safety nets for the poor.
Bangladesh has attained satisfactory progress in achieving the MDGs. The areas where Bangladesh achieved the targets include goal 1- eradicating extreme poverty and hunger, goal 2-achieving universal primary education, goal 3-promoting gender equality and empowering women, goal 4-reducing child mortality rate and goal 6-combating HIWAIDS, malaria and other diseases.
Experts found that Bangladesh has some weaknesses in goal 5-improving maternal health, specifically maternal mortality rate and does not have any control on goal 7-ensuring environmental sustainability and goal 8-developing a global partnership for development. Besides these, Bangladesh has some weakness in employment generation (Goal-1, Target 1.B) and malnutrition (Goal-1, Target 1.C). The observations came at a press briefing on ‘Southern Voice on Post-MDG-Dhaka Expert Group Meeting’ organized at CPI] auditorium in the city, in January 2013 (The Financial Express, 2013)
We have to reduce percentage of poor to 29% by 2015; we have to reduce maternal mortality rate to 139, child mortality to 31 and enrolment to primary school to 100% by 2015. The gap is more evident in nutritional outcome of MDG goal. The poor in Bangladesh still suffer from nutritional deficiency which can be improved by increasing entitlement capacity of the poor to have balanced diet. I shall not go into various challenges and caveats we face, but will single out one of the most important challenges that are “institutional challenge”. Impact of various efforts for improving the socio-economic conditions of the poor in the developing countries can be maximized through proper management and implementation of development projects. Effective project management and implementation are also crucial for sustainable development. However, despite strong statements and rhetoric about the essential role of institutions, and the realization of its potential contribution in development efforts, the issues of institutions have received relatively little attention by policy makers, planners and implementers of development projects.
a) Political Instability:
The main challenge is the lengthiness and augmentation of political turmoil. This affects economy both in short and medium term. The lack of political stability results in lack of good governance, transparency and accountability of both public and private sectors. Political turmoil of late 2013 and early 2015 has resulted loss in the economy. Different estimates of GDP foregone ranges from 0.55% to 1.1% of GDP.
b) Lack of good governance:
Corruption, nepotism, political interference in economic activities result in inefficiencies, wastage of public fund and lower rate of growth, employment and poverty reduction.
c) Reform measures:
Reforms in financial sector, public enterprise and regulatory bodies should be carried out.
d) Growth rates:
Average annual GDP growth rate needs to be increased to 7.5% to 8% to be in comfort zone of middle-income countries by 2021. For this: (a) Investment to be increased to 32% from current 26% to 27% of GDP. (b) Increase employment (c) Increase quality of education and training (d) Increase total factor productivity (TFP), (e) Increase export diversification (f) Introduce of improved technologies in all sectors.
e) Mitigating adverse impact of climate change:
Bangladesh is vulnerable to environmental risks and climate change, which must be addressed properly.
f) Improve human welfare:
While growth is necessary, attention to distributional aspect of income and asset among people has to be addressed as well. This aspect coupled with higher allocation of resources to education, health, social welfare will result in increase in human welfare.
In the backdrop of gradual international integration, it would be important for the policy makers to monitor external factors as any external instability can easily be transmitted in to the internal economy. The risk factors for Bangladesh economy, in general include the following.
a) Insufficient infrastructure i.e., public capital mainly insufficient investment in power generation could be a major threat for growth,
b) Constraints in domestic revenue mobilization with continuing dependence on international trade tax, with direct tax collection increasing at a pace that is slower than the domestic Value Added Tax (VAT),
c) Low degree of monetization hinders normal flourishing of the equity market. A shallow equity market is subject to easy manipulation. The low level of financial development also characterized by the absence of effective bond and insurance markets,
d) Slow pace of complementary reforms to ensure improvement of environment for private investment including FDI, improvement of governance in public infrastructural facilities and utilities, regulatory framework for capital and debt market, contract enforcement through judicial process and transparency in public expenditure,
e) Lack of adequate human capital having enough technical or vocational education is one of the important challenges facing Bangladesh economy,
f) Constraints in the opportunities of investment by nonresident Bangladeshi in productive sectors.
Within this context, faster GDP growth consistent with the poverty reduction goals can be met if, firstly the efficacy and quality of regulatory bodies like Bangladesh Bank, Bangladesh Securities and Exchange Commission, Bangladesh Telecommunication Regulatory Commission, Bangladesh Energy Regulatory Commission advance significantly. Secondly, if the efficiency of the government bodies like Planning Commission, Tariff Commission, and Bangladesh Bureau of Statistics, Implementation Monitoring and Evaluation Division of the Planning Ministry enhances considerably. Thirdly, if the agencies responsible for promotion of business like Board of Investment (BOT) and Export Promotion Bureau become more dynamic and pro-business. Fourthly, if the bodies representing the business interests like Federation of Bangladesh Chambers of Commerce & Industry, Bangladesh Garments Manufactures and Exporters’ Association work in tandem with the government for sustainable and equitable development to ensure benefits of development to the people who are poor and disadvantaged. Last, but not the least, if and only if good governance with adequate transparency and accountability in both the public and private sectors is ensured.
To address these issues appropriate macro policies especially fiscal, monetary and trade policies combined with a set of heterodox policies, backed by political will and political stability (with democratic norms, rule of law and good governance), are necessary to enable the Bangladesh economy to grow at an accelerated rate in the medium term and pave the way for Bangladesh to become a “success case” of overall development.