A concerted, coordinated effort must for macroeconomic management

The assessment of key macroeconomic correlates of Bangladesh being carried out by the Centre for Policy Dialogue (CPD) as part of its flagship Independent Review of Bangladesh Development (IRBD) programme comes at a crucial juncture in the country's development journey. The measures required to correct some of the long-standing as also the newly emerging disquieting trends informing the management of the economy warrants in depth analysis to arrive at possible solutions.

As is known, the Bangladesh economy had to face formidable difficulties owing to the adverse fallouts of the Covid-19 pandemic. At a time when the economy was coming out of the worst impacts of the pandemic, the situation was exacerbated by the Russia-Ukraine war which started in late February 2022 and was manifested in high global commodity prices, high imported inflation, and supply chain disruptions.

While these exogenous factors have definitely left their footprints, embedded structural weaknesses, sub-optimal policies, lax policy implementation, lack of good governance, and inability to implement the required reforms have compounded the difficulties facing macroeconomic management in recent times.

In July 2022, CPD had cautioned that these weaknesses would aggravate the pressure points in managing the Bangladesh economy. Indeed, the Bangladesh economy has remained under considerable pressure throughout the first three quarters of FY2023. This was manifested through, inter alia, subdued momentum in revenue mobilisation and consequent shrinking of the fiscal space, high reliance on borrowings from the central bank for financing budget deficit, tightened liquidity position of scheduled banks, high prices of essentials, deteriorating external sector balance and foreign exchange reserve.

In view of these challenges, the Bangladesh government has resorted to a 42-month International Monetary Fund (IMF) supported programme under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) in an attempt to restore macroeconomic stability. [The key objectives of the ECF/EFF arrangement are to restore macroeconomic stability and prevent disruptive adjustment (i.e., strict demand and import management measures which are disproportionately affecting the poor and the vulnerable and are likely to adversely impact medium-term growth prospects if they remain in place). The ECF/EFF programme is also expected to induce momentum in implementing source of the overdue macroeconomic reforms.]

As IMF itself mentions, 'Bangladesh would risk falling into a subpar equilibrium of low growth, low investment, and weak human development, if left to restore macroeconomic stability on its own'. Furthermore, to meet the large climate financing requirements, the government in parallel sought support from the Resilience and Sustainability Facility (RSF) of the IMF. [The programme objective of the RSF is to improve the climate investment potential of Bangladesh.]

Bangladesh has also sought budget support of US$ 500 million form the World Bank in April 2023. The timeline of the IMF programme coincides with the preparatory phase of Bangladesh's LDC graduation and the second half of the period to attain the SDGs.

Given the juxtaposition of current developments and upcoming milestones, it is critically important to focus on consolidating the gains of the past, restoring macroeconomic stability, and adjusting to new realities taking the growth and stability trade-offs into cognisance. It is also to be noted that the IMF programme is being implemented on the eve of presentation of the FY2023-24 budget and when the country is preparing for its next national elections.

As experience shows, any attempt to restore macroeconomic stability under a predetermined set of conditions inevitably entails some hard choices and limits the options available for policy manoeuvring. The below examples could be useful to highlight this point.

1. If maintaining fiscal balance via lowering the budget deficit is the policy objective, then exploring new avenues of revenue mobilisation or reducing public expenditure might be unpopular for a political government. Also, continued bank borrowing to finance the growing budget deficit may crowd out private investment.
2. If improving the external sector balance is considered, then pursuing a free-floating exchange rate regime may entail inflationary implications. On the other hand, maintaining a managed exchange rate regime may not bode well for the foreign exchange reserve situation.
3. As a way of containing inflation, if a market-based interest rate is pursued, then it will imply higher cost of funds for the businesses. Counter inflationary measures such as providing direct fiscal support to the vulnerable groups via social safety nets may contradict the objective of maintaining a healthy fiscal balance.
4. Similarly, providing subsidy on agriculture and allocations for public procurement to ensure food security may not go hand in hand with the objective of maintaining fiscal balance. The subsidy required to ensure food security will depend on the import price of agricultural inputs, which, in turn, will be impacted by the exchange rate regime and global commodity prices.

Such intertwined nature of policy options calls for a concerted and coordinated effort towards macroeconomic management. At the same time, it raises further questions regarding how the very concept of macroeconomic stability should be perceived.

Past experiences from the developing countries show that stabilisation packages prescribed by the multilateral agencies share many common elements. However, there are divergences in the results of such packages.

In this backdrop, CPD identified four sets of critical issues which should receive heightened attention in the current policy discourse, particularly from the macroeconomic management viewpoint. These are: maintaining fiscal balance, improving external sector equilibrium, containing inflation, and ensuring food security. While the think-tank acknowledges the presence of several other critical issues, the aforementioned four were consciously focused upon given their significance in restoring macroeconomic stability, disciplining macroeconomic management, and identifying development priorities.

Each of the selected four blocks of issues takes note of the IMF conditionalities (e.g., subsidy management, reserve estimation and milestones, market alignment) and their implications, data-related concerns etc. Furthermore, findings from recent nationally representative surveys such as HIES and LFS have been made use of as required.

Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Mr Towfiqul Islam Khan, Senior Research Fellow, CPD, ([email protected]); Mr Muntaseer Kamal, Research Fellow, CPD, ([email protected]); Mr Syed Yusuf Saadat, Research Fellow, CPD.