Interview with M.A. Taslim, PhD, Professor of Economics, Dhaka University
The Executive Times (ET): The 7 percent GDP growth target set by the Bangladesh government for FY2011-2012 seems far from achievable. What is your own estimate?
M.A. Taslim (MAT): The economy is unlikely to maintain the momentum of the last year. The 6.7 percent growth rate was achieved with both imports and exports growing at over 41 percent and private credit growing at 25.8 percent. This year exports and imports are likely to decline very substantially. Exports have grown only 17.3 percent during the first 5 months of this fiscal year and imports have grown 23.2 percent during the first 4 months. Exports are likely to decline further as the full impact of the economic woes in EU and USA take their toll.
LC openings for the import of machinery and raw materials during the first 4 months have fallen by a massive 33.9 percent and that for raw materials have fallen by 0.5 percent. These suggest a significant slowdown in investment and current production this year relative to that of the last year.
Bangladesh Bank has already applied brakes on monetary growth. Private credit growth during the first 4 months of 2011-12 has declined to a little more than one-half of what it was a year ago. The growth in private credit will be most likely held down as controlling inflation is a priority. Hence, private investment will slow down considerably.
The balance of payments is showing signs of stress. Foreign assistance has dried up and foreign investment is not forthcoming. Remittances growth is still at the low level of the last year. The emerging deficit will depreciate the local currency. A slowdown in GDP growth is the most likely outcome.
On the plus side are the growth in public investment, good growth in government revenue and good performance of the agricultural sector. The latter has enabled a very substantial reduction in food import. But these are unlikely to fully offset the impact of the negative factors. Barring some spectacular development economic growth is likely to be much below that of the last year.
ET: What are the challenges for the economy in 2012?
MAT: The principal challenges are
1. arresting the spiraling inflation
2. restoring fiscal discipline
3. creating a conducive environment to raise business investment
4. availing foreign labor market opportunities
5. reducing trade barriers
6. providing adequate physical and legal infrastructure, and
7. raising labor skill
ET: What about foreign direct investment (FDI)? Will it pick in 2012?
MAT: There is little likelihood of a large increase in FDI. The spat with the USA and the World Bank will prove costly. The image crisis that has developed will take some time to recover from. The infrastructure bottlenecks are a hindrance to both local and foreign investment. Because of these problems the opportunities for attracting substantial foreign investment is slim.
ET: What do you think should monetary policy priorities be for Bangladesh Bank for the rest of FY2012?
MAT: The top priority has to be achieving the target monetary growth, and thereby bringing down the soaring inflation rate. Since the current fiscal policy is inconsistent with a restrictive monetary policy, Bangladesh Bank will need to show great ingenuity and firmness in steering the economy in the right direction.
ET: How can Bangladesh achieve export and export destination diversification in 2012?
MAT: This is the job of the private sector. The government should not try to dictate strategies. What it should do is provide adequate physical and legal infrastructure, and reduce cumbersome bureaucratic procedures that raise business costs. It's a mistake to try to choose winners and treat sectors differently on the mistaken notion of potentials. A level playing field is the best course of action for the government.
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The Executive Times (ET): What is your ballpark estimate of the country’s GDP growth in FY2011-2012? Please give reasons.
Mahfuz Kabir (MK): According to the Sixth Five-Year Plan, Bangladesh has been projected to achieve 7 percent growth in FY 2011-12. In the context of recent pessimism over macroeconomic performance, now the biggest question is whether the country would attain this growth rate, not what the growth rate is likely to be. The answer is not straightforward. On the optimistic front, performance of food production was satisfactorily high, which contributed to avoiding the potential food scarcity during the second quarter of the current fiscal year. Manufacturing sector also performed well. Bangladesh Bank data shows that export registered very high growth (56.16 percent) in the first four months of the current fiscal year (July-October 2011) compared with that of the same period in the previous fiscal year (17.12 percent). The growth of RMG exports was 56.55 percent during July-October 2011 and 16.51 percent during the same period of the previous year. Recent exchange rate depreciation by a significant margin is likely to boost export, especially RMG. Bangladesh’s latest Input-Output table shows that knitwear and woven garments jointly contribute 7.4 percent of GDP in which more than 65 percent input comes from 27 sub-sectors as forward and backward linkages. The contribution of these two giant export industries has now increased, which must have a positive multiplier effect on the whole economy. This would contribute to a faster GDP growth. This year [2011] the RMG exports to the US market has secured the third position by superseding Mexico and Indonesia. According to a recent study, export contributes to GDP growth in Bangladesh significantly both in the short and long run. Since service sector goes hand in hand with agriculture and manufacturing, it can be concluded that good performance of these two sectors would help positively in attaining 7 percent growth of GDP in FY 2011-12.
However, there are impediments to accelerating economic growth. The latest Bangladesh Bank data show that import of capital machinery registered lower growth (14.58 percent in the current fiscal year while 38.9 percent in the previous fiscal year), which might stall the manufacturing growth in the coming months if the current growth rate prevails. On the other hand, the growth of NBR tax revenue was 16.57 percent in the first four months of the current fiscal year and 26.57 percent during the same period of the previous year. In the midst of stagnant inflow of foreign aid, lower growth of tax revenue and declining sales of national savings certificates, the government is compelled to borrow from the central and commercial banks to finance an ever-gigantic budget, which creates extra pressure on macroeconomic management. There are two other well-referred-to ‘evils’, viz. general inflation, and increase in electricity and fuel price that would trigger the cost of production and transportation.
Nevertheless, Bangladesh economy grew significantly better in the last fiscal year -- 6.7 percent in 2010-11 from 6.2 of 2009-10 -- despite acute shortage of power supply, increasing inflation, weak economic governance, significantly lower investment compared to national savings, and high deficit financing. Therefore it is possible for the economy to attain the projected growth in the current fiscal year by capitalizing on the above positive aspects of economic performance.
ET: What are the challenges facing the economy of Bangladesh in 2012? What impact, if any, will the current Euro-zone crisis have on the economy?
MK: The major economic challenges are mainly six. The topmost challenge is how to stabilize the capital market. The government has already taken a range of measures to boost it up, but it is still largely unstable and unattractive to investors.
Second, transport and communication remain fragile because of a lack of adequate and quality investment in the last two years, which hinders a vibrant emergence of the economy through better rural-urban, urban-urban and rural-rural connectivity.
Third, excess government borrowing from the banking sector is likely to multiply debt burden of the government as hard terms are involved in such borrowing, especially from Bangladesh Bank. There is a popular notion that aggressive public borrowing results in squeezed private borrowing, thereby creating ‘crowding out effect’ on private investment which is detrimental to the whole economy. As my calculation shows, there is no evidence of such negative impact either in the short or long run (Figures 1 and 2, respectively). Instead, increased public borrowing had positive but statistically insignificant impact on private borrowing in the last two years, and a significantly positive impact in the last 18 years. It implies that the private investment has benefited in both the short and long run due to expansionary fiscal policy over the years, deficit financed through borrowing from banks. However, domestic borrowing from non-banking (NSD certificates) demonstrated very insignificant growth (3.35 percent growth in FY2010-11 and 0.66 percent in the first four months of FY2011-11). Lack of diversification in government borrowing may create imbalance in the nominal sector of the economy.
Fourth, inflation is already alarming. Point-to-point general consumer inflation crossed single digit in March 2011, whereas food inflation exceeded 10 percent in December 2010 and continued in double-digit. Non-food inflation joined this race in November 2011. While high consumer inflation indicates notable reduction of the consumers’ well-being and spreads money-illusion in the economy, the incidence of inflation on the poor and marginalized groups tend to increase much sharply. A recent study (Chowdhury et al., 2011) reveals that the incidence of national general consumer inflation is more than double on the marginalized. Therefore, increasing inflation is likely to cut real income of the consumers and reduce the size of the real economy notably.
Fifth, recent hikes in the electricity and fuel price are likely to increase production cost. This would again trigger inflation, and partly offset the benefit of depreciation of Taka in the export sector.
The last important challenge is how to increase investment in both public and private sector, and both national and foreign direct investment (FDI). National investment is currently much lower than national savings, which indicates significant underutilization of capacity of productive factors. The economic performance in 2012 would critically hinge on the degree and quality of public investment on important physical infrastructure, and facilitation of private investment mainly in manufacturing.
There are two fonts of potential impact on Euro-zone crisis on the Bangladesh economy. EU is the most important destination of Bangladesh’s RMG products. But since Bangladesh produces mostly low-end garments, the negative impact on exports would be marginal. However, EU is an important development partner of Bangladesh. If Euro-zone crisis continues to prevail in 2012, the EU countries would concentrate more on their own regional interests through bail-out packages, which could lessen the amount of development assistance to Bangladesh.
ET: What are the imperatives for managing the macro-economy efficiently in 2012?
MK: The most important imperative is to further increase and sustain the growth of RMG exports to reap the benefit of the current export-led growth strategy.
Capital market should work like a truly competitive market with many actors (not few) and perfect flow of information. All barriers and artificial influence over demand and supply side including liquidity shortage should be removed. Monitoring and oversight mechanism should be strengthened with sophisticated instruments, expertise and technologies.
The government must diversify the sources of its credit. If necessary, it can declare higher incentive for NSD certificates. It will help manage the burden of public borrowing and make money more available for private invstors at banks.
Inflationary pressure on the economy must be managed through devising proper economic instruments. Money supply causes inflation according to the standard economic theory. The monthly data for the last 65 periods reveals that this relationship is not true in Bangladesh even for the lag of four-months (results may be made available upon the reader’s request). Therefore an aggressive contraction of money supply would not be a viable option to curb inflation. It would rather stimulate the influence of ‘black’ economy, increase transaction costs and weaken economic governance.
Prices of basic public utilities must be rationalized to reduce the pressure of subsidy. While recent increase in electricity price was a decision based on high power procurement cost from quick rentals, purchasing oil for power generation has been creating tremendous pressure on foreign currency reserve, thereby worsening external balance. Therefore, there must be a rapid shift from such quick ad hoc to a more permanent solution of power generation in 2012.
Creating a more congenial atmosphere is a must for accelerating private investment, which will require a multi-prong approach including, inter alia, public service, physical infrastructure, cost of doing business, and business friendly policies and practices. The year 2012 will be the last year for the present government to undertake efforts to create such atmosphere since the government will remain busy with national elections in 2013.
ET: Do you expect foreign direct investments to pick in 2012?
MK: FDI has been a source of technology diffusion and knowledge spillover. It is used to create export markets and to develop new patent or intellectual properties. However, FDI inflow has been fluctuating for the last five years. Cheap labor and FDI-friendly policies have been the traditional drivers of attracting FDIs.
In spite of many fiscal incentives, FDI inflow has remained low at around one percent of GDP. The key factors behind this are: labor groups are not friendly to investors due to weak implementation of labor laws, political unrest, bureaucratic delay and corruption, and weak infrastructure that includes roads and highways, gas supplies, port facilities and educational as well as institutional infrastructure. Since these problems are structural in nature and will take time to address, a dramatic increase in FDI inflow is unlikely to happen in 2012. |
ET: What are the monetary policy priorities that Bangladesh Bank has taken up or should take up for the rest of FY2012?
MK: The monetary policy stance for July-December 2011 has been termed “restraining”. In practice, it is rather very ‘tight’, one that is intended to curb ever-increasing inflation, and to avoid ‘high-risk’ and ‘unproductive’ use of money. The monetary policy priorities of Bangladesh Bank are mainly twofold: accelerate economic growth and arrest inflation.
The current policy of the government is to promote inclusive or employment-friendly growth, which is also endorsed by Bangladesh Bank. Now, there is a popular trade-off between inflation and unemployment in economic theory. However, the Bangladesh case is a paradox of increasing both unemployment and ever-increasing price index. Thus, there is a policy gap, which makes it difficult to understand the dynamics of employment through the lens of monetary policy. Since money supply turns out to be unrelated to inflation, whether arresting inflation is truly a target monetary policy remains a question.
Again, another important question is whether impressive growth is attainable through a tight monetary policy to reduce aggregate demand. Theoretically, increasing aggregate demand is a significant way to expand the domestic economy. Expansionary fiscal policy to enhance aggregate demand and tight or contractionary monetary policy to discourage it is referred to as a ‘mixed’ policy. However, such a contradictory policy for economic growth would end up achieving nothing.
Since monetary policy has largely failed to arrest inflation over the past one decade or so, it is now imperative to revisit the goal of the policy in order to avoid all contradictions in greater national policy or ‘Vision 2021’. It should be directed predominantly towards achieving higher economic growth, which would be inclusive in nature.
ET: How can Bangladesh achieve export and export destination diversification in 2012?
MK: Export diversification index of Bangladesh has continued to remain high for the last one and a half decades. It is due to high concentration on few products in the entire export basket. Over the last two decades, RMG sector emerged to be overwhelmingly dominant in the export basket of Bangladesh even though some diversification is taking place within RMG very recently. That is, Bangladesh has embraced lower diversification in its export items over the years, which indicates that the country’s exports continue to be susceptible to greater shocks in exports. Bangladesh’s RMG is over-dependent on a limited number of markets in North America and Europe. RMG depends on a limited number of export products, and the country lags behind major competitors such as China and Viet Nam in terms of product diversification. Apparel exports are also below the world average unit value, which reflects the dominance of low quality apparel exports from the country.
In order to achieve greater diversification, it is better to further diversify RMG products in which Bangladesh has achieved comparative strength, and to gradually shift towards high-end garments to uplift productivity through wage incentive. Furthermore, the following products should have greater attention: footwear and leather products, agro and agro-processing, light engineering including auto parts and bicycles, plastic products, pharmaceuticals, home textiles, shipbuilding, and software and ICT products.
While deepening relationships with existing markets is the key to export growth, geographical diversification is found to be of great significance for Bangladesh. Therefore, the country should look into potential destinations in giant neighbors, such as India and China, as well as new regions, such as Latin America, Africa, and Eastern Europe, where enormous export potential is still untapped.
ET: What are the imperatives for accelerating export growth in 2012?
MK: To accelerate export growth an array of policies and measures will have to be adopted:
Reduce the anti-export bias of the trade regime, remove domestic supply side constraints, take advantage of preferences extended by the EU and get preferences from the USA and improve functioning of government institutions dealing with exports.
While garments exports from African, Caribbean and some other countries enjoy duty free access to the USA, RMG exports from Bangladesh do not yet qualify for such preference. Bangladesh will need to continue to lobby hard in the USA for duty free access of RMG exports.
Remove supply-side constraints/inefficiencies in physical infrastructure including ports, transportation, power, finance and skilled manpower. Shortage of power and gas, which poses a major constraint on production, will need to be solved on a priority and sustainable basis.
Improve governance and reduce inefficiencies in government institutions related to exports, especially customs.
Exploit opportunities from the changing global economy. Bangladesh could take advantage of the current shift in the global economy by quickly integrating with India and China. The immediacy of Bangladesh to the two big economies could be the strength for western investors on developing goods and services for these two giants. If ‘China plus one’ strategy of the international buyers/investors could be properly utilized, the exports would experience a sudden jump.
ET: Finally, what suggestions do you have for improving the overall economy?
MK: Manufacturing must be promoted as the key driver of economic growth and job creation. The role of this sector has also been emphasized in the Sixth Five-Year Plan and Outline Perspective Plan towards transforming Bangladesh into a middle-income economy by 2021. However, other sectors will need to grow as forward and backward linkages. In this process, agriculture should lose its prominence in providing jobs and share in GDP. Quality and high-end agriculture is a prerequisite for improving per capita output of agriculture through which it will be converted to a modern from traditional sector.
Investment is needed in ‘supporters’ which are critical to promoting manufacturing. These include basic public infrastructure, such as power, road, railway, airports, gas, public transportation, etc.; private investment in transportation, storages, communication, civil construction; and financial sectors.
Rural and informal sectors are largely bypassed in the mainstream development effort, which result in their humble outfit; they are merely accommodating people to live only. However, a vibrant growth in informal sector is a must to create decent living conditions in rural and informal economy.
FDI could be used to increase domestic demand for goods and services as well as to finance domestic investments. SMEs could also develop long term relationship with foreign firms and joint ventures for transfer of technologies. Therefore, policies and practices should concentrate on attracting foreign investors. Tax holiday, exemption from double taxation, specialized zone, profit repatriation, etc. are already in place. Further investment should be attracted in leather goods and footwear, electronics, light engineering, plastic goods, toys, etc., which intend to move out of China to other places of Asia. The recent one-stage GSP rule of the EU would be a compelling reason for growing domestic backward linkage industries in Bangladesh. This opportunity needs to be utilized properly.
Developing special economic zones is necessary with ‘one stop’ all infrastructure and services for sustained progress of industrialization. The law has already been enacted but initiative is needed to implement it rapidly. A potential barrier would be scarcity of land to locate these zones. However, nearly 80 percent of BSCIC plots all over Bangladesh is still not allotted. A hybrid model should be developed by using these plots to establish economic zones.
Capacity of the ports to handle more goods needs to be enhanced. A recent study reveals that the most efficient container port in Asia is Chittagong which handles about 92 percent of import-export trade of the country. It is running quite efficiently despite old machineries and infrastructure. Its cargo handling capacity is currently being over-utilized ‘super efficiently’, which needs to be reversed through capacity expansion.
Bangladesh should utilize its geographic location to become the economic hub of South and East Asia. It will need to develop strategies to establish the country as a regional hub for financial markets related services to trade, businesses, fashion design and expert services for enterprise development. Not only one at Sonadia island to serve the landlocked parts of India, Myanmar and China, multiple deep seaports can be established to support regional trade and export of substantial port services in this region.
