With the death of former prime minister Khaleda Zia, a long and eventful chapter in Bangladesh’s politics has come to an end. The reform initiatives launched under her leadership have had far-reaching impacts on the country’s economy and politics.
One of the most frequently used words in Bangladesh is ‘reform.’ In the country’s reality, it has always been among the most difficult tasks. After the fall of the Ershad government through the mass uprising of 1990, the country returned to a democratic system. During this period, many important reforms were initiated in politics and the economy. Subsequent governments tried, to varying degrees, to maintain that continuity.
Saifur Rahman, the then finance minister, led economic reforms during Khaleda Zia’s tenure. It is known that, as prime minister, she gave him full freedom in pursuing reforms. This is considered a significant step in Bangladesh’s economic transformation.
When M Saifur Rahman assumed office as finance minister in 1991, the fall of Hussain Muhammad Ershad had just taken place. Many describe Ershad’s decade as a dark period for the economy. Toward the end of his rule, some reform initiatives were taken under donor pressure, but they were not completed. Reforms in the tax system and the financial sector were particularly notable.
After taking charge, Saifur Rahman initiated major economic reforms. It should be kept in mind that Manmohan Singh became India’s finance minister at the same time. In this region, the reform process essentially began under his leadership. Globally, there was a wave of reforms, particularly in liberalising trade regimes. M Saifur Rahman followed that path, because at that time, there was no alternative to reforms for advancing the economy.
Soon after assuming office, the Khaleda government announced a new industrial policy in 1991. This led to rapid expansion of foreign investment and the private sector, particularly in small and medium industries. The policy allowed 100 per cent-foreign ownership and joint ventures without restrictions. This policy played a crucial role in the expansion of the private sector and the economy becoming private-sector-driven. All subsequent governments maintained continuity of this policy.
In addition, the foundation for social development was laid during Khaleda Zia’s first term. The Char Livelihood Programme, and the Ashrayan and housing programmes played major roles in poverty alleviation. At the same time, primary education was made compulsory in 1993. In the same year, the Food for Education programme was launched to bring children from poor families to school. Alongside this, secondary education for girls in rural areas was made free, and a nationwide stipend programme for female students was introduced.
VAT law
Undoubtedly, the biggest economic reform during Khaleda Zia’s tenure was the enactment and implementation of the VAT law. Under the 1991 law, value-added tax (VAT) was introduced for the first time in the country at the production and import stages. This opened up new avenues for revenue collection. At the same time, as part of free-market and trade liberalisation policies, import duties were significantly reduced.
Bangladesh’s tax-to-GDP ratio is still below 10 per cent. About 70 per cent of total tax revenue comes from indirect taxes, of which VAT is a major component. Despite this, the sharp decline in foreign assistance in the national budget (although foreign borrowing has increased in recent years) is largely due to VAT. This VAT system was introduced during Khaleda Zia’s first term. Within five years of its introduction, the share of domestic resources in the development budget increased from 21 per cent to 40 per cent. At the time, however, all political parties opposed the VAT law.
Economist and distinguished fellow of the Centre for Policy Dialogue (CPD), Debapriya Bhattacharya, has highlighted the economic reforms during Khaleda Zia’s tenure. He wrote, “From history, we can recall two such measures that have had far-reaching impacts on our economic development.”
The first was the introduction of VAT in 1991, and the second was the adoption of a flexible exchange rate regime after 2001. These two major reform initiatives were undertaken under the leadership of then finance minister M Saifur Rahman during two different terms.
Although the need for VAT and a flexible exchange rate regime was acknowledged, many of us were sceptical about the institutional preparedness required for such bold steps. In fact, the finance minister himself participated with us in open debates on the proposed measures. Saifur Rahman ultimately moved forward with these reforms. Looking back now, it appears that he was right. (“There Is No Alternative to Reforming the System,” Dr Debapriya Bhattacharya, Samakal, July 26, 2021.)
Dr Debapriya Bhattacharya further wrote, “Among Saifur Rahman’s contributions in undertaking various reform initiatives to help achieve budget targets, the formation of the Banking Reform Committee deserves mention. The committee’s recommendations on improving corporate governance in private banks and strengthening coordination between fiscal and monetary policy were highly important. Unfortunately, in recent times (referring to 2021), the number of directors from the same family on bank boards has increased, and controls on tenure have been relaxed, reverting to earlier practices.”
No new banks from in 2001–06
Another notable aspect of Khaleda Zia’s tenure was that no new private banks were approved between 2001 and 2006. Typically, new governments begin approving new banks, often granting ownership to party affiliates, where political considerations outweigh economic ones.
When the BNP-led four-party alliance came to power in 2001, discussions about new banks resurfaced. However, Bangladesh Bank conducted a study and stated that given the size of the economy, there was no need for new banks. Managing existing banks in line with domestic and international standards was already a major challenge. Giving due importance to the central bank’s opinion, M Saifur Rahman decided not to issue any new private bank licences. Despite political pressure, he resisted it. No new bank licences were issued during the BNP government’s five-year term. The Food for Education programme was also launched during this period.
Due to private-investment-friendly policies and strategies, progress in the industrial sector led Goldman Sachs to include Bangladesh in its list of the world’s 11 fastest-emerging countries in 2005 along with the countries such as Brazil, Russia, India, and China.
However, it must also be noted that from 2001 to 2005, Bangladesh topped the global corruption rankings for five consecutive years. In other words, there was no strong stance against corruption.
At the same time, the required level of investment in the power, energy, and infrastructure sectors did not take place, particularly in the power sector. As a result, after the Awami League came to power in 2009, it adopted various measures, including quick rental power plants, to rapidly increase electricity generation. This, in turn, opened new avenues for corruption.
Distinguished fellow of Centre for Policy Dialogue (CPD), Mustafizur Rahman, told Prothom Alo that during Khaleda Zia’s tenure, when Saifur Rahman was finance minister, several liberalisation initiatives were undertaken in trade. The tariff structure was rationalised, enabling Bangladesh to participate strongly in the globalisation process. The benefits of these initiatives were realised in the economy in later years. The Awami League later maintained this continuity, although it adopted somewhat protectionist measures toward the end.
Mustafizur Rahman further said that export incentives began to be reduced during Saifur Rahman’s tenure. At one point, export incentives stood at 25 per cent. As competitiveness improved, Saifur Rahman decided to reduce them, and they were subsequently reduced in phases. They have now come down to 4–5 per cent.
At that time, there was discipline in the banking sector. Bangladesh Bank exercised authority, and the situation of non-performing loans was not as severe. According to Mustafizur Rahman, there was an understanding that disorder in this sector would have political repercussions.
Overall, Bangladesh suffers from weak enforcement of rules and a pronounced lack of good governance. Among the reforms that have taken place, a large portion originated in the post-1991 period. Analysts believe that much of the credit for these reforms belongs to the Khaleda Zia government.