‘We will have to bear hardship for next couple of years’

Wahiduddin Mahmud

In an interview with Prothom Alo, economist and former caretaker government advisor for finance, Wahiduddin Mahmud speaks about various aspects of the ongoing economic crisis, how it came about and the way ahead.

Q :

How do you view the ongoing economic crisis?

Whether we call the present economic situation a crisis or hardship, the nature and the depth of the problem must be perceived. We are all aware that the source of the problem ostensibly is the adverse state of the global economy. But the weaknesses in economic management that have prevailed for the past decade or so, are responsible to a great extent for the present situation. The visible hardships are, firstly, the rapid rise in the price of the dollar, especially in the kerb market. Along with that, here is also concern about the foreign exchange reserves. Secondly, there is the matter of inflation, particularly in the matter of food products. On top of that, the price of fuel oil has increased. The abnormal increase in the price of such a widely used product as diesel, has especially had a serious impact on the overall economy.

Overall, people’s lives are under tremendous pressure. Certain other points of contention have arisen. For example, problems in the financial sector, increase in default loans and capital flight, have been prevailing for long. There is also controversy over Bangladesh Bank’s setting the bank interest rates. Then there is the question of funding the proposed mega infrastructure projects and the implementation schedules, and the backdrop of seeking loans from international agencies, IMF in particular, all leading up to the present circumstances. These problems are all inter-linked and one cannot be segregated from the other. In such circumstances, the alternatives in setting policies are never very pleasant or easy. One has to choose from the lesser unpleasant alternatives and that is disconcerting. This situation demands reliable facts and figures as well as serious thought and analysis.

Q :

You have related the overall problem in a nutshell. Could you elaborate further on certain issues, for example, the dollar price and the pressure on the reserves. How real are the apprehensions?

For many years we were in a good place with a balance in our foreign transactions due to our export earnings and remittance. Then again, the foreign loans or assistance that we would take every year was basically to implement development projects, not for our foreign currency reserves. Our forex reserves at the time were growing steadily. However, in the 2021-22 fiscal, the scenario completely changed though at that time we received much more net foreign loans, around USD 14 billion. Even with such huge loans, we failed to meet the deficit in our transactions. To the contrary, the reserves fell further. In the current fiscal too, if the trends in foreign transactions continue in this manner and the situation persists, our reserves will steadily dwindle, not matter how much loans we take. This will be felt in the coming years when the burden to repaying the loans increase. However, we are not in a situation like Sri Lanka going bankrupt or Pakistan close to such a predicament. Our problem is not like that. They miscalculated in taking loans and were caught in the trap of repaying these loans. Our problem is still not about repaying loans, though the annual amount of repayment is on the rise. After three or four years, the amount to be repaid will increase. So unless we are cautious now, the liability of loan repayment will create problems.

Our present predicament has been created by import expenditure increasing far more than remittance and export earnings. So even though we are getting more overseas loans than before, this is not adequate to cover the huge deficit in current earnings. Dollars are being taken from the reserve and released in the market. Even then the dollar price is not stabilising. But there is hope in the fact that this year too our exports have increased considerably. Then again, expenditure in import of raw materials for the readymade garment industry has also increased. Even so, if the export trend rises, that will give some relief. Remittance sent in from the Middle East may also increase. The countries of the Middle East are not likely to be affected by global recession. The price of fuel oil is going up. So if we do not make a serious policy error, it will be possible to restore balance in our overseas transactions. We will not face a situation like Sri Lanka or Pakistan.

Q :

Questions are also arising about reserves. There are problems with the exchange rate too.

We have made certain mistakes in the management of the reserves and the taka exchange rate. Perhaps the increase in our reserves made us complacent. In a country like ours, reserves are increased to avoid any risks in the future and also to generate confidence among the foreign investors and loan providers. Reserves should not be regarded as funds to be invested in projects, like the budgetary funds. But that is our way of thinking. Some way or the other, a part of the reserves has been allocated somehow. That is why questions have arisen about the actual amount of usable reserves. We have also taken up several mega projects in one go, giving very little thought to repayment of the loan liability.

In 1990, India had reserves of USD 1 billion. That country’s economy is seven times bigger than ours. They had increased their reserves now to USD 600 billion. Even so, the price of the dollar has gone up in India and reserves have fallen. But that had not caused alarm. But we kept up the taka value against the dollar and dipped into the reserves to release dollars in the market. Instead, if the price of the dollar was allowed to increase gradually and the reserves were replenished by buying dollars from the market, then we would not have suddenly felt this so sharply. The economy would get the chance to adjust with the higher priced dollar and the panic would not have been created.

The price of the dollar has gone up in other countries too. But in an import-dependent economy like ours where industrial raw material, commodities, food, fertiliser, everything has to be imported, the dollar rate puts heavy pressure on inflation. We are now seeing a wide margin between the rate fixed by the bank and that in the kerb market. Perhaps the panic led to this situation. Then again, the lack of a clear policy created speculations and restlessness in the dollar market. Now siphoning out capital by means of hundi has become very easy.

Q :

Inflation pressure was also created by the global economy and certain decisions of the government.

There is direct link between the dollar and inflation in an import-dependent economy like ours. As it is, the cost of many products which we import from the international market has gone up. This has been exacerbated by fuel oil prices, particularly the extreme manner in which the price of diesel has been hiked. This has created a sort of uncertainty and panic in the overall economy. Panic does not bode well for the economy.

We have the capacity to generate power, but are having to load shed because of the oil problem. Industrial production costs are going up and this is pulling back our competitive edge in the market. The abnormal hike of the fuel price has also given rise to questions about our energy policy. I am not an energy expert, but certain things have caught everyone’s attention. For example, there is no congruity between the manner in which the power generation capacity increased and the source or supply of fuel. Other than that, a handful of businessmen were given a monopolized opportunity for power generation in the private sector. The contracts were tailored in their interests. This had increased a large sum for expenditure in the budget. Yet instead of exploring for gas, we have taken up an import-dependent energy policy, particularly becoming more dependent on LNG, diesel and fuel oil. Now that we have found ourselves in dire straits, we are planning gas exploration. Even if this is implemented, it will be years before this yields results.

Q :

Why do you think the price of fuel had been increased so much?

The sudden hike in the price of diesel is perhaps linked to our biggest weakness in economic management. Due to weaknesses in revenue collection from income tax or profits, that is direct tax collection, we have become more dependent on indirect tax like import duty and VAT. Yet in principle, VAT should be imposed only on consumer goods. Yet in this country, taxes are imposed on an essential commodity like fuel so as to collect revenue. This has been happening since the introduction of VAT in the nineties. It is true that the cost of diesel has gone up in the international market, but we could have sold it at the price of the international market without increasing our prices if we were not so dependent on fuel for revenue. If the tax on fuel was adjusted, then there would be no need to increase fuel prices in this manner.

When the price of fuel was low in the international market, the state- -run BPC, as the sole supplier made huge profits. Making huge margins of profit by selling fuel is not a good policy at all. If investment was needed in the energy sector, then it could be given from the budget allocation as in the case of other projects, as is being given in the power generation sector.

Q :

The excessive hike in fuel prices will pitch the agriculture sector into a crisis too.

It is not just the price of diesel, but the increased price of fertiliser too that is raising costs of agricultural production. Our food security is linked to this. We still depend on the international market to import rice and wheat. Prices have gone up there too. Then again, there was very little rain this monsoon and crops in higher areas, like the aman crop, required irrigation. With the price of diesel going up, this will be a problem for the farmers. And more than that, normally the rains leave residual moisture in the soil so the boro crop can do with less irrigation. So problems may arise there too.

We also have very limited capacity to stock fertilizer and food grain. Now there is talk of special subsidy. This is being said about the farmers who have fallen below the poverty line due to inflation. There is talk of rationing to assist them. There is need to expand the social safety net. But where will the funds come from? If this increases the budget deficit, there will be inflation again. This too is a vicious cycle. In this instance we have similarity with Sri Lanka. Where our revenue ratio with the GDP is 10 per cent, in Sri Lanka it is around 12 per cent. These two countries have the lowest revenue earnings in the entire South Asia.

Q :

The problems are acute in the financial sector too.

There is nothing new to say about the mismanagement in the banking sector. It seems there has been deterioration here rather than improvement. Default loans are a massive problem. This has a link to capital flight. There has been a lot of talk about preventing capital flight, but it is difficult to say if the government is strongly committed to this or not. We have made a money laundering prevention act. Bangladesh Bank has an automatic system in place to keep record of large transactions. Billions of taka just can’t disappear from the banking sector. Footsteps can be traced in these transactions. If we probe into these, we at least will be able to understand the methods of capital flight. If we do not halt over-invoicing in imports, under-invoicing in exports, or having a local partner overseas just as a façade to siphon off funds abroad, or send the funds by ‘hundi’, if we have no idea of the money laundering methods, how can we ever stop capital flight? If we analyse such transactions, it will even be possible to an extent to identify those behind this money laundering.

Q :

Many countries are increasing interest rates in order to reduce inflation. But Bangladesh has said it won’t increase interest rates. What should be done?

A debate has emerged over interest rates. During the Covid pandemic, as part of the stimulus given to business and industry, a ceiling was fixed on interest rates. But business does not need so much support any longer. We have debated over interest rates in the past too. In the eighties, as part of market-oriented reforms, and at the behest of the World Bank and IMF, the interest rate was left to the market, other than for a few priority sectors. Then too there had been arguments for and against fixing a maximum ceiling on interest rates or removing any ceiling whatsoever. We are having the same argument now. The argument in favour of removing a ceiling on interest rates is that if we lower it, then all big powerful businessmen will walk off with huge loans. And according to the accessibility of the loans, others who have the potential of being good entrepreneurs, whose investment productivity is perhaps more, may be deprived of availing loans. In other words, efficient distribution of financial resources is not done in accordance to productivity. That is the textbook argument in favour of liberal interest rates. IMF and the World Bank follow this argument.

But there is another angle to Bangladesh’s reality. If interest rates are completely open, then this will encourage those who want to take up very risky projects, those who are intentional defaulters, knowing that they will not have to repay loan, or will have it rescheduled with lowered interest rates. If a loan is rescheduled repeatedly and if inflation is taken into account, in many instances the actual interest rate even becomes a negative sum. This has happened in the case of all the big defaulters. Then there is another group who launder the money. They walk off with the loans. And genuine investors simply can’t cope with the high interest rates.

So given the circumstances of our country, adopting a middle position would give the best results. So the interest rate that has been fixed at present, should be lifted. That does not mean that we will not monitor the situation. Turkey is much more developed than us, but an economic crisis has emerged here too. That bears some similarity with us. Fixing interest rates is a populist policy and also somewhat appeases the businessmen. The Erdogan government dismissed three of the country’s central bank governors in succession because they had wanted to lift the ceiling on interest rates. Here, instead, we can fix another ceiling.

Q :

There is also little talk about large infrastructure projects now. Have we created a crisis in this area too?

Many people are placing the blame on large infrastructure projects for the crisis. Perhaps we were over enthused by the strong state of our forex reserves and took up too many mega projects for which we will have to pay our liabilities. There was need to pay more attention to prioritizing the projects and cutting costs. Bu it is also true that calculating the profit and loss of a huge project like Padma Bridge is extremely complex. It is a very political matter. But funds must be considered when taking up big projects. Then again, communication facilities increase with such infrastructure projects and the benefits are visible. But in economic consideration, the actual profit of such costly projects depends on how much investment is attracted. If, in particular, this increases investment in export-oriented industries, then the weight of foreign loans is not a problem. That applies to the case of Vietnam.

If we make a list of all the large mega projects around the world, be it over a river or an expressway over land, we will notice that most of these are in developing countries. Even if China is on the list, the other counties are not such fast developing economies like China. There are projects like this in countries of Africa and Latin America too. Yet in comparison, these countries do that have any world class universities. After all, it is extremely difficult to create an Oxford or Cambridge or a Harvard.

That was just an analogy. But the fact remains that a balance is required between infrastructure and human resources. If one side sags low, the benefits cannot be reaped.

We managed to successfully build the project over the mighty river at a huge expenditure. Yet we have been unable to free hundreds of rivers and wetlands across the country from illegal encroachment. This does not need money, just the application of the law. If that can be done, the infrastructure of the river routes would be developed for sure, and it would be a boost for environmental and flood control too. But we have not looked into the profits and losses of that.

Q :

So what is the way forward?

In conclusion I can make an assessment of the entire situation by saying that we are not in the same problem as Sri Lanka or Pakistan. Repayment of our loan liabilities is not our actual problem. But we certainly will have to channel our overseas transactions in a more positive direction. I believe that can be done with firm policies in place. If I am not wrong, we will not face a situation like Sri Lanka. But we will have to bear much hardship over the next couple of years. I see no policy in sight that will assuage the sufferings that our common people are facing due to this inflation. This is extremely painful. It is not only the lower income people who are suffering, the middle class lives are under pressure too. In order to tackle the situation, the government policies should have an analysis of the circumstances. The problems are all interlinked. There needs to be coordination and transparency in the policies so even if there is hardship, it will not be so alarming. The uncertainty will not be so acute.

We will be able to emerge out of this situation eventually, but we must learn from our past mistakes. We must overcome the weaknesses in our revenue collection. We must place more emphasis on human resource development. We must resolve the anarchy, the lack of values and disregard for merit in our education system.

A new challenge that looms before us now is that Bangladesh is leaving the LDC status. We must diversify our exports. Alongside investment, this will require development in technology and human resources. We also have to determine how we will negotiate and navigate in the global economy. For example, Vietnam already has signed a trade agreement with the European Union, another China-based economic bloc has been created, SAARC is not functioning, but neighbouring India quite a few years ago went to ASEAN and is becoming an important partner there. Such deals require a good amount of acumen in economic diplomacy. So we need to turn our attention to the weakness of our economic management. In this crisis, the only good aspect will be if we can take a lesson from our weakness and determine what we will do in the days ahead. That will make it easier for us to prepare as a higher middle-income country.

Q :

Are we failing to overcome the present crisis as we are busy appeasing powerful quarters by providing them with all benefits and facilities? What is the political economy of this crisis?

Our problem is that we have made the economy more businessman-friendly than business-friendly. We have been providing large industrial groups with excessive facilities, with no equal opportunities for many potential and promising entrepreneurs. It was therefore not possible to provide a level playing field for all. The direct and indirect fall out of this has been capital flight, loan default and an overall pilferage of the economies limited resources.

The weaknesses in the banking sector are not directly visible, but are gnawing away at the foundation of the financial sector. It is the common people of the country who bear the burden of this in one way or the other. Before a regulatory framework was set up in the eighties, we made the mistake of giving permission to open banks in the private sector. This enabled the owners and directors of the banks to withdraw huge portions of the common people’s deposits as loans, most of which remained in default. Bangladesh Bank drew up many rules and regulations after that and with the active intervention of the High Court, managed to remove around 70 owners from the board of directors and forced them to return their loans.

But in recent times, with the regulatory framework in the banking sector becoming lax, the old problems linger on and new ones emerge. According to market economy, we have provision to buy bank shares and change bank ownership through acquisition. Yet in a sensitive area like the financial sector, we have not installed any regulatory system against business monopolies. This was yet another mistake. South Korea too had initially lent patronage to big industrialists, but with conditions attached and for a fixed span of time. So before crony capitalism is created, a business environment conducive to competition was created. This did not provide them with the scope to control political and economic decisions. We made big businessmen in Bangladesh too, but the big challenge for the political economy now is to be able to create a business-friendly environment. If they gain too much power, the powerful quarters will obstruct any change. If they manage to get more benefits and facilities in the existing system, they are hardly likely to be interested in changing it. So unless we have a strong political commitment to change, then like the Chinese proverb, we will just continue going where we are going. But we will no longer be able to achieve on this path as we did before.

* This interview appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir