Fahmida Khatun is executive director at the Centre for Policy Dialogue. She is a member of the governing board of BRAC. She is also non-resident senior fellow at the US-based research organisation Atlantic Council. She has a post graduate degree and PhD in economics from the University College London, UK. She has done post-doctoral research at the Earth Institute of Columbia University.
She has talked to Rafsan Galib of Prothom Alo about the current economic condition, crisis and solutions.
The last fiscal year has been considered as one of the worst fiscal years for the overall economy in the country's history. What is the government doing under the circumstances?
The government has taken a number of steps which are really limited steps. In many cases, those steps were not correct. The steps should have been taken in accordance with the crisis, Another thing is that the steps were not taken timely. When the crisis has deepened, only then did we come to realise that something has to be done. I think adequate measures have not been taken.
The Sri Lankan economy faced a deep crisis. Inflation crossed 69 per cent. Now they have brought inflation to 5 per cent, which is less than us. Why are we unable to do what Sri Lanka could do?
Sri Lanka has become a model for handling crises. When Sri Lanka fell into the crisis, that was an example, it is also an example as to how they have come out of the crisis.
Sri Lanka has given importance on two things-monetary policy and financial policy to tackle the crisis. All the countries across the world have used monetary policy to control inflation. Monetary policy has to be used if the inflation goes up high. Rate of interest on loans has to be increased. Other counties including Sri Lanka have done that. They all have increased the rate of interest on loans so that money flows less to the market. If money goes to the people, they will continue to spend money resulting in the rise of inflation. At this stage, steps have to be taken to rein in inflation. But we couldn't do it. Another thing is that a single step cannot solve problems if the problems are multifarious. Alongside using monetary policy, Sri Lanka has focused on collecting revenue. At the same time, they have taken measures to lessen administrative and government expenditures.
The Asian Development Bank in a report a few days ago said inflation in Bangladesh will decrease to 6.6 per cent in the current fiscal year. How optimistic are you about the forecast of ADB?
I am not optimistic to a great extent. The central bank for the first time has brought about a structural change in the monetary policy. So far they formulated monetary policy targeting money supply. But this time from July to December, they have formulated monetary policy targeting interest rates. They will try to control inflation. September is likely to end and the rate of inflation is increasing further. The food inflation has reached 12 per cent. If this situation continues for the next couple of months, I don't think the situation will change. And contractionary monetary policy is not enough if an expansionary financial policy is used. That is what is happening in our country. There is no coordination between monetary policy and financial policy.
Another thing is that monetary policy is not a static matter. Monetary policy has been formulated and the rate of interest on loans has been increased. If it is necessary to increase that, that has to be done. In such a situation, the rate of interest is increased in the US and in many countries of Europe. If the inflation decreases a bit, they keep the interest rate as it is for a few days. If inflation increases, they increase the interest rate. As a result, a policy will have to be taken considering the situation. If there is no supply of commodities in the market, the increase in the rate of interest will not yield any result.
Prices of commodities both locally produced and imported are lon an upward trend. There is a supply of locally produced commodities, but these come to market through various sections of middlemen. As a result, prices go up while there is an artificial crisis or various manipulations. In case of import, it is seen that a few big companies or groups control the market.
Now a commercial policy has to be adopted for these matters. Again, if there is no coordination among the policies, it would be difficult to rein in inflation. More companies will be granted permission for import. Then a competitive environment will grow naturally. This will help decrease prices of commodities. We have noticed inflation above 9 per cent in the last fiscal year. If underlying reasons related to the market are not settled, inflation will not come down dramatically in June this fiscal.
The price of goods is on the rise. Why does the fixing of prices yield no result? Every syndicate is making billions of taka from the market. Why cannot the government do anything?
The government can do everything if they have goodwill. It is not that the government does not know those who are manipulating the market. The question is whether they want to break the syndicate now. To do so, the number of importers must increase. Another thing is that supply and prices of goods etc. will have to be brought under management. When the price of goods increases, it creates noise and one or two steps are taken to tackle it. Then the price of other goods increases and the circle continues. This is nothing new in the country. Had an overall management or framework existed, it would have been difficult for the syndicate to take advantage.
Such management also makes it possible to import quickly in time of need. It also becomes easy to decide on import of which products are banned and from where; what sort of duty is imposed and what time it will require to import goods from which country. Now the price of goods increases and customers’ pockets become empty while taking decision and quick steps on import. There is another thing; when prices of goods rise excessively, at that time situation can be tackled to some extent by reducing customs duty, but it requires strong monitoring so that consumers can get the benefit of it.
Institutional capacity must be increased to take action against market manipulation and syndicate. There is a competition commission, for example, and many people do not know about its existence. Their capacity and human resources will have to be increased, as well as this agency will also have to be strengthened legally. The competition commission sues many companies, but these cases are not settled. There are laws on the punishment for syndicating, but we do not see the implementation of those provisions. The market cannot be controlled by slapping fines only.
Another thing is to strengthen the Directorate of National Consumer Rights Protection so that they can take effective measures. There is no benefit to taking action against wholesale and retail traders at the shops. Even though the government fixes the prices, traders have to buy products at higher prices.
Bangladesh Bank keeps printing money, which increases inflation further. They are not even listening to economists’ advice. Is there any way other than printing money?
First, we must look into why money is being printed. Because the government is borrowing from Bangladesh Bank; the government takes money from several domestic sources including commercial banks and the sale of savings certificates to run its development activities. No government wants to do so because borrowing from the central bank means taking money by printing. Now, why the government is in need of borrowing from the central bank? Because our monetary policy is expansionary; our development projects are being implemented with additional cost. Project implantation got delayed for various reasons, resulting in an increase in rise of expenditure. It also happens due to the rise in the prices of goods. On top of that, waste, corruption and irregularities persist.
Another issue is the administrative or operating cost of the government and we see no austerity here. There has been talk on austerity several times from the top level of the government, but we saw no reflection of it. We often see in the media that foreign trips do not stop, vehicle facilities have been increased, buildings are being constructed and promotion is being made even though there is no post. Now the election is approaching, so the government is taking initiatives to make the administration happy. As a result, the size of the government is increasing as well as its size. If this expenditure is checked, the government must borrow. Now other banks will lend whom -- the government or the private sector; it will create pressure on liquidity, and that is why the government has found an easy way and they are going to the central bank. For this, money is being printed and that is sprawling inflation.
Banks are caught with defaulted loans. The government, too, is borrowing from banks to meet costs. Again, Bangladesh Bank is providing money to banks to tackle the crisis. Since a liquidity crisis persists here, what is the way to tackle this situation?
The way can be found among these reasons. The amount of defaulted loans is on the rise. It has been increasing because the big borrowers, especially, those who are influential maintain a political nexus. They are taking loans, as well as defaulting. The question is whether they are defaulting to do business, to build a factory or increase production. This does not happen. Rather we hear that money from the loans is being laundered. We learned about this money laundering from the report of Global Financial Integrity, but that is not updated and complete. Such huge loans are being taken from banks, but it does not reflect in the investment in private or industry sectors. Where is the money going actually? The amount of defaulted loans is said to be about Tk 1.31 trillion, but the amount of loans with weak conditions is about Tk 3.77 trillion, which is over 20 per cent of the bank’s total loans, and that means the actual scenario is very tough. Now, institutions must be strengthened to come out of this situation.
The central Bank must be allowed to function independently. Banks must function independently following rules and guidelines. But these are not happening because of external interference. In fact, political decision is necessary for it. The interest rate was fixed at 6-9 per cent in April 2020, and that was a political decision. Now what the central banks is saying about monetary policy is also a political decision, but the central bank was supposed to take decision independently.
The finance minister said recently, “The economy is performing well, everyone is doing fine. Those who are saying the economy of the country is not well do not understand economics at all.” Now Bangladesh Bank and the finance ministry are sitting with economists to take their advice to mitigate the crisis. What are your thoughts on it?
It seems we need to learn economics from him. Economists analyse the economy based on government data. General people have felt the impact of the economy on their bones, and they can say about how good or bad the economy is performing and how much the economy has affected their lives. When their pockets become empty purchasing daily essentials at the market, when they have to cut their grocery list or return home without buying many things, they then understand how the economy is performing. Those who want to go abroad for treatment need dollars, and when they do not find it, they then understand how well the economy is going. So, we have nothing to say new here. The remark of the finance minister was very unfortunate, insensitive and impractical.
Now Bangladesh Bank and the finance ministry have started consulting with economists and that is a very good initiative. It should have started earlier. We expect the recommendations of the economists will be reflected in their policies now.
This report appeared in the print edition of Prothom Alo and has been rewritten in English by Rabiul Islam and Hasanul Banna