SANEM’s Quarterly Review on Bangladesh Economy: June 2017

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SANEM’s Quarterly Review on Bangladesh Economy has been successfully held on Friday, June 17, 2017  at The Westin Dhaka. The core objective of this QRBE (Quarterly Review of Bangladesh Economy) is to present SANEM’s views on critical policy areas which the country needs to address in its journey towards attaining the middle-income country status. This June 2017, QRBE also presents SANEM’s reflections on the proposed national budget. Dr. Selim Raihan makes the keynote presentation.

It has been a matter of big concern that the private sector investment in Bangladesh over the past few years has been stagnant in proportion to the gross domestic product (GDP). Though in the budget speech improvement in infrastructure and business environment, importance of the special economic zones (SEZ) and setting up of institutions like Bangladesh Economic Zones Authority (BEZA) and Bangladesh Investment Development Authority (BIDA) are rightly emphasized, there have not been any clear roadmaps or directions on how these will facilitate accelerated private sector investment. For example, still, there is no clear roadmap on the establishment of the SEZs which has put the private investors into an uncertain scenario. Also, the plan of actions for the improvement of cost of doing business is unclear and the progress is not visible.

The targets of revenue collection and public expenditure are very ambitious. There is a very ambitious target of revenue collection in the proposed budget of FY2017-18 (around 32% against trend growth rate of 15%). Also, there is a very ambitious target of public expenditure in the proposed budget of FY2017-18 (around 26% against trend growth rate of around 15%). Furthermore, there is a very ambitious target of foreign financing (foreign aid flow of around 7.6 billion US$).

Despite the importance of the implementation of the VAT law, the preparation for it seems to be rather inadequate. In absence of a clear direction on the improvement in the tax-infrastructure and ensuring efficiency in tax administration, investors and businesses may not be very confident in the effectiveness of the VAT reform, which may again cast shadows on the future private sector investment prospects. To counter this, the VAT-free turnover ceiling has been raised and a good number of sectors have been exempted from the VAT, which seems to be rather ad hoc, and such decisions need to be re-evaluated in the coming days. On top of all this, there is a need for a significant improvement in the tax-infrastructure.

Gloomy job creation in the economy over the past few years is linked to the sluggish private sector investment. The major concern is that economic growth in recent years has not been able to generate a large number of jobs in the economy, which has prompted an alarm whether Bangladesh has entered a phase of ‘jobless growth’. Policies and actions which can promote private sector investment in diversified labor-intensive manufacturing and services sectors will likely to result in generating large scale employment. In the budget speech, the emphasis on skill development and some related measures is very relevant. However, there is a need for a serious thinking process in the policy-making arena to avoid the ‘jobless growth’ phenomenon.

As the data shows, the country in the FY2016-17 is experiencing almost halving of the growth rate of exports compared to the immediate past fiscal year. The current slowdown of export growth is linked to both the international and domestic factors. International factors include some kind of recession in Bangladesh’s major export destinations, and domestic factors include both policy induced and supply-side constraints which aggravate the cost of doing business. For example, a large number of products have been brought under the coverage of new supplementary duty, which might discourage export diversification. Also, there is a lack of clear indications on how critical infrastructural problems for the priority sectors would be solved.

Remittance is showing a drastic fall in the current financial year. The proposed budget has rightly pointed out the need for reducing the cost of remitting money through formal channels and taking some supporting measures. These are certainly positive steps. However, the fall in remittances is not only due to the high transaction cost, but also a number of international and domestic factors are responsible for it. These include slowdown of Middle-eastern economies, deep political crisis, and conflicts in the Middle-east, lack of savings and investment opportunities at home, unregulated informal channels of remittance, and appreciated taka against US dollar. It should be mentioned here that exports and remittances, over the past three decades, have been two major drivers of economic growth in Bangladesh. With setbacks over both exports and remittances, the prospect of achieving a higher GDP growth rate in FY2016-17 compared to that of the past fiscal year seems to be bleak.

The banking sector in Bangladesh is probably passing through one of its most critical times. Repeated scams in both public and private banks have shaken the business confidence. The surge in non-performing loans is an indication of the fragility of the banking system. The recent draft bill seeking an amendment to the Bank Companies Act 1991 to allow four from a family to be bank directors is a reflection of the weak regulatory and governance in the banking sector. Also, the proposed budget, as in the past, made a provision of recapitalization funds for the misruled public sector banks. Such unruliness in the banking sector, unless corrected, will drive away the genuine investors and aggravate the misuse of the bank loans. The proposed budget, however, has not indicated anything to counter such misgovernance in the banking sector.

The government’s capacity in implementing the overall budget, in general, and different development and infrastructural projects, in particular, does not exhibit much improvement. Therefore, apparently, the high size of the proposed budget is unlikely to ensure better use of the scarce resources. Escalation of project costs, bureaucratic delays, cost over-run and corruption, all these put shadows on the quality and timely delivery of the development projects. Flimsy implementation experience of annual development programs (ADP) is a major concern and the proposed budget has not been able to mark any significant departure from the past experiences. Given such feeble institutional capacity in implementing ADP, there is a need to come out of the practice of “annual” development programs, as scopes of a good number of the critical development projects, taken under the ADP, go beyond the annual timeline. The development programs and associated budgets can, therefore, be made with time-frames of 3-5 years with annual evaluations and readjustments. Also, such development programs need to be effectively aligned with the national five-year plan and SDGs.

The proposed budget has increased the allocation for social protection which is commendable given Bangladesh’s much-needed effort until 2030 to meet SDG 1 (no poverty) and SDG 2 (zero hunger). However, as leakages, mistargeting, wrong selection of projects and corruption are common problems in the social protection projects, a mere rise in allocation will not serve the purpose. In this context, much needed institutional reform should be a priority. Also, proposed public spending on health and education, in proportions to the GDP, are inadequate and much lower than what are needed for the country to be on the track in achieving SDG 3 (good health and well-being) and SDG 4 (quality education).

Bangladesh economy is now at a crossroads and the country needs to have some major ‘breakthroughs’ in several areas of policy making and institutional processes to achieve ambitious development targets. The proposed national budget has not made any significant departure from its preceding budget exercises, thus not raising many hopes about such ‘breakthroughs’.

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