Economy After 1/11

by S H Zahid

In the words of Hua Du, the   country director of the Asian Development Bank, the Bangladesh economy is now facing the most difficult challenge in its history.

Devastations caused by natural calamities—two consecutive floods in the months between July and September and cyclone, Sidr, in November—to property and food crops, soaring prices of fuel and commodities in the international market, weak demand for RMG in the US market, and sagging business confidence in the aftermath of the crackdown on the corruption by the interim administration, all combined, are now posing a serious threat to macro-economic stability. Hua Du while releasing the Bank’s quarterly economic update on Bangladesh economy last week referred to the major problems facing the country’s economy.

However, Finance and Planning Adviser Dr. Mirza Azizul Islam does not see any major crisis in the economy in spite of the November 15 cyclonic storm. He, however, does admit the fact that high food prices would persists for some more time.

Multilateral donors and economists are now certain that the GDP growth rate this fiscal would be less than what was originally projected, 7.0 per cent. The central bank or the finance ministry is yet to come out with a revised GDP growth figure but the International Monetary Fund recently said the economic growth rate this year would be around 5.5 per cent and the ADB in the latest update said the growth is expected to be below 6.0 per cent.

According to the latest economic growth projection, the agricultural growth this fiscal is likely to fall to 2.2 per cent from 3.2 per cent in the last fiscal because of the floods and cyclone. Shortfall in food production this year is estimated to be around 1.8 million tons. The government has in its own stock about 0.75 million tons of food grains. It will have to ensure import of, at least, 1.0 million tons of food grains as early as possible since the prospect of local procurement seems to be very bleak.

All attention is now focused on the next Boro crop, the major rice crop grown during winter months. But much would depend on the timely availability of fertilizers, diesel and other inputs in adequate quantities at the farmers’ end.

The situation in the industries sector has not been at all rosy in the past months. As against a robust growth of the sector in last fiscal because of the steady expansion of the export-oriented manufacturing and a rise in domestic demand. But since the beginning of the current fiscal, things in the industries sector, apparently, have gone wrong. Exports have slowed down because of the decline in export demand, mainly from the country’s largest export destination—the USA.

The drive against corruption, black money holders and tax evasion and eviction of illegal business by the present interim administration caused some fear and uncertainty among the business and investor community. Investment activities slowed down and imports of capital machinery and raw materials declined. The number of projects registered with the Board of Investment between January – September period this year was 1206 compared to 1482 registered during the same period of 2006.  Similarly, the value of investments registered with the BoI between January-September this year was less than 50 per cent of that of the same period last year.

Since its coming to power in January 2007, the present interim administration has been able to maintain macro-economic stability and revive the structural reform agenda despite a difficult global environment and adverse weather. 

While revenue performance and implementation of the annual development programme continue to be problem areas, the present government has successfully restored fiscal discipline, to some extent. In contrast to higher than targeted money and credit growth during last four months of 2006 calendar year, the growth of the same has fallen significantly due to drop in demand. As of end-September 2007, broad money and private sector credit growth declined to 17 per cent and 15.5 per cent respectively.

The forex reserve has soared to 5.3 billion dollars, which is comfortable and equivalent to 3.2 months’ import. But soaring prices of fuel oils and commodities, particularly those of food items, remain a threat to the reserve. 

The slowdown in export receipts and higher import bills, mainly due to rising international commodity prices, pushed the trade deficit to $717 million in July-August period of 2007-08, up from $156 million during the corresponding period of the previous fiscal. Despite an increase in workers’ remittances, the surge in trade deficit turned the current account to a deficit of $ 68 million from a surplus of $389 million in the same period of the fiscal 2006-07. The rising oil prices and the need for higher import of food grains in the wake of the recent floods and cyclone, according to the ADB quarterly outlook, threaten the balance of payments (BoP) outlook.

The multilateral lenders, quite justifiably, were pressing the government hard until recently to adjust power, fuel and gas prices to compensate for the financial losses being suffered by the relevant state-owned enterprises. But, under the prevailing circumstances, the government is unlikely to go for any hike and the IMF and the World Bank, apparently, have understood the difficulties being encountered by the government in this respect.

A one per cent or 1.5 per cent fall in the projected GDP growth in a given financial year is not a big deal. It does happen in many countries, developed and developing. But what has been most damaging feature of the economy since the takeover of the present interim administration is a growing uneasiness among the businesses and general consumers. The former was aggrieved by the drive against corruption, tax evasion, hoarding and other irregularities. But the reasons for the common men becoming frustrated are altogether different. It is nothing but an unabated hike in food items like rice, wheat, edible oils, spices of all types, powdered as well as liquid milk have made them extremely resentful.

The crisis of confidence among the businesses, developed, rightly or wrongly, because of the decisive actions on the part of the government to major players in politics and business who were involved in corruption and irregularities, financial or otherwise. Many businesses accused of corruption and other irregularities are now in jail and some others have gone into hiding to evade arrest. The absence of their owners has been seriously hurting the normal operations of their business and industrial establishments that employ a large number of people. Many importers and traders dealing in essential commodities being panicked by the drive against hoarding and corruption during initial days of the present interim administration decided to slow down their business activities. This resulted in supply disruption of essential items in the market, leading to substantial hike in their prices. The increase in the prices of fuel oils and commodities, mainly food items, in the international market made the situation worse.

The government liberlised import of essentials and resorted to limited intervention in the market through the members of the Bangladesh Rifles. Such intervention was beefed up during the month of holy Ramadan and the prices of most essentials remained more or less stable, though at a higher level. However, the uptrend in the price situation returned soon after the last Eid festival. Two consecutive floods in the months between July and September and the decision of the Indian government to stop export of rice, onion and lentil added fuel to price-hike.

The point-to-point inflation, which recorded an uptrend throughout the current calendar year, reached a record high of 10.10 per cent in July last and eased slightly to 9.6 per cent in September. But it hit the double digit (10.03 per cent) again in October. The arrival of Aman rice and winter vegetables within next few weeks might have some temporary soothing effect on the overall price situation.

Given the domestic supply situation and the international price level of essential commodities, the inflationary pressure on the economy seems to be inevitable. The situation, if seen in the context of the track record of the immediate past government in containing the rising prices of essentials, could have been even worse under a political government. 

The stock market, one important economic area, surprisingly, has been vibrant since the day the present administration assumed power. In contrast to the developments in other major economic indicators, the market capitalization almost doubled over the last 10 months with funds entering the market in huge quantities from all directions. Alarmed by the prospect of another bubble burst like that of 1996, the Securities and Exchange Commission (SEC), the capital market regulator, has been trying to cool off the enthusiasm of the investors to some extent. Many suspect that the entry of huge black or undisclosed money in the market has been responsible for irrational behaviour of the stock market. Those who have amassed wealth through irregular means have found the stock market as the safe haven. However, a serious mismatch between demand for, and supply of, quality shares and lack of investors’ confidence in fixed income securities are major constrains deterring the growth of the stock market.

When the stock market is booming, the banking sector, for quite sometime, has been floating in excess liquidity of around Tk. 140 billion, mainly because of inadequate demands for funds from investors and businesses.

The interim administration feeling the pinch of a slowdown in economic activities and heightened consumers’ resentment over price situation decided to ally growing fear among the businesses and convened a dialogue with the business leaders. With a view to restoring business confidence, the government assured the business community that the anti-corruption drive would be properly targeted to avoid unnecessary harassment of genuine and innocent businessmen. Besides, the government has formed a Regulatory Reform Commission to streamline and upgrade the regulatory and legal framework concerning business and investment. It has also formed a Better Business Forum headed by the Chief Adviser to ensure effective communication between the government and the members of the business community. These steps, if pursued properly, are expected to help develop better understanding between the businesses and the government. The proposed Truth Commission, if constituted, might also contribute to the government’s bid to putting the business activities on the right track.

It is expected that the private sector would gradually return to their normal activities following the corrective steps that are being taken by the government. But the extensive damage caused to crops, property and infrastructures by the latest cyclone that battered the coastal districts emerged as a major headache for the government. Donors, neighbours and humanitarian organizations, national and international, have responded well to help the cyclone victims. The government would require substantial resources for the rehabilitation and feeding the cyclone victims over a longer period. Only rice crop—Aman- grown in the affected districts has been damaged and the farmers will have to wait for long nine months to harvest the next Aman. So, they need to be supported until that time. In addition to rehabilitation activities and distribution of foods under the VGF programme in areas affected by floods and cyclone, the government should immediately start food for work and test relief programmes. Such programmes while helping the needy would enable the government a large part of the rural infrastructures damaged by floods and cyclone reconstructed. 

The economic challenges facing the government, if not formidable, are difficult, no doubt. But the interim administration being a cohesive unit having no political compulsion should be true to the challenges and try to leave behind a well-organised and reformed economy for its next political successor.