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The Financial Express

Hopes still abound for economic turnaround


Hopes still abound for economic turnaround

Finance Minister AHM Mustafa Kamal said recently the country's economy will surpass that of Malaysia and Singapore by 2024. He said the Bangladesh economy flourished immensely under the leadership of Prime Minister Sheikh Hasina.

Bangladesh is set to become the world's 26th largest economy within the next decade, according to a report published by UK-based Centre for Economics and Business Research in early January. It says Bangladesh's economy, now ranked 40th, will overtake heavyweights such as Malaysia (34th), Hong Kong (37th), Singapore (38th), Denmark (40th) and Norway (36th).

The minister said the country will achieve all of its goals by the estimated time.

However, the coronavirus pandemic is posing a big challenge before the country's economy. The International Monetary Fund (IMF) has already lowered the country's GDP growth projection to 3.8 per cent for fiscal year 2019-2020 from its earlier estimate of 7.4 per cent.

The downward GDP (gross domestic product) growth revision is 3.6 percentage points lower than pre-Covid estimates, according to its Bangladesh report released recently.

The IMF projected readymade garment exports and remittances, the two major sources of external financing, to decline sharply.

Necessary policy responses to prevent a domestic pandemic, including shutdown of major cities, will inevitably affect economic activities and slow growth, the IMF said in its report.

It, however, predicted the gradual recovery in the second quarter of FY '21.  Despite signs of disruptions in the domestic food supply chain, overall inflation is projected to remain broadly unchanged, owing partly to a bumper harvest, it said.

The Washington-based global monetary watchdog has advised the authorities to re-focus on addressing the banking sector problems, particularly state-owned banks, following the crisis.

The authorities have started amending several laws to enforce more discipline, but repeated loan rescheduling, regulatory forbearance, and failure to deal with weak and insolvent banks hindered progress. For strengthening the banking sector, the IMF gave a set of recommendation - introducing risk-based supervision and avoiding regulatory forbearance; strengthening corporate governance in private banks, ensuring that classification and provisioning requirements are in line with Basel standards.

The Fund also recommended addressing the poor financial performance of state lenders through improved governance and risk management, a more level-playing field, and a clear definition of the public mandate with transparent budget support and putting in place a framework for effective resolution of weak banks.

It said loans under the stimulus package should be effectively targeted and monitored with due diligence and risk assessment considerations by banks to preserve banking soundness while providing support where most needed.

The IMF advised the central bank to preserve banks' capital resources by temporarily suspending distribution of capital, including dividends, share buybacks, and increases in executive compensation and discretionary bonus payments.

The banking sector is expected to play an important role in channelling assistance to the economy. A substantial portion of the recently unveiled stimulus packages will be provided via subsidised bank loans to targeted recipients.

The prime minister has so far announced a total of 19 stimulus packages worth Tk 1.03 trillion to cushion the shock of the pandemic on various sectors.

The packages, which are 3.7 per cent of the GDP, are being implemented under the supervision of the central bank and the finance ministry.

A World Bank report, before the outbreak of coronavirus, projected the country's GDP growth would surpass that of India, China and Pakistan in the current fiscal.

The WB report said that growth took a hit in much of South Asia as the impact of the global economic slowdown was compounded by the cronoavirus crisis.

The economic slump in India, a deepening recession in Iran, and looming twin crises (fiscal and balance-of-payments) in Pakistan have affected the outlook for many of the smaller economies in the region, which have struggled to maintain solid growth rates in an increasingly challenging global environment.

The World Bank had earlier painted a brighter picture for Bangladesh's economy for the next two fiscal years, pinning hopes on strong domestic demand, exports, investment and remittance. The Global Economic Prospects, a flagship report of the WB Group, said economic activity would grow at an average of 6.7 per cent a year over fiscals 2018-2020, benefiting from strong domestic demand and strengthening exports.

Whatever the growth rate projection for the country, the government must take some precautionary measures to face unpredicted disasters arising out of the effects of the pandemic. It needs to adopt a flexible budget for the next fiscal year so that it could include priorities later to safeguard the economy from the impacts of the recession. Indeed, no budget was prepared in the country's history under such uncertainties.

The government also needs to streamline its expenditure to create more jobs to help the poor get out of poverty. One of the development challenges should be to raise expenditures in the public sector through annual development programme (ADP) and channel more funds to the market. Line ministries should have more institutional capacities to implement ADP and raise public sector infrastructure investments.

What matters most is stability and sustainability of the growth so far achieved. Investment in infrastructure such as power, roads and telecommunications will be extremely important to keep the sustainable growth rate above the potential rate.

However, in addition to output growth - and for poverty reduction purposes - one needs to look at the impacts of that growth on employment and real wage. Likewise, industrial growth cannot reduce poverty unless growth is employment-intensive and inequality-reducing in nature. There should be efforts to ensure macroeconomic stability rather than to show higher GDP growth rate.

 

 szkhanfe@gmail.com

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