Views of Professor Atiur Rahman, PhD. Department of Development Studies, University of Dhaka, Chairman of Unnayan Shamannay and former General Secretary, Bangladesh Economic Association.

Bangladesh economy is at a crossroads. It is now facing a number of challenges. The major challenges are economic stagnation, high inflationary pressure, post-flood management and regaining business confidence.

Inflation is the biggest challenge for 2008. The impact of the rising inflation rate is being felt almost everywhere; the prices of essential commodities have gone up, and so have the costs of living. There are a number of factors behind the rising trend of inflation in Bangladesh. The factors that contributed to the price hike in essential items, most particularly food, are slow growth in agriculture, rise in the world prices of food items, depreciated value of taka against the US dollar and especially against the Indian rupee and rise in the prices of diesel and kerosene. Lifestyle of China & India is also creating problem for us. The income of the workers of these countries has been going up. They are consuming more creating high demand for foods. Besides, most of the developed countries are now converting crops into bio-fuel and in the last 5 years it increased 5 times.

2007 is the worst year in terms of floods and cyclones and thus there have been significant losses in the agriculture. Post flood management is likely to be one of the major challenges in the near future. Also, we are observing a worldwide famine syndrome as a result of agriculture production going down. So, import cost is very high. I observe the present inflationary situation will continue in the year 2008.

Poor people are directly affected by food inflation. More than 60% of their income goes to buying foods. According to our survey, inflation rate becomes double to the poor people compared to the normal inflation rate. In August 2007, food price inflation rate on average was 21.3% for the low income households but the normal food inflation rate calculated by Bangladesh Bureau of Statistics was 12.5% in July 2007. So, how can the poor people survive? Either they have to eat less and they will become more malnourished or they will have to spend less on health, education etc. which will create another human poverty.

It appears from several analyses that rising world prices of food lead to rises in the consumer price index with significant margin and, as a result, it has some profound negative impacts on inflation and poverty in Bangladesh. We need to import by reducing the reserve. Also, the government has to give subsidy on food-specially to the poor-to ensure social protection. Building reserve is not a bad idea but it should not be at the cost of creating poverty. Another big challenge is the adjustment of fuel price. We can't adjust the price (increase the price to adjust to the international price level) overnight, as it will directly affect agriculture & the poor. Adjustment of price is a must but we will need to adjust /increase the price slowly. We can consider whether we will adjust the price or we will invest more, say in refinery, so that more efficient distribution of fuel is possible. We have to divert our energy to CNG and even we should change our lifestyle to consume less energy or save more energy.

So there are a lot of challenges, but all these are for the uncertainty in the business sector.

We have constructed a Business Confidence Index (BCI) on the basis of a business sentiment survey conducted recently among businesses in Dhaka. We have found that BCI (out of 100 point) for RMG sector is 61 point, Pharmaceuticals sector is 62.67 point, Financial Institution sector is 61.43 point. For other industries it is 43.72 point and overall it is 48.50 point. Our findings suggest that currently, the business community in Bangladesh is suffering from lack of business confidence, which can have negative implications for future investment and economic growth.

There is a serious concern that economic growth is likely to slow down in the coming days. This concern could be justified by looking at a number of indicators. There has been a decline in the investment-GDP ratio in FY 2007 against FY 2006. Furthermore, L/Cs opening for the imports of capital machineries, machineries for miscellanies industries experienced reduction in the share in the total L/Cs opening.

GDP growth will be around 5.5 percent to 5.8 percent; this is an Argo-based estimation. If we consider the manufacturing sector and service sector it may even go lower. But 5 plus growth rate is not bad despite whatever is happening. If we can organize our politics well, institutions well, a temporary setback on the growth rate will not be so bad for our economy. The problem is we are not doing that; election schedule should be declared so that business confidence can come back. Also, the government should come up with strong political agenda. The anti-corruption drive is creating problems for growth to some extent. We have to do everything very carefully. We have to realize and decide which way to go-whether we need no growth no corruption or some growth some corruption-these are the options the government has to think about. We shouldn't choose an extreme position. Regaining the confidence of the businessmen in their usual business activities is very important for the smooth functioning of the supply chain. This is very important not only for curbing inflationary pressure but also for getting rid of the current state of stagnation in the economy.

RMG export growth has begun to suffer because of reduced orders even before the withdrawal of restrictions on China in 2008. China will create problem in our export when it comes with full force in 2008. Already some of our RMG orders are being diverted to China as it has better infrastructure and provides one stop service and labour stability.

The pharmaceutical sector will do better in the coming years; already we have got some new licenses. We also need to focus on labour export; our embassies are not functioning well in this regard.

Investment is not taking place. This is for many reasons. Business people are not taking money from the banks and investing and so the liquidity is swelling; I am worried about the investment sector actually. The rate of interest should be reduced to encourage more investment.

Govt. has been able to mobilize revenue; this is the biggest success of this government. If this had not been done problems could be more serious. Government tried to bring transparency; this is good because at least people know what the government is trying to do & how it is responding to the people. Failures of the govt. are that it could not control inflation, could not hold elections.

A tightened monetary policy is unwelcome when the economy has shown signs of near stagnation with slower growth, high inflation and high unemployment. A contractionary policy is likely to result in an adverse impact on investment, employment generation and economic growth for Bangladesh. Very recently Bangladesh Bank has changed its position, and has made it known that it would move from contractionary monetary policy to a cautious expansionary monetary policy. This is a pragmatic step. Indeed, future development of the country will depend on how effectively these challenges are encountered.