Middle income trap can be evaded by breaking four shackles

The old challenges will loom larger before the government than before. The problems we have seen pertaining to inflation, macroeconomic stability and economic management, have not been resolved as yet. No measures were taken to address the basic problems that have been afflicting the financial sector for long. As the right steps were not taken at the right time, newer problems have emerged.

The level to which our foreign currency reserves have dropped does not bode well at all. The foreign currency exchange rates are also not stable at all. Remittance and export revenue are the main driving forces of our economy and both sectors are unstable. The increase of remittance through official channels is very low. Money has been siphoned out of the country for long. And hundi is being used as the medium for money laundering. Because of hundi, remittance comes in through unofficial channels rather than official channels. Even exports are not steady, sometimes doing good and sometimes bad.

When the foreign exchange reserves were plummeting, a serious crisis was emerging in the dollar market. But the measures taken then to control imports had a negative impact on the overall economy. The main impact fell on investment. The raw materials to capital machinery, serious harm was done. Controlling imports can only be a short-term solution, and cannot continue for long.

For long we have noted a lack of leadership in resolving the problems of the financial sector. The problems have been viewed in an isolated manner, rather than holistically. Right up till before the outbreak of Covid, the economy was fine. We have macroeconomic stability. When we were going through good times, we did not raise questions about taking the right steps at the right time regarding economic policy. But now that we have fallen into a crisis, the economy has brought forward these questions looming large before us. Do we have answers to these questions? The unfortunate truth is that in most cases our policymakers do not have the answers.

For example, we have weaknesses in revenue collection. Over the last one and a half decades, several large projects have been taken up for our infrastructure development. These projects require funds. With a serious deficit of adequate funds from domestic sources, our dependence on foreign funds is on the rise. This crisis is worsening because we are unable to ensure adequate revenue collection. This is not simply due to economic reasons, there are political reasons behind it too. There is a large group who do not pay taxes, but enjoy all sorts of benefits and facilities. They are influential. A system has emerged where these influential groups get tax exemptions, tax cuts and also evade paying taxes. But hardly any action is ever taken against them. This culture that has been firmly established. This is a major cause behind Bangladesh's economic crisis.

The former finance minister was probably referring to the foreign exchange reserves. IMF has released the second tranche of the loan. But they may be stricter about releasing the third tranche. In the case of the second tranche, Bangladesh failed to fulfill two of the conditions. When they sit to review the second tranche, they may be stricter in seeing how far their conditions are being met.

I want to raise a fundamental question here. We are viewing the IMF conditions as conditions. We feel that these conditions must be met in order to get the loan. But we should have felt the urgent need to fulfill these reforms on our own accord. We need reforms on an even much larger scale than IMF has mentioned. IMF is not talking about reforms in our education and health sectors. We need wide-scale reforms in our social safety net programmes too.

On one hand we are taking loans, without thinking of about either repayment or how to utilise the loans appropriately. Most of the loans are being taken for infrastructure development. There are two problems with this. One is cost overrun. That is, the final expenditure is much higher than initially estimated in the budget. Then we have to take further loans. Next, the project takes a much longer time to complete than estimated. As a result, the benefits from the project do not quite tally with the projections in the feasibility study.

If there was optimum use of the foreign loan, we would see a flow of foreign exchange. There is no improvement in this area. Other than a few, no specialised economic zones have started up. If at least 10 to 15 specialised economic zones could have been started up fully and foreign investment brought in, the pressure on repayment of external debt would ease somewhat.

Bangladesh is still receiving certain trade facilities as a least developed country. Any economic pressure from outside would be most unwarranted. The question is, how to avoid such pressure. The problem was created in the political arena and the solutions lie in the hands of the politicians. They must make an effort, the government in power must take initiative. We hope they take steps to absolve the tensions create with the countries of the West.

We are dependent on one product (readymade garments) for exports. And the destination of our exports is also chiefly two regions (the European Union and North America). Alongside increasing our export destinations, it is high time we diversify our exports.

While high inflation continues in Bangladesh, it is being controlled in neighbouring countries. Their central banks have taken on an independent role. They are taking measures such as putting up interest rates and adopting a contractionary monetary policy. These countries are also doing comparatively well in their tariff policies and market management. The question is, if they could take such measures, why could not Bangladesh? Three factors are at an extreme here during this high inflation period - delays in taking up policies and strategies, not taking the up the right policy at the right time, and lack of coordination.

Sri Lanka's central bank governor recently came to Bangladesh to attend an international conference. He was asked how Sri Lanka turned around from such a disastrous situation. Among many points, he said that the central bank was allowed to act independently. There were no interventions from the political leadership. Herein lies Bangladesh's weakness. Bangladesh Bank is still not independent. They are unable to function independently particularly in resolving problems of the banking sector.

We want to be optimistic. We are seeing attempts to control inflation by increasing interest rates, albeit late. A contractionary monetary policy has been announced. This was a demand of the times. This will sent interest rates up. People's demands will contract, but the measure has been taken very late. The inflation was high, interest rates were till kept fixed at 6 per cent and 9 per cent. But it will not be possible to control inflation by the monetary policy alone. There are two more factors here -- tariff policy and market management. Our market management is extremely weak. There is a lacking in surveillance, monitoring, transparency and accountability. There are many unscrupulous businesspersons who manipulate the market in many ways. They hike the prices of commodities. The government institutions that are supposed to take measures against this, take some isolated action, but nothing effective.

There needs to be coordination between the monetary policy, the tariff policy and market management. We see an alarming absence of integrated efforts among Bangladesh Bank, the commerce ministry, the finance ministry, NBR and other government institutions under a single head. It is now clear that unless we take integrated action, we will not be able to tackle this crisis. The solution will drag on.

One of the main reasons for income inequality is the scope of work in the labour market is restricted to just a specific few areas for the poor. There is very little mobility there. Unless education for all can be ensured, this disparity will simply increase. Some may say that primary education is for all here. But what is required is quality education for all. One's work in the labour market is being fixed by which ever sort of educational institution one has attended. In the case of health too, we see that whoever has money, avails good healthcare. Those without money do not have access to good healthcare. Many poor people have to sell their property to avail medical treatment.

Another area of inequality here is inequality in wealth. Wealth is being amassed by certain people, whether through legitimate or illegitimate means. When there are a high number of loan defaulters, tax evaders and corruption in society, this leads to a disparity in wealth. We all know the sources of this inequality. But unless measures are taken to block these sources and the economic management that strengthens the sources remains in place, the inequality will rise. If we cannot block the sources of income disparity, Bangladesh will become an even more unequal society. The youth will grow all the more restless and frustrated.

The demographic dividend is a gift. But it will end after a certain span of time. Studies say that we will receive the dividends of this demographic up till 2034-35. It will begin to dwindle from them on. University students have an obsession for jobs in the civil service. But only a fraction of the burgeoning number of these youth successfully can join the civil service. Yet they go on trying year after year. Their labour, time, talent, everything goes to waste. Our society, our economy is being deprived of their service.

If the production sectors in the economy could flourish, they scope for their employment could be created there, then the youth would not be so obsessed with government service. So who will join our production sectors? Just as our growth narrative has been strong over the past 10 to 15 years, our employment narrative has been equally weak.

A priority list should be drawn up of the projects undertaken. Our economy is not going through good days, a crisis prevails. Our major priority at the moment is to revitalise our economy. If we now start taking fresh loans for mega projects, pressure on our economy will simply multiply. It would be foolhardy at the moment to take up fresh mega projects.

Given the level of development we have reached and the economic targets we have fixed, it is rather shocking to see the state of our banking sector. There could be an explanation for this. Despite a multitude of problems, the readymade garments sector and remittance keeping the banking sector afloat. There is a glaring lack of good governance in the banking sector. No one will disagree that sweeping reforms are required in the sector. High loan default, one financial scam after the other, influence of powerful quarters, the Bank Company Act, none of these is conducive to the banking sector.

The previous finance minister spoke of forming a commission in the banking sector. We never saw that come to fruition. The banking sector requires an independent commission. The economy will not be able to go far with the present state of the banking sector. In the case of many other countries, we see them stuck in the middle income trap. We will remain stuck in this middle income trap unless we break the four shackles -- weaknesses in the banking sector, low revenue collection, dependence on a single product in exports and low public expenditure in the education and health sectors.

Thank you too.