EVEN in the post-Covid period, the Bangladeshi economy was going to take a turn-around, with macroeconomic indicators posting positive signals. However, the Russia-Ukraine war began to cast a gloom by disrupting the supply chain, leading to the alleged imported inflation. But that was, as many would argue, only one side of the story that overlooked the domestic mismanagement resulting from incorrect policies. Ipso facto, Bangladesh has been grappling with gruesome inflation and other ailments for quite some time. The major indicators of economic health witnessed deterioration that is, a downward trend in forex reserves, revenue, and the value of taka, while inflation soared high. All these unexpected events stole talk shows and newspaper headlines in recent years but invited no further elaboration.
But the most recent painful picture comes from BBS data that depicts, to add sourness to the injury, double-digit inflation and a declining quarterly GDP growth rate. It is a commonsense perception that falling income and rising prices of goods and services would have put mounting pressure on consumers, who are already struggling in terms of declining purchasing power. By and large, one could perhaps speculate that a darker cloud is assumed to loom large on the horizon of the Bangladeshi economy, throwing a large number of people into poverty.
One of the emerging deterrents to a recovery of the economy appears to be the escalating tension in the Middle East. As we all know, the Russia-Ukraine war adversely affected our supply chain, pushing up the costs of production. The new threats arising out of the Iran-Israel war tension could turn things from bad to worse by blocking supply chains ringing around the Red Sea and other channels of supply. It is therefore expected that Bangladesh鈥檚 economic outlook could get worse, and the government needs to carefully manage the economy to ease the pressure on people.
Bangladesh鈥檚 economic growth stood, as BBS reports, at 3.78 per cent in the second quarter of the 2023鈥�24 financial year, attributed to the slowest pace in three quarters. The sharp decline in growth in manufacturing and services, which account for about 85 per cent of our GDP, has to be blamed for the situation. The reasons are not far to seek: import restrictions and the central bank鈥檚 restrictions affecting machinery imports to augment production. On the other hand, while inflation could be contained in other countries, unfortunately, Bangladesh has yet to see the soothing sign, whereas the inflationary spiral is consistently eroding people鈥檚 purchasing power. Thus caught in a quagmire, apparently inflation is increasing while economic growth is declining in Bangladesh 鈥� a situation not confronted in recent decades.
The consequences of this double conundrum of falling growth and rising inflation are quite understandable. First, and as often echoed by economists, the people鈥檚 income opportunity and purchasing capacity are declining, pushing a significant proportion of the people below the poverty line. Second, the country鈥檚 manufacturing sector is both export-oriented and domestic-oriented, but those aimed at the domestic market saw a decline because of a lack of effective demand caused by the reduction of people鈥檚 purchasing power.
Renowned economist Zahid Hussain (former economist, World Bank) identified three factors behind the overall decline in economic growth as revealed by BBS data: macroeconomic mismanagement, import restrictions, and a distressed financial sector.
We share the view that macroeconomic mismanagement became evident as inflation could not be controlled, which resulted in people鈥檚 reduced purchasing capacity.
Also, imports had to be restricted because of the crisis in the foreign currency reserves, but such a crisis could not be overcome as the foreign exchange market management was not properly tuned. There were sharp swings in the exchange rate following mistaken management of the exchange rate regime, eg, multiple rates for multiple sources of foreign exchange. The spectre of speculation in forex and commodity markets, following inflation and exchange rate volatility, did great damage to the economy.
On the issue of the financial market, allegedly, good borrowers do not get loans from the financial institutions; rather, bad borrowers are rewarded under the veils of different concessions. As a result, loan defaults reached historic highs, financial discipline was destroyed, and laundering, not internal investment, led the way.
The low tax-to-GDP ratio, even compared to neighbouring countries, reins. Citing Boston Consulting Group, as a recent book shows, one could possibly argue that if 25 million people with a per capita income of over 5,000 dollars could be brought under tax net within the next 7 years without imposing additional taxes, the tax-to-GDP ratio would perk at 20 per cent and investment to 40 per cent by 2030. It would be easier to collect taxes when people feel that corruption-free economic expansion is being carried out for the people at large, not to feed any favoured group. Second, the highest solvent stands at 89 lakhs, of whom only 9 lakhs pay taxes; many professionals, including actors and actresses, refrain from paying taxes. By and large, raising the tax-to-GDP ratio needs a hard-boiled political commitment, and the additional taxes would come from evaded sources.
The good news of a feeble rise in inflows of forex from both remittances and exports could turn pale following the latest threats of the Iran-Israel war, when fuel prices in the international market have started to increase. If fuel prices increase, then shipping costs and other commodity prices will also increase.
Caught in a quagmire, Bangladesh needs to pursue proper policies. Neither political nor economic dogma could lift us out of the woods, but a more efficient way of market management, severe restraints in public non-development expenditure, zero tolerance for corruption and market manipulators, and eyeing on attracting FDIs through burying bureaucratic barriers and a basket of business requirements could help stem the rot.
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Abdul Bayes, a former professor of economics and vice-chancellor of Jahangirnagar University, is now an adjunct faculty at East West University.
