Bangladesh News

It is going to be an unusual year for any finance minister and a perilous one as well. The pressures on the economy are rising from too many fronts and so the stakes of tackling them are also going up. Along with the economic factors, the non-economic issues are becoming ever larger and may invade into the economic playing field.

It is an unusual year because this is the second year the country is without an elected government that has put reforms — institutional and political — above everything. And as the election promised by December is approaching, people are getting edgy about how much of its agenda will be accomplished. And unaccomplished reforms dig deeper canyons into the economy.

Perilous in the sense that the year ahead is likely to be much less chipper worldwide than in the near past. The international economy is now in a quandary and it would need the captainship of a seasoned and wise financial maestro for Bangladesh to sail through that choppy water. Domestically, inflation or to be precise agflation has emerged as the single biggest issue of concern, and there is no indication that the situation will calm down anytime soon.

Already many of the promises that the finance adviser had made in the last budget holding down inflation, maintaining a sound macroeconomic stability, reducing poverty and inequality and ensuring food security — have gone haywire not necessarily always because of his own doings but because of the waves of international bad news. One does not need to read the Centre for Policy Dialogue (CPD) study which showed that poor people’s real income has dipped by 38 percent over the year, they already feel the pinch everywhere from the kitchen market to the swanky restaurants. Indeed more people are losing their entitlement in the process.

Business confidence that was dented badly because of an overdose of corrective actions has recovered to some extent, but it still needs to bounce back quite a length for the private sector to get engaged. The mere figures of increased credit flow or LC settlements would mean a little since they would not necessarily mean matching increases in volumes, because of runaway price increases of commodities worldwide. And putting bets on the booming capital market is bound to be unsustainable as most stocks have unreasonably high Price Earning Ratio, showing that a big correction is inevitable. Whether that landing will be hard or soft, only time will say.

As much as gains, globalisation also promises pains for Bangladesh because of the big worry worldwide about the risks of financial meltdown, recession and, of course, runaway inflation. The US market is already lead heavy and the euro-area economy that shone with heavy export boom, suddenly reversed. Business confidence is falling there, even for the companies in Germany whose economy grew by 6 percent in the first quarter. Consumer spending has buckled and retail sales dropped. Losses and write-downs of the global banks already total $335 billion, and HSBC forecasts that the average inflation rate in emerging economies will rise to 6.6 percent this year (and remember it is the wholesale price index and not consumer price index which should be much higher), its highest in ten years. And the average world inflation rate has already risen to 5.5 percent, its highest since 1999.

To make things worse for them, the emerging economies, probably with the exception of Brazil , are following loose monetary policies leading to negative actual real interest rates. This means these economies will need to appreciate their currencies to curb inflation by reducing import prices. Bangladesh is however poised on a different dilemma — it can target inflation through exchange rate management but at the cost of exports. On the other hand, it can go for export enhancement by making imports costlier and thereby fuelling inflation further. Only a determined visionary can choose between the two in unambiguous terms.

But even an export-oriented stance will need panning out a proper export strategy, finding ways to spur its productive mechanism and diversifying markets. It can no longer sit on the garment serendipity that occurred because of a number of reasons including higher labour costs in Southeast Asia and the war in Sri Lanka .

And there is that big worry of fuel prices breaking all previous records every week and inching towards the $200 a barrel mark. The commodity market is also overheated by the joint action of the Chinese and Gulf consumers. For Bangladesh none of these spell any good news.

The international trade posture is also not going to be helpful for Bangladesh that relies so heavily on exports for growth and employment. The WTO trade talks have gone nowhere, signaling no new hope of deals on increased trade in industrial goods and reduction of agriculture subsidy. The US election is approaching and the euro-area is also getting ready for polls, which all signify that a much more protectionist trade approach is in the offing. This could only make Bangladesh’s market access efforts much more difficult to succeed.

The indications of what the next budget will look like, which is not going to be placed but proposed today (as the parliament no longer exists), have been appearing in the press, and the prospect does not look very promising. The finance adviser is expected to propose a high revenue target matched by high expenditure. The expenditure part is understandable because the government will need a big social safety net mostly in the form of food subsidy and employment, and also a fat fuel import bill. If fuel prices are not adjusted quickly and properly — and probably this is the time to deregulate the fuel market to align it to the international market — the government will have to slop a huge subsidy on fuel too. The demand for increased public servant salary will only add to the outlay. But what is not fully comprehensible is whether a high revenue target can be fulfilled next year. This is more so because this year’s unusually high performance has already perched up the benchmark upon which next year’s ambitious target has been set. A blurry idea about continuation of reforms after election can make one all the more doubtful about lofty targets.

Indications are there that the government will resort to high borrowing from the bank to finance budget deficit, inviting delicate monetary stances with political-economic fallouts. Curbing inflation will necessarily require squeezing private sector credit, which the entrepreneurs will not like. Consequences on both ends can be messy with unintended casualties in the fight against inflation.

The only way of mitigating high bank borrowing is to access a higher quantum of foreign aid, but that path may again be slippery next year. Bangladesh has received a huge chunk of foreign assistance including budgetary support this year in the aftermath of dual floods and the super cyclone Sidr. High flow of new budgetary support, which is available at much lower interest rate than bank credit, may not be forthcoming next year, as indications say.

On the other hand, one can get reasonably doubtful about how much poverty reduction impact the new budget will have by looking at the next ADP that is Tk 900 crore less than this year’s original outlay. Accounting for the commodity inflation — just remember iron rod prices have almost doubled in a year — and the limited spending capability of the government machinery, the real expenditure on development projects will be much less than anytime before. This means a lesser amount of money trickling into the rural economy and less impact on rural poverty.

Given that the economy today is much more globalised than ever before, and that the global scenario is highly volatile, Bangladesh will need to develop its capability of monitoring the global situation on an urgent basis. This will help the country to get prepared for any shocks or opportunities, be it in the food sector or in exports. And it will have to keep enough flexibility in its budget through block allocations and scopes for reallocation of funds in cases of necessity.

This flexibility will be needed because we all believe a new elected government will be responsible for seeing the economy through for half of the next fiscal year; and that government will justifiably want to review the budget. This is why a budget, especially its ADP, designed in a loose fashion rather than marshaled in a tight and sanguine way, would be desirable.

As the new budget is about to be placed today, everybody will know the realities the finance adviser will be subjected to. But that understanding may necessarily not mean that everybody will be accommodative and receptive of the pains that accompany policies not aligned to the present day, and future scenarios. This may, in every sense, be a new test for budgeting exercise in Bangladesh.