STAR

Steering the economy in 2010

Professor Mustafizur Rahman
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Mark Twain once said: "December is the toughest time of the year. Others are January, February … October, November!" For a country such as Bangladesh, in a similar vein, managing the economy does pose formidable challenges, on a continuing basis, with problems carried over from the past years, and new challenges emerging over the subsequent years. No one year is less challenging than the other and keeping Mark Twain's irony in mind, by any measure 2010 is going to be yet another challenging year for Bangladesh from the perspective of macroeconomic management.

In the preceding year of 2009 the increasingly globalising economy of Bangladesh had to address the adverse impacts and implications of the global economic crisis by putting in place counter-cyclical measures, coming up with stimulus packages and taking measures to rev up the domestic demand. As is known, FY2008-09 ended with a 5.9 percent GDP growth performance; 2009 was also able to record stellar performance of the agriculture sector, posted buoyant remittance flow and ended with historically highest record level of forex reserves. However, the year 2009 also experienced significant volatility in export earnings, less job opportunities in the overseas market, inflationary trends gaining steam and depressed investment trends.

The challenge in terms of macroeconomic management in 2010 will be to sustain the positive track record of the past, tackle the emergent negative signals inherited from 2009 and face new challenges. In view of this, following sections focus on a number of areas, which are likely to pose heightened challenges for Bangladesh's policymakers in 2010.

Energising investment
Investment continues to remain the Achilles heels of the Bangladesh economy. With an investment which is equivalent to about 24 percent of GDP, and with incremental capital-output ratio (ICOR) hovering around 4.0, Bangladesh needs to both significantly enhance its investment-GDP ratio and reduce the ICOR by raising capital productivity. It is to be noted that, in the first five months of FY2009-10 import of capital goods and capital machineries was about 2.1 percent lower than the corresponding period of the preceding year; growth of import of textile and articles thereof (one of the major industrial raw materials) was (-) 11.8 percent in this time.

Uncertainties about availability of electricity and the looming gas rationing have discouraged investors to go for large-scale expansion, stalling decisions about adding new capacities or building new enterprises. This is also reflected in low industrial term loan disbursement of about 9.1 percent in the first quarter of FY2009-10. ADP utilisation rate of 29 percent in the first six months of current fiscal year. Power division, which has been centre of attention for understandable reasons was able to use only 22 percent of its total allocation in the first half of FY2009-10.

Pace of ADP utilisation, whilst high in terms of historical trends (compared to 24 percent in the preceding year, and 42.2 percent higher in monetary terms over corresponding period of the last year), will need to be significantly raised if the rest 71 percent of the allocation is to be utilised over the next six months, i.e. the second half of FY2009-10. What is also disappointing is the not-so-good performance record of the 20 ministries under medium term budgetary framework (MTBF) in terms of ADP implementation.

It is to be noted in this connection that of the 886 projects in the ADP for FY2009-10 only 35 are new; 511 projects are either carry over projects (165 projects) or to be completed in this fiscal year (346 projects). Priority will need to be given to completing these projects on time.

AMIRUL RAJIV

True, import trends and L/Cs opening figures do indicate some positive movements in recent times L/Cs opening increased by about 37.4 percent in the first six months of FY2009-10, and L/Cs opening for industrial raw materials has entered into a positive terrain, posting a rise of 2.9 percent over the corresponding period. Sustaining these trends will be important -- however, this will hinge on how the investment scenario spans out.

By all indications the crowding-in impact on private sector investment will be strengthened only if critically important investment-stimulating sectors such power, energy and infrastructure are able to register accelerated growth. About 475 MW of new capacities have been added to the national grid during the first six months of FY2009-10, however, the pace will need to be significantly accelerated in 2010.

Budget for FY2009-10 has kept Tk. 2,500 crore on account of the public private partnership (PPP). The first bid under the PPP (Construction of the Second Dhaka-Chittagong National Highway in Bangladesh) has also been floated in January 2010. One hopes that in 2010 the PPP Act will be in place, and PPP will gain momentum as well.

Although significant buoyancy was observed in the capital market in 2009, the number of entities coming up with new IPOs, including the Grameen Phone Ltd., was only 18. The boom in the capital market, providing opportunities for mobilising savings of small savers and raising equity, needs to be welcome. However, most of the play so far has revolved round the secondary market. The price earnings ratio, at 25.7 (in December 2009), is considered by some experts to be somewhat high and risky. Smart monitoring will be called for to ensure that the savings harnessed through the capital market gets translated into real sector investment, and that the interest of small savers are adequately safeguarded. Offloading of shares of SOEs and private sector enterprises will need to be Stimulating the export sector
In recent months, Bangladesh has experienced some of the lagged impacts of the global economic crisis. Export earnings have declined by (-)6.9 percent in the first five months of FY2009-10. Although a majority of the developed countries have entered the recovery phase, one can discern some shifts in the relative competitiveness scenario in the global market, particularly in view of the stimulus policies pursued by Bangladesh's major competitors such as China, India and Vietnam.

Cleverly crafted exchange rates policies of these countries have also strengthened their competitive position. Some of Bangladesh's competitors in the apparels market, including China, have once again reverted back to policies of stimulating export of lower-end products where Bangladesh has traditionally been strong.

In order to boost exports to new markets, the private sector will need to be given all the support it needs to take advantage of the interest of Japanese apparels buyers in Bangladesh. In this context, speedy implementation of the incentives for new markets for apparels items provided as a part of the stimulus package will be required. The promising export-oriented ship-building sector, which had received orders worth about $600 million before the global economic crisis (for ships with 2 thousand -- 20 thousand tonnage equivalent), will need to be provided with the necessary support to strengthen its foothold in the global market. It will not be easy to maintain twenty plus percentage growth rate in earning from services export in 2010, in line with the performance of 2008 and 2009.

Lower number of people going abroad will at one point catch up with the remittance flows if structure of the migrant work force does not change significantly, so that more skilled people go abroad. The search for new markets abroad and the twin tasks of reducing the cost of migration and skill upgradation ought to be pursued in all earnest in 2010.

Consolidating agriculture performance
Performance of agriculture sector in Bangladesh during the recent past epitomises the dictum that good policies and high quality implementation of those policies do give good dividends. The timely downward revision of fertiliser prices, subsidy for diesel, timely availability of and subsidy for electricity for irrigation -- all these policy initiatives have contributed to the production of 32.16 mmt rice and wheat in FY2008-09. This is 8.1 percent higher than the preceding year. Attaining FY2009-10 target of 35.25 mmt, which is 9.6 percent higher than the last year, will thus critically hinge on output performance during the upcoming Boro crop the target for which has been set at 19.0 mmt.

In this connection, the recent reduction of administered price of non-urea fertilisers (ranging from 30 percent to 45 percent), allocation of Tk. 750 crore for diesel subsidy (raised from Tk. 350 crore allocated in the budget), continuation of 20 percent subsidy for electricity used in irrigation pumps and introduction of krishi cards (to 18 million farmers) for distribution of agricultural inputs, loans and subsidies are indeed welcome measures.

Availability of good quality seeds, electricity and inputs, to the required amount, at affordable prices, and on time will be crucial driving factors to ensure success here. What will be challenging, though, is balancing the conflicting interests involving producers (price that gives incentives) and consumers (affordable rice price). The procurement price fixed for farmers does have downstream impact on retail prices and the attendant tension cannot be denied. Some experts have put forward suggestion about fixing Tk 15/kg for paddy and Tk 25/kg for rice as procurement prices for Boro in order to give positive signals to producers.

This will need to be carefully considered. Maintaining the required stock (some experts have suggested 15 lakh mt), appropriately timed open market operation as and when needed, and efficient distribution through safety-net programmes ought to get priority in this connection. In 2010, incentives to promote adoption of hybrid and HYVs, work on change in cropping pattern and crop rotation, maintaining the dynamics of balance between the use of the surface and the ground water for irrigation, and addressing possible climate change impact on Bangladesh agriculture ought to receive high priority.

Enhancing employment opportunities
Each year about 18 lakh additional people join Bangladesh's workforce. With an underemployment plus unemployment rate of 28.5 percent already in the pipeline, creating job opportunities for these and also the new entrants to the job market poses formidable challenge for Bangladesh.

Since labour absorption capacity of agriculture is becoming increasingly limited, it is through employment creation in industrial and services sectors that this challenge could be adequately addressed. Employment elasticity of GDP growth being about 0.34 in Bangladesh, the pace of GDP growth rate will need to be significantly raised to accommodate the increasing labour force of the country.

With lower number of people going abroad (about 17 lakh people went abroad for work in 2007 and 2008; to compare, the estimates for 2009 are only about 4.75 lakh), good ADP utilisation performance and creating opportunities for private sector to investment and generate new jobs in the economy will be a challenge that will need to be addressed in 2010.

Of vital importance here will be the ability to stimulate the SME sector and making credit available to the SMEs at low interest rates. Speedy implementation of the stimulus and incentives given to export-oriented sectors will also be called for. Underutilisation of allocations earmarked for "Employment for the Hardcore Poor" (which had replaced the erstwhile '100-Day Employment Guarantee Scheme') during the first phase of the programme is not a good signal.

Whilst the National Service for the youth is a good initiative, the entire scheme should be well thought out and designed in a manner so that the selected young women and men could be subsequently gainfully employed within and outside the country. Required training facilities, adequate trainers and appropriate infrastructural support will need to be ensured before this programme is graduated from the current pilot phase to the envisaged nation-wide status.

Stimulating domestic resource mobilisation
The target growth rate for domestic revenue mobilisation in FY2009-10 is about 19.9 percent. However, this is unlikely to be achieved. CPD estimates are that a growth rate of 13.5 percent will perhaps be attained and revenue collection may fall short by about Tk. 4,500 crore. Whilst NBR targets may be attainable, with income tax collection rising by an impressive 23.4 percent in the first five months of FY2009-10, the targets for non-NBR component will perhaps not be achieved. The much-hyped facility of legalising undisclosed money could generate only Tk. 0.35 crore from the paltry sum of Tk. 3.0 crore that was declared in the first quarter of the current fiscal year. Bangladesh has gone for a higher deficit budget this year, to the tune of 5 percent of the GDP in view of the counter-cyclical measures, which have driven up the budgetary expenditures.

Nevertheless, because of the likely underutilisation of the ADP, actual deficits may as well be similar to the historical trends. However, renewed efforts towards domestic resource mobilisation ought to be given high priority if dependence of the ADP on domestic borrowings and foreign aid is to be reduced, and if more local resources are to be made available for undertaking the various developmental and safety net programmes in a non-inflationary manner.

Containing inflationary pressure
Inflationary pressure started to gain steam towards the end of 2009, with national inflation rate in November 2009 rising to 7.2 percent on point-to-point basis. What is disquieting is also the higher food inflation rate of 7.8 percent (non-food being 6.4 percent) with urban food inflation being 9.8 percent and rural 7.0 percent.

Although more up-to-date figures since then are not available, the inflationary momentum appears to have sustained and gained some momentum since then. The January 2010 Monetary Policy Statement of Bangladesh has made an attempt to address this issue by reducing the target for domestic credit growth (by scaling down the growth target for credit to the public sector). In view of the need for stimulating investment, the scope for pursuing overtly contractionary monetary policy at this point of time appears to be limited, and it will perhaps be advisable to continue with the accommodative monetary policy being pursued by Bangladesh Bank.

However, it will be a challenge to tackle the so-called impossible trinity of addressing inflation rate, exchange rate and interest rate simultaneously, and the central bank will have to remain vigilant and be ready to change its monetary policy stance if and when this is required in view of the emergent situation. Since global commodity prices are on the rise, and global inflationary trends tend to be transmitted quite speedily to the domestic market, renewed efforts will be required in terms of supporting production, maintaining stock, timely market intervention and monitoring. Of critical importance here will be monitoring the movement of rice prices, which have registered, some rise in the recent past.

From this perspective, it will be crucially important to ensure a good Boro harvest in the coming months. Maintaining good stock of rice and wheat and going for open market sales as and when required will be important.

Only a few of the major challenges that the Bangladesh economy is likely to face in 2010 have been flagged. This is by no means an exhaustive menu. Admittedly, in a dynamic scenario, new challenges could as well emerge as 2010 progresses and these will need to be addressed and tackled through appropriate policy responses. No doubt, strengthening of the capacity of development administration through appropriate incentives and regulatory reforms will be critically important from the perspective of addressing the emerging challenges that are likely to confront the Bangladesh economy in 2010.

Professor Mustafizur Rahman is the Executive Director, Centre for Policy Dialogue (CPD)

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