Economy faces a stiff challenge in the new year

As Bangladesh enters the new year and prepares to meet the prevailing economic and political challenges, it has become imperative to assess the present economic realities of the country. This is assessment is not just essential for determining financial policy, but also for the necessary reforms of the overall economic framework and programmes.

There are several complex problems existing in the present economic context that must be resolved through integrated and strategic thinking. Inflation, the crisis in foreign exchange reserves, investment inertia and unrest in the labour market, all must be resolved through integrated planning.

While highlighting the priority areas in preparing for the next national budget, the importance of an extensive reform programme must also be brought to the fore. Structural changes must be brought about in the revenue policy, the banking system, the industrial policy and the trade system by means of this programme. Inclusive policies are required to establish economic stability and long-term grown in the country, aimed at resolving not only such short-term problems like inflation or trade balance, but to address larger structural inconsistencies too.

Under such circumstances the government must ensure through an effective integrated initiative that it is possible to maintain macroeconomic stability and take the country ahead along the path of sustainable development.

The main cause of the prevailing economic crisis is continuous inflation which has not abated as yet. Bangladesh Bank over the past two years has repeatedly increased interest rates, but this has not had much effect on inflation. Bangladesh has failed significantly in this area, while neighbouring countries have been able to keep inflationary pressure under control.

The previous government had been accused of not taking due measures to keep inflation under control. But the present interim government has not been able to show much success in this area either.

The main cause behind this failure is a lack of coordination between the monetary policy, the revenue policy and domestic market management. The policy makers must now understand that these measures remain scattered and ineffective without an integrated strategy. That is why the interim government's top priority should be controlling inflation and providing assistance to the law income people by means of social safety nets.

Bangladesh's export earnings and remittances provide hope. The recent positive trends in these sectors have somewhat improved the foreign exchange reserves, which is an important indicator for economic stability. But a consolidated and integrated policy is required to hold on to this success and positive trend.

The economic sector, the readymade garment industry in particular, has been the main driving force of Bangladesh's economy. However, labour unrest, tensions within the factories and problems related to worker safety emerge as a major obstacle to proper initiatives for this sector. Unless an effective solution is brought about to these problems, this may have a negative impact on export growth and the foreign exchange earned through this. This will require protection of labour rights, ensuring a favourable work environment and effective reforms in industrial relations management.

Remittance flow has played an important role in boosting forex reserves in recent times. In order to increase use of legal channels and to encourage remittance, it is essential to implement digital banking, mobile financial services and improved policies. It will be possible to increase this flow further by means of incentive packages for expatriates and developing an expatriate welfare fund.

In the meantime, the standstill in private sector investment is having a long-term negative impact on the country's industrial and employment sectors. High interest rates, unstable law and order situation, and the lack of a business-friendly environment  pose as a major bottleneck to investors. The government must take measures to attract investment, such as reforming the investment policy, simplifying the tax administration and improving law and order.

The foreign exchange market is another area of concern. Bangladesh Bank is showing signs of going towards a more market-dependent exchange policy, but it is essential to implement this at the right time and through the right process so that import costs and inflationary pressure do not go up further.

This change should be carried out by means of a well-organised strategy so that business establishments and consumers can be duly prepared. But the lack of strong economic management within the interim government so far has not been very conducive to tackling these challenges.

Lack of coordination regarding economic issues is increasing concern in policy formulation and implementation. This is a time when the interim government must display effective and extensive interventions to tackle these challenges.

The white paper which was submitted on 1 December clearly detailed the corruption in the mega projects of the part government, the unlawful capital flight, the extensive spread of crony capitalism and the various illegal benefits and facilities that were taken.

This report is an important document for the interim government and has necessary directives for adopting measures against these corrupt processes. By implementing the recommendations of the report, the government can start the process of resolving the basic reasons behind the corruption and irregularities. This includes important economic, political, administrative and judicial sector reforms which should be reflected in the priorities of the government's activities.

The 5 August mass movement gave rise to hope for united efforts in national reconstruction and reforms. But reality steadily grows complex. Differences of opinion  over the extent of reforms, the tenure of the interim government and time of the next national election may divert the interim government's attention away from economic priorities. A disruptive political environment can harm the efforts to resolve the crises, which is gradually affecting the purchasing power of the general people.

The policymakers must take such steps that provide the people with economic relief and, at the same time, set a path for long-term reforms. The steps include concerted efforts to control inflation, creating an extensive social safety net and tackling the supply side of inflation by investing in agriculture, energy and  transport infrastructure.

At the same time, the aim of the policy makers should be to establish a strong foundation for far-reaching reforms in the important economic, political, administrative and judicial sectors. There is consensus among the stakeholders regarding economic reforms including reforms in revenue management, reforms of the tax system, restructuring the banking sector, and modernising trade and investment policies. However, there are clear differences about political parties and the new political groups over political, administrative and judicial reforms.

It is important to ensure that these differences to not weaken the pace of economic reforms. If these conflicts are not controlled properly, these might obstruct the efforts to resolve the prevailing economic problems. That is why the interim government needs to pay due attention to economic reforms and also to pay attention to dialogue and creating consensus over other institutional reforms. Addressing the long list of these priorities requires well-defined leadership, effective communications and commitment to steady progress by the interim government.                                         

* Selim Raihan is a professor of economics at Dhaka University and executive director, SANEM. He may be reached at [email protected]

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