bangladesh economy in stress: tasks for the new government

Thoughts on Economics Vol. 23, No. 04

Bangladesh Economy in Stress: Tasks for the New Government

A.R. Bhuyan1

[Abstract: Bangladesh in the past one decade made commendable progress in terms of steady growth of GDP, per capita incomes, export earnings etc., and impressive improvements in the social sector and steady reduction of poverty. The political unrest in the past year threatens all these gains. Violent programmes of shutdowns and blockades, particularly during the last three months of the past year (2013), led to a virtual stoppage of all economic activity across the country. The cost of the extensive destruction caused to physical infrastructure and private and public properties, together with losses suffered by production sectors and businesses would amount to billions of Taka. The new government has thus heavy responsibilities at hand to recover from the damages suffered in the wake of the political crisis and at the same time restore the lost growth momentum. Even before the political unrest began last year, Bangladesh economy was beset with many problems. Political disturbances only compounded these problems. The immediate tasks for the new government will be to address problems of law and order, infrastructure and energy, investment, exports and remittances, and consolidate past achievements in human resource development. Addressing problems of, and extending support to, real sectors and maintaining macroeconomic stability are also crucially important to carry forward the process of economic growth. This paper discusses the present concerns for the economy and makes some recommendations for the government to address these concerns.]

Introduction

Despite pervasive corruption, poor infrastructure, and often unfriendly political conditions created by the politics of confrontation by mainstream political parties, Bangladesh economy achieved a steady 6.0 percent GDP growth in the past one decade. In the immediate past fiscal (2012-13), the economy grew by 6.03%, which is slightly lower than the average 6.2 percent growth achieved in the past four years, but still respectable because many developing countries, including the neighbouring India, experienced a much lower rate of growth.

1 A former Professor of Economics at the University of Dhaka. The paper draws on the author’s personal on-field observation and press and media reports of the time. Opinion expressed is, however, entirely the author’s own.

8 Bangladesh Economy in Stress……………..

Per capita income in Bangladesh rose to $1044 in 2013 from $630 in 2006 and exports rose from $15.5 billion to $27 billion during this period. Over the past five years food stock was close to 1 million tons and inward remittances averaged $1 billion per month. Foreign reserves rose to $18 billion in 2013 from $10 billion in 2010. The poverty rate came down to 26% from 29% five years ago. There have been impressive improvements in social sector indicators as well, especially in school enrolment, adult literacy, life expectancy at birth, and gender parity in education. Life expectancy now stands at 69.2 years – almost three and a half years more than India, where per capita income is almost double that of Bangladesh. Women’s participation in workforce – particularly in the garments industry – has risen tremendously. The country achieved laudable success in bringing down maternal and child mortality rates and the rate of population growth, and reducing poverty. In the Index of Global Hunger for 2013 published by the International Food Policy Research Institute (IFPRI), Bangladesh moved up 11 notches over the past year.

All these gains in economic and social fronts have, however, come under threat because of the violent political unrest that flared up in the most recent months creating havoc all around the country. The political unrest led to a virtual stoppage of all economic activity during much of the past calendar year (2013), particularly in the last three months of the year, sparing none of the productive sectors. Even the agriculture sector, which remained virtually unaffected by occasional political disturbances and strikes in the past, has this time suffered badly. In one estimate, damages caused to national infrastructure and private and public properties, together with losses suffered by real sectors of production and in the services sector in the last three months of 2013 could exceed Tk.1000 billion.

Apart from disruptions in economic activity, the political unrest has also created a lot of uncertainties for the economy in the current year (2014) and beyond. For example, the implementation of the ADP, already behind target, will be difficult in the period that remains of the current fiscal. There is also the fear of serious declines in the growth of export incomes, remittances, foreign aid, investment, and fiscal revenues. All these damages caused by bitter confrontational politics are likely to have a crippling effect on the economy in the medium and long term. Apart from destroying private and public property and the country’s physical infrastructure, the acts of violence have badly tarnished the country’s image in the outside world. The situation might be worse if the political stalemate continued longer. The recently concluded national election has brought some respite from strikes and blockades but it will take time for the economy to fully recover.

Because of the ongoing political stalemate and escalating violence, the IMF, and the Asian Development Bank (ADB) have, respectively, revised down their earlier

Thoughts on Economics 9

forecasts on Bangladesh’s GDP growth to 5.5% and 5.8% for the current fiscal (FY2013-14) as against the government’s growth target of 7.2%. The World Bank, too, in its latest edition of the Global Economic Prospects has predicted Bangladesh’s GDP growth to be around 5.7% in the current fiscal year on grounds of the political unrest, slow remittance growth, and the image crisis of the country’s main export (garments) sector in the aftermath of the twin industrial disasters of the Tazreen fire and Rana Plaza collapse. Local think tanks, too, have warned of a much slower growth than what was actually achieved in the past fiscal. In fact, all projections by local experts as well as development partners indicate that Bangladesh’s GDP growth shall remain below 6.0 percent in FY2013-14, way behind the publicly-set 7.2% target. Bangladesh Bank, too, revised down the country's growth outlook to between 5.7-6.0 percent, and finally the government itself revised down its own target to 6.3 percent for the present fiscal.

A recent report by the Global Economic Forum (GEF) has warned that any prolongation of the ongoing political stalemate will have disastrous impact on Bangladesh’s economy and bring down its growth in the medium term. According to the GEF report, political unrest will make ADP implementation difficult and also discourage any new investment in productive economic activity. Point-to-point inflation and prices of essentials will rise, adversely affecting the lower income group of people.

With this background, this paper attempts to highlight the observed impact of the long-standing political conflict on various sectors of the economy and recommends measures the newly installed government will need to take to restore the economy to order and carry forward the objective of attaining stable and sustained economic growth.

Impact of the Political Unrest on Various GDP Sectors

Industry

Manufacturing. The unprecedented political violence badly jolted the industrial sector. The manufacturing sub-sector, with 19% share in GDP, was hit hard. The production and supply chain in most of the country's manufacturing industries broke down due to frequent shutdowns and blockades countrywide. They could neither get the required raw materials nor distribute their output. Many industries had to cut production by as much as 75 percent to avoid congestion at warehouses because outward delivery from factories was obstructed by hartals. A large number of small and medium-scale enterprises and at least 20 jute mills were shut down, mainly because of difficulties in getting raw materials and marketing their products. Tannery owners saw a 15-20 percent drop in their export orders in the last two months of 2013


and were facing difficulty with unsold stocks of leather and leather goods. Their loss is estimated at Tk.7 billion. The frozen foods industry, which is exclusively export-oriented, suffered a 24% decline in export. Besides, industries like plastics, petroleum byproducts, cosmetics, ceramics, iron and steel, rubber, and food processing suffered huge losses and were facing acute storage problems for their products.

Construction. The political unrest affected all construction activities very badly, including in construction works under ADP. Production of cement, paints, furniture and tiles slowed down, and growth of iron and steel production turned negative, which indicates a slowing growth in the construction sector. A lot of public sector development projects involve construction works, but their implementation was hampered by shutdowns and blockades that disrupted transportation of construction materials such as rods and cements. To cite an example, the entire work of the Dhaka-Chittagong four-lane highway depends of smooth transportation of construction materials, but contractors were unable to carry materials to the project site due to shutdowns and blockades.The construction activity in the private sector, too, plunged into crisis. According to the Real Estate and Housing Association of Bangladesh (REHAB), Tk.76.80 billion investment by apartment builders remained virtually stuck up. There was a 60 percent decline in the sale of apartments and plots by builders and developers, and the number of new projects undertaken by them dropped by 75 percent. Nearly 23,000 ready apartments, worth Tk.21.5 billion, remained unsold due to the political unrest. The problem further intensified as the flow of bank credit to the sector almost dried up. Because of the fall in apartment sales, the housing industry apprehends a loss of Tk.6 billion in the present fiscal year. Along with developers, the backward linkage industries in the construction sub-sector were also in dire strait as demand for their products fell by over 60 percent. Manufacturers of construction materials were thus facing tough times. The sale of land plots across the country also declined to the lowest level.

Agriculture

The agriculture sector, which accounts for 19% of GDP, and is the life blood of the economy in terms of providing food security and supplying the much needed raw materials for the industrial sector, suffered badly from the onslaught of the political unrest. Because of disruptions in transport, farmers could not market their products, nor could they get timely delivery of inputs. Producers of fresh vegetables and fruits were the worst sufferers as they could not transport their products to major centers of consumption and hence they were compelled to dispose their produce at throwaway prices. For the same reason, farmers could not procure fertilizers and other essential inputs ahead of the boro season. Huge quantities of fertilizer were stockpiled at


different distribution centers but these could not reach the farmers. The aman season passed well for them because weather was good and aman crops needed little of inputs, but the present boro season is mainly dependent on urea fertilizer and irrigation. Any disruption in the movement of fertilizer and diesel for irrigation is likely to hamper the production of boro rice, the largest food crop of the country. Any shortfall in the boro production will put the country’s food security at stake.

Livestock and Poultry. The livestock and poultry industries, the two prominent sub-sectors of agriculture, faced a serious of setback due to continuous political agitation, violence, shutdowns and blockades. The poultry industry virtually reached the verge of extinction because farms could not get the necessary fodder for chicken, fuel for warmth, raw materials for producing feed, and security for transport, sale, and trade for survival of the farm owners. The price of broiler chicken came down to the lowest level compared to the price of last five years. Some 15 thousand tons of broiler chicken and around 31.5 million eggs remained unsold every week. The farm owners had to sell each piece of broiler chicken at Tk.70/80 as against the production cost of Tk.110/120. A one-day-old chick was being sold at Tk.15/20, while its production cost was Tk.35. Similarly, each piece of egg was being sold at Tk.5, while its production cost was around Tk.6. Moreover, huge quantities of eggs were rotting everyday due to transportation problems. Medicines worth Tk.150 million remained unsold every week due to the political unrest.

According to the Bangladesh Poultry Industries Coordination Committee (BPICC), the poultry industry incurred losses worth more than Tk.4 billion during the days of political unrest, when 36 thousand farms, which is about 30 percent of the poultry industry, went out of business and tens of thousands of people faced unemployment. In a word, the poultry industry with its investment of Tk.250 billion was in a dire strait.

Services Sector

Shutdowns and blockades affected all services sub-sectors, which together hold about 50 percent share in the country’s GDP. Though services sector data is available only on an annual basis and hence cannot be obtained until the end of the fiscal year, there are indications that activities of most sub-sectors, viz., transport, hotels & restaurants, community & social services, financial intermediation, education, and wholesale & retail trade suffered heavily due to the political unrest. There are also some proxy indicators such as the decline in bank loans to finance trade and various services sector activities, from which one may deduce that the services sector growth in the current fiscal (2013-14) would be much lower than in the previous fiscal (i.e., 2012-13).


Thus, according to a Bangladesh Bank (BB) report published in early December, the growth of bank credit to the trade sector decelerated to 12.93% in the first quarter (July-September) of the current fiscal year (2013-14) from 24.68% in the corresponding quarter of the previous fiscal (2012-13). BB data also shows that bank credit to transport and communication subsector registered a negative growth of 43.54% in the first quarter of the current fiscal year as against a high positive growth of 85.68% in the corresponding quarter of the previous fiscal.

Transportation. In the six months of continued political unrest, the transportation subsector, which accounts for about 11 percent of GDP, came to a virtual collapse. According to the Bangladesh Road Transporters Association, the sector lost Tk.15 billion in the past one year. Damages caused to roads and railways disrupted transport links across the country. Because of the deadlock in transport, some 600 CNG filling stations remain closed. In the month of December alone, the CNG stations reportedly suffered a loss of Tk.70 billion because of the forced decline in the movement of vehicular traffic. The providers of courier service lost 90 percent of their business due to shutdowns and blockades. The courier companies reported huge losses due to the damages caused to their vehicles by picketers at different parts of the country during blockades and hartals.

Wholesale & Retail Trade. The political unrest caused a sharp decline in the volume of wholesale and retail trade, which accounts for 14 percent of GDP. With the transportation system going haywire, producers in fields and factories could not obtain their inputs, nor could they move their products to buyers.

Tourism, Hotel and Restaurant Business. The tourism sector was in deep trouble. Hotels and restaurants in major tourist spots saw few guest arrivals. According to the Tour Operators Association of Bangladesh (TOAB), the number of local tourists decreased by 90 percent in the peak season of 2013 compared to the previous year. Also, most of the foreign clients cancelled their scheduled tours to Bangladesh due to the political unrest. About 80% of the bookings in hotels, motels and guesthouses were cancelled. The average occupancy rate fell to as low as 20% in plush hotels in Dhaka and to less than 10% at hotels, resorts and cottages outside the capital. In normal times the average occupancy rate is about 85 percent.

About 50 hotels and resorts and 35 restaurants were shut down in Cox’s Bazar, the most popular and the major tourist spot in the country, were shutdown in November-December 2013. More than 300,000 people are directly or indirectly dependent on the tourist industry for their livelihood, but hotels and related establishments laid off almost 30% of their employees in the last three months of the past year to cut down their losses. A study by World Travel and Tourism Council forecasted that the share


of travel and tourism sector in GDP, which was 2.1% in 2012, would rise to 2.3% in 2013, but the continuing shutdowns and blockades in the past months perhaps proved this forecast wrong. It will take a lot of time for the country’s tourism sector to recover even after improvements in the political environment that are now in sight.

The Financial Sector. Although the financial sector accounts for a small, 2.1%, share in GDP, it plays a crucial role in the overall growth of the economy. The core of the financial sector is the banking system, which suffered badly due to the political disturbances. Most of the renowned banks saw a sharp decline in their profits in 2013 and an increase in default loans. There was now virtually no demand for fresh bank credit from the private sector. Banks were sitting on idle funds as borrowers were not interested in taking even the approved loans. According to Bangladesh Bank data, the overall credit in the banking system increased by less than 7% in July-December, 2013 whereas Bangladesh Bank’s monetary policy programme targeted the credit growth at 15% during this period.

Old bank loans turned doubtful or bad. Default loans of banks shot up to a staggering Tk.600 billion in December 2013 from Tk.427 billion a year ago. Previously, the World Bank had assessed that only the state-owned commercial banks of Bangladesh, which account for 25% of the country’s banking system, were vulnerable but now the political unrest destabilized the private commercial banks as well.

Telecommunications. The only successful sub-sector in the services sector that performed well despite the political unrest is telecommunications. The mobile telephony performed well and showed positive signs of progress. The number of mobile telephone subscribers rose by 18% to 110.68 million at the end of September, 2013 from 93.78 million at the end of September, 2012. The telecom services sector remained buoyant particularly after the introduction of 3G services in September, 2013.

Other Effects of the Political Unrest

Apart from its impact on production of goods and services that directly influence the GDP and its growth, the political unrest had its effects felt in every area of economic activity – viz., government’s revenue collection, manpower export and remittances, private sector investment, the implementation of ADP (public investment), employment, inflation, and exports.

Revenue Collection. According to NBR data, the overall tax collection in July-December amounted to Tk.503.38 billion, which was 12.5% short of the period’s target of Tk.575.19 billion, although it was 12.2% higher than the collection of Tk.448.65 billion during July-December of the previous fiscal. The decline can be attributed to the prolonged political unrest. Thus, the slowdown in business activity


due to the political unrest squeezed value-added taxes, and the fall in business profits in turn led to a decline in corporate income taxes. In fact, in July-December, 2013 customs duty receipts fell by 3.35 percent from the same period a year ago, while VAT and income tax collection also slowed down significantly. The shortfall in tax collection raises fears that the NBR’s revenue target of Tk. 1360.9 billion in this fiscal might be difficult to achieve.

Manpower Export and Remittances. Political disturbances affected inward remittances, as the observed decline in the rate of remittance growth in recent months would indicate. Thus, remittances by migrants increased by only 8.4 percent in the first six months of the current fiscal year, as against 12.6 percent increase in the previous fiscal (2012-13). In December, 2013 remittance inflow was 5.5% lower, compared to the same month a year ago.

While political disturbances were definitely a factor, the flow of remittances slowed down largely because of the decline in the export of manpower in the past two years. The process of outmigration received a further jolt when the political environment turned chaotic. Inward remittances in the present fiscal may therefore fall further as a result. According to the Refugee and Migratory Movement Research Unit (RMMRU) of the University of Dhaka, only 373409 workers managed to go abroad for employment in 2013, down by more than 30 percent from 607798 in 2012. The RMMRU says that for the first time in the past three decades, remittance inflow in Bangladesh might decline this year.

Private Sector Investment. Private investment had remained stagnant during past years because of problems in getting gas and electricity connections and the high cost of bank loans. The political unrest made investor confidence quite uncertain and worsened the investment situation. There was little new investment by the private sector in the past few months. The Board of Investment (BOI) sources reveal that proposals for investment in the 11 months between January and November, 2013 were 40% lower than in the corresponding period of the previous year. In the five months of July-November, 2013 the BOI received 384 local investment proposals, compared to 700 proposals received in the same period of the past year.

The lack of interest in making new investments is reflected in the slow growth of the private sector’s demand for bank credit and the accumulation of huge idle funds in the banking system. In the period up to 5 December of the present fiscal, private sector credit increased by just 7.7 percent whereas it had increased by 20.0 percent in the past fiscal year. Due to the fall in the demand for credit in the midst of political unrest, the disbursement of industrial term loans during July-September of FY14 stood 15.5


percent lower, compared to the disbursement during the preceding quarter. Likewise, the disbursement of agricultural and non-farm rural credit stood 16.0 percent lower in the first half of the current fiscal, compared to the same period of the previous fiscal. The slow growth in the demand for credit resulted in a large volume of idle money worth Tk.900 billion in the banking system at the end of November, 2013.

Public Investment (Implementation of ADP). Due to the political unrest, the implementation of public sector projects under ADP slowed down significantly. Only 27 percent of ADP projects were implemented in the first six months (July-December) of the current fiscal, which is 3 percentage points below the implementation rate achieved in the corresponding period of the previous fiscal. The ADP implementation was also the lowest in the past five years, all because of the protracted political crisis. The implementing ministries and agencies utilized Tk.180.87 billion during July-December of FY14, out of the total ADP outlay (except self-financed) of Tk.658.72 billion. The ADP implementation till December of the current fiscal was in fact lower than in the previous fiscal in absolute terms as well.

The implementation of ADP – with both local and foreign funding – dropped this far in the current fiscal. Out of the amount of Tk.180.87 billion utilized in the first six months of FY14, Tk.122.75 billion came from the government’s own fund and Tk.58.12 billion from external sources. The implementing ministries and divisions were thus more adept in spending funds allocated from internal rather than from external sources. The poor spending rate from external resources (project aid) affected overall foreign aid inflow to the country.

Shutdowns and blockades hampered or delayed ADP implementation by obstructing the transport of construction materials to project sites. Implementation was also hampered because proper supervision of the project work was not possible due to the political unrest. Development partners that regularly monitor all donor-funded development projects did not do any monitoring work during the past few months.

The Planning ministry sources apprehend a much slower implementation of development projects in the remainder of the current fiscal year because the disbursement of foreign aid is very likely to decline in the unstable political environment. World Bank officials said that it might not be possible to fully implement the present year’s ADP because of political hostilities and advised for a downward revision of the ADP. Already, the inflow of foreign aid slowed down significantly during the past few months. In July-September, 2013, foreign aid disbursement was 23% lower than in the corresponding months of the previous fiscal.

A decline in the disbursement of foreign aid will obviously necessitate a large increase in domestic borrowing for financing the ADP. Revenue shortfalls will have


the same effect as government will need to increase its borrowing from domestic sources to finance the budget deficit. In the first six months of the current fiscal, as mentioned earlier, government’s revenue collection fell short of the target by Tk.72 billion.Employment. Employment in the country's private sector dropped sharply due to the political unrest. Most of the manufacturers and entrepreneurs almost shelved fresh investment and expansion plans following the unstable political situation. Because of non-stop shutdowns, there was hardly any new employment in October-December months, be it in industry or in the services sector. Instead, a large number of workers lost their jobs. Because of the deterioration, if not collapse, of business opportunities, about a million workers in industry and services sectors reportedly became unemployed in the past few months. According to the Board of Investment (BOI) data, overall employment fell by over 50 percent during January-November of 2013 compared to that of the corresponding period of the last calendar year. Besides, overseas employment of Bangladesh migrant workers was much lower in the 2013 calendar year, in comparison with 2012. This was mainly due to various types of restrictions imposed by major labor-importing countries, in particular the UAE, which has been the biggest recruiter of Bangladeshi workers in recent years. The government was also unable to send the expected number of workers to Malaysia. The chances for Bangladeshi workers seeking employment in Japan, Iraq, Egypt and Saudi Arabia are not very encouraging either. Government is of course, trying to revive the employment situation in the oil-rich Middle East and send workers to emerging economies in Southeast Asia as well as to remote regions such as Australia and New Zealand, Europe, Latin America, and Africa.

Inflation. The political unrest pushed up the inflation rate because the blockades and shutdowns almost completely shattered the supply chain. Already, inflation went up by 0.32 percentage points to 7.35 percent in December from 7.03 percent in October. Overall inflation went up solely because of the rise in food inflation, which increased by 0.62 percent to 9.00 percent in the two-month period essentially driven by supply disruptions and rising costs. Transport costs rose to abnormally high levels because of repeated shutdowns and blockades. The supply of rice from the producing regions fell due to political unrest. These were the main factors behind the rise in food inflation.

According to Bangladesh Bank, supply side disruptions caused by prolonged countrywide shutdowns will make it difficult to contain inflation within the officially-set 7.0 percent target in the present fiscal. Moreover, the recent increase in wages in the private sector, the formation of a National Pay Commission and the government’s decision to set up a public sector wage board have already created aggregate demand pressure, which enhances the risk of inflation. Other reasons behind the rise in


inflation were high inflation in India and the increase in the prices of fuel and food grains in the international market. The supply side pressure brought on by countrywide shutdowns exacerbated that risk.

Exports. Despite global economic and financial crises and slow economic growth in developed countries, Bangladesh’s exports grew by 16% in the past months, but the political unrest has now rendered the country’s export prospects uncertain in the immediate term. Particularly at risk is the country’s garments sector, which accounts for about 80% of the country’s total exports. Due to prolonged shutdowns and blockades, garments exporters failed to make timely delivery/shipment of their exports, for which reason foreign buyers were reportedly shifting their purchase orders to other garments exporting countries. According to BGMEA, the association of garments manufacturers and exporters, 40% of the export orders were cancelled by the foreign buyers in the last two months of 2013 calendar year, and the industry suffered a loss of Tk.70 billion. Political instability affected not merely the export of garments but, more or less, all other exports of the country.

The political instability also compounded other risks facing the garments industry. Bangladesh already suffers an image crisis in major markets after the United States cancelled the GSP facility in June, 2013 following allegations of low labour standards, human rights violation and unsafe working conditions. The U.S. decision to cancel the GSP was prompted by the occurrence of several fire incidents in Bangladesh garments factories in quick succession and frequent collapse of factory buildings.

Bangladesh’s garments industry was also under the threat of a possible GSP cancellation by the European Union because few compliance issues were addressed, but it got a breathing space as the EU extended its GSP facility till the end of December, 2017. Nevertheless, Bangladesh’s garments export will still be at a disadvantage because it shall face tough competition with Pakistan in the EU market as the European Union has recently accorded GSP facility to Pakistan for 75 products, mostly garments. The facility will remain in force for four years beginning from 1 January, 2014.

Tasks for the New Government

Even before the political unrest began last year, Bangladesh economy was beset with many problems, but political disturbances compounded those problems further. As noted in the outset, Bangladesh has good success records in diverse areas but the uneasy situation created by the political unrest is destabilizing the economy and hindering its growth potential. The weak growth in the directly productive sectors,


including in services and construction, and the slowing down of remittances signal a significant decline in aggregate demand in the current fiscal year. Some of the losses suffered by industry and agriculture sectors due to the political programmes of shutdowns and blockades may be recovered if the situation improves, but the losses of garment factories and the services sectors, including education, will remain irrecoverable even in the distant future.

Various Pledges of Government. Government is aware of the many problems the economy currently faces and is also alive to its responsibilities to overcome these problems, as the various pledges it made in the run-up to the 5 January elections would indicate. As it appears in the ruling party’s election manifesto (titled “Bangladesh Moving Forward”), government’s primary target is to implement the Vision 2021 to achieve a middle-income country status for the country by 2021 and its long-term plan is to elevate Bangladesh to the level of developed countries by 2050.

With a view to making Bangladesh a truly middle-income country by 2021, government has pledged to increase per capita income to $1500 from the existing $1044, the GDP growth to 10 percent from the existing 6.0 percent, to reduce the poverty rate from the existing 26 percent to 13 percent in the next seven years, to ensure food security, and create employment for the unemployed youths.

The government has also pledged to raise the electricity generation capacity to 24000 MW by 2020 from the existing 10000 MW and to ensure electricity connection to every household of the country.

For the development of the industries sector, government has pledged to take necessary measures to attract investment from both home and abroad, strengthen the RMG sector, upgrade infrastructure facilities considered necessary for industrialization, and enhance opportunities for industrial expansion by implementing special economic and industrial zones in all seven executive divisions of the country.

Government has also pledged to build another bridge over the Padma river in addition to the ongoing one, a second Jamuna bridge, a modern international airport, the proposed deep sea port in Sonadia, a circular rail route around the Dhaka city, and the Dhaka-Chittagong Expressway.

The various pledges made by government to boost economic growth, ensure food security, alleviate poverty, and create employment by developing industries are indeed welcome, but the commitment to undertake some new and very costly infrastructure projects appears quite ambitious at the moment, particularly because the recovery and rehabilitation of the economy from the destructions caused by


political disturbances will take some time. Nevertheless, these are important targets to achieve over the medium and long term.

The immediate tasks for the new government will be to address problems of law and order, infrastructure and energy, investment, exports and remittances, and consolidate past achievements in human resource development. Addressing problems of and extending support to real sectors and maintaining macroeconomic stability are also crucially important to carry forward the process of economic growth. These tasks are discussed at some detail in the following.

Improve Law and Order Conditions. Government’s top priority should be to improve the law and order situation. There should not, however, be any compromise with terrorist activities that jeopardize internal security. Those that have destroyed national properties and caused mayhem and murder in the past few months through blockades and shutdowns must be hunted down and brought to justice. Taking such a strong step is of utmost importance in order to restore peace and stability in the country as well as to enhance the country’s image abroad.Dialogue with Political Parties. A foremost task of the government is to enter into a meaningful dialogue with political parties with a view to reaching a lasting solution of the problem that has soured political relations and resulted in deadly violence, paralyzing the entire country. The present calm after the January 5 elections may be short-lived because the unrest may flare up again if opposition political parties are not brought into confidence.

Improve Relations with Trade and Development Partners. Government will need to intensify diplomatic efforts to obtain support from multilateral donors as well as major trade and development partners like the US, the UK, Canada, Japan and the EU. These countries, on which Bangladesh depends heavily in areas of trade, aid, and investment, have made no secret of their dissatisfaction over the January 5 elections and the subsequent state of politics in the country. As Bangladesh’s friends and well-wishers, these countries have criticized the government out of an honest desire to see that Bangladesh’s development is not impeded any further by the deadly confrontational politics. Government should therefore convince development partners about the sincerity of its efforts to ease the political situation and allay their apprehensions.

Physical Infrastructure. The infrastructure of roads, highways, bridges and railways that was extensively damaged or destroyed during the days of shutdowns and blockades, disrupting transportation and supply chain, will need to be repaired and restored on a top priority basis.


Power and Energy. The development of the energy sector already occupies a high priority in the government’s agenda. Strong efforts will be needed to raise the electricity generation capacity as pledged in the government’s election manifesto. It is heartening that Petrobangla has found a significant increase in the recoverable gas from the country’s largest gas field Bibiyana. This additional reserve comes as a comfort for this gas-starved country, which did not have much luck with any major gas discovery in the last one decade. The new found gas may now be used in the production of electricity.

Nevertheless, efforts should be made to also use the available coal resources for power production. However, given that the use of coal to generate power does not have universal citizen support, government will need to solve the energy crisis by optimizing the use of available gas and coal resources as well as exploring opportunities for using wind, tidal, and solar energy in power generation as far as possible. Moreover, it will be necessary to address the key problem of system loss in the power sector, which is probably among the highest in the developing world.

Poverty Reduction. Poverty alleviation programmes should be among the top policy priorities of the government. A high and stable rate of economic growth (in excess of 8 percent) will be needed in the coming years to trigger an exit from the endemic poverty situation. Among major causes of poverty is the falling public expenditure on social sectors, growing inequality in income distribution, unequal access to productive assets, and poor access to public services.

High GDP growth, though necessary, is not a sufficient condition for poverty alleviation. The growing inequality in income distribution prevents the benefit of growth to reach the poorer sections of the people. Hence, active government intervention in favour of the poor will be needed to reduce inequalities in income. To that end, a greater attention should be given to increasing the quality of social services (education, health) and reaching them to the poor. Emphasis should be given to primary and secondary education and primary health care, of which the major beneficiaries are generally the poor.

Since the incidence of poverty is much higher in rural than in urban areas, the national poverty alleviation strategy should have agricultural and rural development sectors as its principal targets. Unfortunately, lesser and lesser allocation was made to these sectors in all past five-year development plans, and also in all annual development programmes. A generous allocation to agriculture and rural development sectors will therefore be needed in the next national budget, which will truly reflect the government’s commitment to poverty alleviation.


Safety-net measures like food-for-work programmes are desirable but these cannot eradicate poverty. Poverty can be reduced only by creating opportunities for new employment, including opportunities for self-employment. The creation of such opportunities will, however, require access to credit on concessional terms and easier repayment schedules. While the NGOs played some role in poverty alleviation in the past years, these have had virtually no role in creating employment opportunities.

‘Microfinance’ programmes of microfinance institutions (MFIs) have expanded considerably in recent times, but there is hardly any instance to show that microfinance issued by MFIs was ever utilized for productive purposes and for creation of employment opportunities. Employment generation in fact calls for effective policy measures for stimulating micro- and small enterprises (MSEs) through improving their access to capital. ‘Microfinance’ cannot be regarded as an appropriate model for financing the MSEs for purpose of job creation. Instead, government should expand financing to these firms through national development banks or commercial banks.

While we do not underrate the importance of microfinance institutions for MSEs and farms that cannot provide collateral for credit and hence are not deemed creditworthy by the banking sector, these channels cannot be relied upon as sources of credit mobilization for productive asset creation. High interest rates, short gestation periods and the small size of their loans tend to militate against their usefulness in poverty reduction and asset creation. Proper financial inclusion is likely to require larger financial institutions, some form of subsidy, as well as creative and flexible approaches by the central bank and regulatory regimes to ensure that different banks reach excluded groups like women, self-employed workers, peasants and those without land titles or other collateral.

In fact, a report of the UN Secretary-General back in September 1998 cast serious doubts about any lasting effect of microcredit on poverty alleviation and warned against siphoning scarce funds away from crucial sectors like agriculture, infrastructure, health, sanitation and education to pay for relatively untested microcredit schemes.Accelerating Economic Growth. Government must decisively move toward raising economic growth, because faster economic growth is the sine qua non for poverty reduction. Economic growth, however, means structural change, and in a low-income agrarian country like Bangladesh, the desired structural change will need to be in the direction of industry and services, and away from agriculture, where the potential for employment creation is very limited. Ultimately, jobs will need to be created in the


modern manufacturing sector as well as in rural industrial and non-farm activities (fishery, livestock, poultry, and horticulture) to lift the people out of poverty.

For achieving accelerated economic growth, issues of utmost importance are those of resource mobilization for investment and the development of the private sector. Investment, the most crucial recipe for growth, may be either mobilized by domestic savings (public and/or private) or obtained in the form of foreign direct investment (FDI).

Raising Savings. A cause of concern for the economy is that domestic savings have either declined or stagnated in the recent years. A two-pronged attack will be needed to reverse the declining trend in domestic savings. Public savings will need to be raised by improving government’s revenue collection as well as by cutting down recurrent expenditure. Private savings will need to be encouraged and mobilized through a mix of prudent fiscal-monetary policies that are conducive to augmenting voluntary private savings as well as to their intermediation. The presence of a network of well-functioning financial institutions and a disciplined stock market is crucially important for that purpose.

Investment. Gross investment, like domestic savings, as proportion of GDP is low in the country and has also remained stagnant for a number of years. One main reason is the low level of public investment. Since, however, public development expenditure on physical infrastructure and human resource development is universally acknowledged to have a significant crowding-in effect on private sector investment, raising public investment should be a top priority for the new government.

Good country image, political stability, and a favourable investment climate are essential to attract investment, whether domestic or foreign. For improving the investment climate, government will need to make serious efforts to create a conducive business environment by strengthening the legal framework, maintaining policy continuity, reducing the cost of doing business by improving the physical infrastructure, and, above all, removing non-economic constraints like poor law and order conditions, labour indiscipline, and bureaucratic hassles and corruption.

Extending Support to Real SectorsAgriculture. The agriculture sector lacks dynamism. The heavy dependence on rice production makes the sector vulnerable to the vicissitudes of nature, which may undermine the country’s long-run food security. Diversification of the crop basket and widening the scope of non-farm agriculture should, therefore, be considered important for the development of both agriculture and the rural economy of the


country. However, a sustained growth in grain production will still be necessary to feed the country’s growing population, which will call for improvements in the genetic materials, rationalization of seed production, and better nutrient mixes.

Maintaining stability of agricultural prices is essential for the development of the sector. Price stability in agricultural products can be ensured through higher productivity gains and increased supplies. Related government ministries and departments have lots of responsibility in this regard.

In order to improve productivity in the farm sector, the following supply-side measures should be seriously considered: (a) educating farmers about the balanced use of fertilizers and pesticides, (b) ensuring timely availability of all agricultural inputs at reasonable price, (c) putting in place an effective water management and flood control policy, in order to ensure water supply in areas where scarcity of water restricts crop productivity, (d) ensuring adequate electricity supply during the boro season, which is the most important intervention the government can make to help the sector, (e) raising research effort, aiming at raising crop yield, and developing crop- and seed-development technologies, (f) removing all prevailing regulations and controls on output pricing and on marketing and supplies of inputs, (g) improving the agricultural infrastructure to encourage production, raise productivity, and facilitate marketing of agricultural products, (h) undertaking a crash programme for establishing agro-based industries and also encouraging the development of livestock, poultry, fishery, and agro-related activities, and (i) making agricultural credit available on easier terms through the banking system to enable farmers improve their land and finance inputs.

Industrial Sector. The industrial policy 2010 set the objective of raising the share of industry to 35-40 percent of GDP. This will require 10-12% industrial growth for a sustained period as against the present 8-9%. High economic growth cannot be achieved merely on the strength of agriculture, which, even at its best, can grow by at most 5%. High GDP growth will, therefore, have to be driven by industry and services. Agriculture can, however, provide a strong foundation for high economic growth by ensuring food security and delivering the raw materials for high value added agro-processing industry.

While government will be expected to meticulously fulfill its pledges for the development and expansion of the industrial sector, following steps will be needed to overcome the inherent problems of the sector:

Government’s role in industrial activities should be limited to provision of basic infrastructure and a facilitating regulatory environment. Basic


infrastructure like power, port, and transport, and a proper regulatory environment will be critical.

The stalled process of privatization should be restarted to phase out the remaining state-owned manufacturing enterprises

As committed in the government’s election manifesto, support will need to be given to private sector investment through Special Economic Zones (SEZ) with full provision of all necessary utilities and clean title to land ownership.

Given the small size of the domestic market, industrial policy should be oriented toward export markets.

The emphasis on export orientation does not, however, mean a reduced role for import substitution industries. Export markets may often be difficult to penetrate because of the slowdown in global demand. Hence, alongside policy support to promote exports, industrial policy provisions must also provide adequate encouragement for efficient import substitution industries to cater to the needs of the domestic market.

Industrial policy should encourage the promotion of small enterprises in view of their high employment creating potential. Government may design an effective credit guarantee scheme for small entrepreneurs who have very limited access to bank credit because of stringent collateral requirements.

Government should also design an action plan for stimulating investment in agro-processing industries, which have substantial export potential, and can also play an instrumental role in reducing poverty and generating employment in rural areas.

Industry specific treatment should be meted out to solve problems of leather, frozen food, and RMG industries.

Government should devise an effective programme for remedying the problems of sick industries.

Easy availability of funds for long-term investment and for meeting working capital requirements needs to be ensured, but the high cost of bank credit must be lowered. Nowhere in the world is the interest cost of loans as high as in Bangladesh.


Measures should be taken to prevent dumping of foreign goods and smuggling with a view to protecting domestic firms form unfair competition.

The stock market can be an important source of long-term capital but investors do not seem to have much confidence in the stock market now. At the same time, loan scams and defaults have crippled the banking sector, making it difficult for enterprises to get bank loans. If government genuinely wants the industrial sector to grow at a faster pace, it must adopt measures to boost investors’ confidence in the stock market and also to overcome the banking sector problems.

Government should provide appropriate fiscal policy support to the industrial sector in the form of (a) allowing duty free import of industrial inputs and capital goods, even if it results in relatively high effective rates of protection, and (b) tax holiday facility for 10 years to export-oriented industries and also to other domestic industries on a selective basis.

Most importantly, the development of the physical infrastructure – power, gas, water, sanitary services, transport, communication, ports etc. – should be accelerated, without which all effort to attract new investment will fail.

Macroeconomic Stability

Traditionally, macroeconomic stability, by which is meant low budget deficit and a low inflation rate, is considered a necessary condition for economic growth. This traditional belief does not gain much ground in the unusual situation the new government now faces. Revenue collection is projected to remain below target in this fiscal but government’s spending is bound to rise to rehabilitate and restore the damaged infrastructure in addition to completing the ongoing development projects and undertaking new ones to accelerate the process of growth.

Budget Deficit. Budget deficit is a hotly debated issue for economists because of its perceived effects on macroeconomic stability. This scribe is not, however, much worried about the magnitude of the budget deficit. Deficit financing is a universally recognized method employed to stimulate demand and enhance economic activity. A deficit budget has, therefore, to be accepted whenever available internal resources fall short of targeted expenditures. The all important consideration about budget deficit is how prudently the government would raise the required funds (domestic borrowing from banks and/or foreign loans and grants) for financing the deficit and how the funds would be spent.


Ideally the budget deficit financed with domestic borrowing from banks should be kept as low as possible in order not to crowd out private sector credit, but in the present situation when private sector credit growth remains well below the target set in the central bank’s credit growth programme, increased bank borrowing, if it is necessary for financing ADP projects, is unlikely to have any crowding-out effect on private sector investment. Instead, increased public spending on infrastructure facilities will increase cash flow to the economy, stimulate aggregate demand, and at the same time remove the physical impediments to growth. Concern over budget deficit should not therefore deter government from raising its expenditures on infrastructure development as well as on social sectors, such as education and health and safety net programmes.

Extraordinary situations call for extraordinary solutions. A little bigger deficit than what was initially targeted in the budget for the current fiscal year may, therefore, be necessary. Nevertheless, we would suggest that government intensify its revenue collection effort, including in non-NBR taxes and non-tax revenues, and, on the expenditure side, put a cap on the growth of non-development expenditure and grants to loss-making SOEs, and stop project financing with high interest, short-maturity suppliers’ credit from abroad.

Fiscal Policy Reform. A well functioning and efficient tax system is necessary to ensure a high degree of voluntary tax compliance. To that end, government’s ongoing reform effort should aim at making the tax policy simple and taxpayer-friendly. Bangladesh’s tax effort is low by global standard, but yet its statutory nominal tax rates are quite high, even when compared with its neighbours. To cite an example, the corporate income tax (CIT) rate in the country for publicly listed companies (27.5%) is more or less similar to global level, but the CIT rates applied to non-listed companies (37.5%) and financial institutions (45%) are significantly above the CIT rates of most developing countries. In order to shore up business and investor confidence, these high tax rates need to be lowered. Financial institutions deserve to be treated equally with publicly listed companies, and the corporate tax for non-listed companies could be reduced to 35% from 37.5%. There is in fact some fiscal space for considering tax cuts because budget deficit for the current fiscal remains below 5% of GDP.

Banking and Monetary Policy: The main problem in the banking sector is poor governance, which has resulted in seriously infected portfolios of the state-owned commercial banks that still dominate the banking sector. Even the private banks are not immune from the infection. Largely as a result of corruption, a large portion of total bank loans is non-performing.


Interest rates are historically high in Bangladesh, which discourage investment, and so is the spread between deposit and lending interest rates. The high lending rate is mainly due to the high, risk free, interest rates offered by the National Saving Schemes (NSS). Commercial banks cannot but offer equivalent or higher rates than NSS rates to attract depositors. Since, however, the high NSS rates are set administratively on an ad-hoc basis, Bangladesh Bank’s monetary policy essentially has no effect on the structure of banks’ time deposit rates. Therefore, if lending rates are to be reduced, the current administrative basis for setting NSS rates must be replaced by a market-based system.

However, apart from the high cost of fund intermediation, which commercial banks generally claim to be main reason behind their high lending rates, the wide spread between lending and deposit rates is also due to their high operating costs and high provisioning requirements on classified loans. The central bank may persuade commercial banks to improve on these two areas, whereby they will be able to bring down their lending rates to some extent and thus narrow down the gap with their deposit rates.

Finally, in order to overcome the overall banking sector problems, government will need to (a) take steps to improve governance in the state-owned banks through improvements in management, and (b) make the central bank truly autonomous and independent of government control. The independence of the central bank is crucially important for enhancing the quality of its supervisory and regulatory functions.

Inflation Control. The steadily declining trend in inflation that prevailed since June, 2013 reversed sharply since the beginning of October due to the political unrest, which almost completely broke the supply chain and created shortages in supply. In such a situation, the traditional tight money policy will do little to bring down the inflation rate. Instead, it will be necessary to adopt an expansionary monetary policy that will make credit easily available to the private sector, boost production in fields and factories, and bring down prices.

As part of loan conditionality, however, Bangladesh Bank is apparently under some pressure from IMF, which wants to see tighter money and high interest rates to stem inflation. The IMF has also its supporters who always keep policymakers alarmed by propagating the fear of inflation and, without deeply looking into the actual causes of inflation, blindly endorse the IMF’s policies of tight money and high interest rates. They seldom realize that tight money policies would choke off the private sector’s effort to stage a comeback and embark on fresh investments that would help them raise production and profits and recover the losses they suffered during the mayhem of the past few months. This scribe recommends a truly accommodating monetary


policy, which at this time would effectively contribute to increasing real sector production and supplies and bring down prices and inflation.

Apart from a supportive monetary policy, deterrent measures will be needed against unscrupulous traders, hoarders, and profiteers that arbitrarily raise prices in the market. Also, strong steps will be needed to prevent criminal acts of extortion from businessmen and illegal toll collection by miscreants from vehicles during the movement of merchandise, which in large measure are responsible for raising domestic prices. At the same time, there will be the need for exercising some fiscal restraint such as reduction of government’s non-development expenditure, which will contribute to lowering prices.

Policies required to Expand Exports

The restoration of the US GSP facility, which was cancelled in June, 2013 following allegations of low labour standards, human rights violation and unsafe working conditions, is now the major concern of government and the RMG industry. The threat of GSP cancellation by the EU should also be averted by duly addressing the compliance issues. The GSP crisis is the result of the sheer apathy and greed of the RMG industry, and therefore, government must make the industry to ensure compliance in order to come out of the crisis.

Secondly, in order to expand exports, the country will need to diversify the composition of the country’s exports, which are now concentrated on a narrow range of products, with readymade garments accounting for 80 percent of the country’s total export earnings, and expand markets instead of merely relying on a handful of destination countries. Within the garments sector, the country would need to concentrate on producing high value items instead of depending on the limited range of low-value garment products.

In order to lessen the dependence on traditional export markets in North America and Western Europe, Bangladesh will need to explore opportunities in the emerging markets in Southeast Asia, Latin America, Russia, Turkey, and the fast growing developing countries of the Middle East.

Thirdly, regional cooperation could play a significant role in diversifying Bangladesh’s export markets. Bangladesh now exports to far-off destinations and very little to its neighbours. Although South Asia is currently amongst the fastest growing regions of the world, intra-regional trade now accounts for only 5.8 percent of the region’s total trade. Inadequate and under-developed transport connectivity vastly increases the cost of mutual trade between Bangladesh, India, Nepal and Bhutan, which has kept their mutual trade substantially below the actual potential.


Fourth, in addition to improving the quality of products that are in high demand in importing countries, Bangladesh will need to strictly comply with the prevailing global production standard in producing those products. Important elements of this global standard are ensuring workers’ rights and safe working condition in the workplace. This means that in order to enhance exports, Bangladesh will need to meticulously comply with the global production standard the developed world now asks of the country.

Fifth but not the last, government will need to formulate sound domestic policies, create congenial investment environment, and develop adequate infrastructure of roads, highways and ports for improving trade facilitation and ensuring smooth supply chain.

Support to the RMG Industry: In order to provide some relief to garments exporters that were hit hard by the recent ongoing political unrest and suffered unanticipated losses, the central bank in a recent meeting, presided over by the Finance Minister, has proposed that government give a 3 percent subsidy on interest on export loans, which will at least partly help RMG exporters to make up for their losses. Export loans at present carry a 7% interest but banks are unhappy because at this low lending interest rate they cannot meet the cost of their funds. Bangladesh Bank’s proposal in that regard is that lending banks will now be allowed to charge 10% interest on export loans, but RMG exporters will pay interest at the prevailing rate of 7% as before, and government will pay the other 3% to banks as interest subsidy.

The meeting also recommended an incentive package for the affected garments factories, which provides for a reduction of taxes on export earnings of the sector to 0.50-0.60 percent from the present 0.80 percent.

Government may also increase the amount of cash incentive for garments exporters to 6 percent of their export proceeds, from 5 percent now. And banks may raise cash credit on garment makers’ export earnings to 40 percent, which is 25 percent at present. These incentives will remain effective for one and a half years though garment makers want the benefits for at least three years.

Manpower Export and Remittances

In order to arrest the absolute fall in the number of workers going abroad in the past year that led to a decline in inward remittances in the current fiscal, government should intensify diplomatic efforts to persuade friendly Middle-Eastern countries to recruit more workers from Bangladesh. The recently agreed government-to-


government deal with Malaysia to send migrant workers has reportedly brought benefit to migrant workers by reducing the cost of migration. Similar deals can be struck with other major manpower importing countries as well. It is also necessary for Bangladesh to take steps to send more skilled workers abroad to enhance the inflow of remittances.

Human Resources Development

Bangladesh was able to outperform many developing countries, including some neighbours, in social development indicators, thanks to successful social campaigns by some NGOs and certain proactive government schemes. But there are still areas of concern, as the country is failing to consolidate its past achievements.

Bangladesh is falling increasingly behind other countries when it comes to public spending, in terms of GDP, for sectors like health and education. Public spending on health services, currently at only 1.2 percent of GDP, and on education at 2.2 percent of GDP, is grossly inadequate. In order to address the human development problems, government should gradually expand public spending on human development to reach at least 6-7 percent of GDP. The process of gradually enhancing government’s spending on education and health to the suggested level should begin right from the next annual national budget.

Health standards are poor, and malnutrition among children is a serious problem for the country. There are major concerns about the quality of basic services. A World Bank study several years ago showed that about 70 percent of doctors remained absent in hospitals.

The emerging health problems from urban environmental degradation, water pollution, solid waste management, along with the increasing risks of AIDS and other contagious diseases like dengue fever have also become a cause of concern. In rural areas, access to safe drinking water has increased but the problem of arsenic poisoning has emerged as a serious health hazard.

In the education sector, the major problem areas are the poor quality of education at all levels, reflected in low education achievements, high dropouts, and poor link of education with the job market. Quality problems in education relate to a host of factors involving curriculum, teacher quality, inadequacy of teaching materials, and governance problem relating to absentee teachers and corruption related to examination and testing.

Overall, the most pressing problem in human development is the low quality of public services, reflected in poor health standards and low education achievements.


Addressing this concern is a key development challenge for Bangladesh and hence it should be given a high priority in the government’s agenda.

Conclusions and Recommendations

1. Bangladesh economy made good progress in economic and social fields over the past two decades. It has been able to lessen the dependence on foreign aid and grow mostly with its own resources. In particular in the past five years, there were significant improvements in per capita income, exports, remittances, foreign exchange reserves and poverty reduction, as well as in various social sector indicators such as school enrolment, gender equality in education, life expectancy at birth, maternal and child mortality rates, and population control. However, all these gains are now under threat because of the losses and damages the long-standing political unrest caused to the economy. 2. The new government has an uphill task to heal the economy from the wholesale destruction caused by the political unrest, restore the growth momentum, and rebuild the confidence of local industrialists and businessman as well as foreign buyers and investors. 3. Government’s foremost task should be to improve law and order and enter into dialogue with political parties with a view to reaching a lasting solution of the problems that resulted in deadly violence that for a time virtually paralyzed the economy. The present calm after the January 5 elections may be short-lived because the unrest may flare up again if the opposition political parties cannot be brought into confidence. 4. On economic fronts, there was already a long to-do list for the government, and the recent political unrest has only lengthened this list. Thus, the infrastructure of roads, highways, bridges and railways that were extensively damaged or destroyed during the days of strikes and blockades will need to be repaired and restored on a priority basis. 5. Government will need to meticulously implement its pledges to address all important economic issues, as outlined in the party’s election manifesto announced in the run up to the January 5 elections. These pledges in main are to accelerate the rate of GDP growth, raise per capita incomes, reduce poverty, ensure food security, enhance opportunities for industrial expansion, and create employment for youths.6. Government also pledged to build some wholly new and costly infrastructures like river bridges, a modern airport, a deep sea port, a circular rail route around Dhaka city, and the Dhaka-Chittagong Expressway. Given, however, the shortage of resources caused by the slowdown in revenue collection and aid inflows, government will need to reprioritize its expenditure portfolio and concentrate on only the most urgent projects, leaving aside the entirely new and costly infrastructure projects of


long gestation periods. Government’s best strategy at the moment should be to develop education and skill development programmes, improve the essential physical infrastructure, raise electricity generation, support agriculture, and promote investment in the industrial sector.

7. In the sphere of agriculture, agro-production and agro-based industries should be supported through ensuring adequate funds and smooth supply of inputs, including electricity. Policy support to poultry and livestock sectors has to be devised. The past year’s high growth of agricultural credit needs to be maintained. Besides, the rural people and businesses hurt by shutdowns and blockades need to be given due support.

8. Industry and businesses would need to be given policy support to enable them recoup their losses. Support measures, recently proposed or already announced by government, are all skewed towards the garments sector. These supports should be extended to other sectors as well, e.g., agro-based industries, transport and small businesses and entrepreneurs that were affected by the political unrest.

9. The private sector’s appetite for investment is weak at the moment because of political instability and the high cost of loans. Besides fiscal measures, an expansionary monetary policy will be needed to prop up investment by making credit readily available for the private sector. High remittances, a comfortable foreign exchange reserve and excess liquidity in commercial banks will allow opportunities for an expansionary policy.

10. In fact, to encourage investment and create jobs, an aggressive monetary policy by the central bank is a must, something like the Bank of Japan is now doing. After the elections, the economy is showing some signs of healing itself, but that healing process won’t go very far if policy makers obstruct it by pursuing a tight money policy and keeping interest rates high.

11. Poverty alleviation programmes already occupy a high priority on the government’s policy agenda. Government will need to expand the social safety network but at the same time also ensure efficient use of resources and check leakage. Active government interventions in favour of the poor will be needed to reduce inequalities in income. Increased emphasis should be given to improve the quality of primary and secondary education and primary health care, the major beneficiaries of which are generally the poor.

12. Governance in the banking sector and capital markets must be improved. Growing debt defaults and recent loan scams and frauds at the state-owned banks have depleted resources of the once strong banks and crippled the banking sector. Strong measures will be needed to prevent recurrence of bank sector frauds and


improve loan recovery. Very importantly, Bangladesh Bank should be made independent of government control, which is necessary for enhancing the quality of its supervisory and regulatory functions.

13. Government should continue with its ongoing reforms of tax policy. Modernizing the NBR and creating an effective and efficient revenue management system is now a national imperative.

14. Bangladesh must consolidate its past achievements in human resource development, in which it outperformed many developing countries in the most recent past. Government’s major task in this regard should be to improve the quality of education and health services. To that end, the allocation for education and health should be increased significantly in the next budget. As proportion of GDP, government currently spends only 1.2 percent on health services and 2.2 percent on education, which are grossly inadequate. In order to address the human development problems, government should expand public spending on human development (education and health) to at least 6-7 percent of GDP.

15. The tasks suggested above may appear daunting but, given Bangladesh’s resilience and the strong gains the country achieved in the past in wide areas of the economy and society, these tasks should not be difficult to accomplish. Fortunately, there are favourable domestic and external factors that will help government to overcome all impediments and move forward to regain the growth momentum and accelerate the growth process further.

16. On the domestic front, the budget deficit as a percentage of GDP is quite comfortable at present. The exchange rate of Taka in terms of US dollar is also stable, underwritten by surpluses in both current account and overall balance.

17. On the external front, international prices of food, fertilizer and fuel are either in a declining trend or stable while the global outlook in 2014 is for stronger economic growth.

18. The most important favourable factor for the economy is the government’s express readiness to work with opposition political parties toward a resolution of the political conflict and clean the mess created by the unstable political situation as well as its firm resolve to adopt necessary steps to accelerate economic growth. Needless to mention, much will depend on how quickly the prevailing political unrest can be resolved through amicable settlement of disputes among the feuding politicians and political parties.

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bangladesh economy in stress: tasks for the new government

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