There is a difference between the government's outlook or projection vis-a-vis non-government description of the current situation. Not only the perception of broader professionals and business community, the government's versions sometimes differ with data published by the government agencies themselves.
We believe that the momentum that was created in post-2010 is running out of steam largely because of a lack of reform, unaddressed problems accumulated over the years and a kind of complacency at the policymaking level that everything is fine. This continued policy of benign neglect, I should say, harmlessly ignoring the real situation and expecting that the business as usual scenario or policy framework will take us to upper middle-income country or high-income country appears unrealistic to me. Unless the government really acknowledges the problems that have been accumulated over the years and address them urgently, prospects will remain bleak.
The fundamental issues like investment, private investment in particular including FDI, which are remained stagnant at 22-23% level together, are completely inconsistent with the growth scenario estimated or projected by the government.
With economic growth we expect the capital increment to increase, which means incremental capital output ratio will increase over time. This is the case for all fast-growing developing counties globally and in particular in the Asian region. At present Bangladesh is the only exception, as if we are going with declining incremental capital output ratio, which cannot happen, cannot be sustained.
For 8% plus growth, Bangladesh must have at least 32% plus investment in relation to the GDP (Gross Domestic Product), which is now 29% including 6.5% public investment. But the real impact of the public investment is much less because of inflated project cost, inefficient implementation, factors which we generally characterise as not getting the value for money.
So, the underlined real economic benefit from public investments may be equivalent to 4% of GDP instead of 6.5 to 7% that is spent, meaning that 3% is wasted straightaway. So, the investment shortfall in reality is much more. This is one thing that needs to be addressed.
The second important issue is the banking sector, or the financial sector as a whole. In Bangladesh there are four or five major components of the financial sector. What are those? Banking is number one.
Second and most prominent is stock market. Third, the bond market which does not exist virtually. Fourth, the insurance market which is in a precarious state. Another one is the non-bank financial sector, which is even worse. Performance of all these components of financial sector has weakened significantly over the years. At present, most of the NBFIs (Non-Bank Financial Institution) are operating in the danger zone and their collapse may also bring massive problems for many banks which are exposed to NBFIs.
Banks are suffering from rapid build-up of non-performing assets and slower growth of deposits. As a result, banks themselves are financially weaker with their return on equity coming down from 24% in 2010 to 4% in 2019 and return on asset from 1.8 to 0.29 in the same period. The net result is that the banks are not in a strong position to support the real economy in a way that is needed at the moment.
Lending to the private sector has declined to all time low in recent years, about 9%. The policies that the government is contemplating against this background, if implemented, will make things worse. For example, the 9%-6% policy, as it is called now, can lead to flight of deposits from banks and thereby reduce loanable funds for the private sector.
The SMEs (Small and Medium Enterprises) will have no access to credit if the interest rate is set at 9%, because no bank will be able to cover the operating cost at that rate. The SMEs will completely be left out of the banking system. Only the powerful ones – powerful business houses – will get whatever limited amount banks will have in hand to offer. There will be little money and powerful borrowers will take it all.
So, it will lead to most inequitable financial development and contribute significantly to worsening of income distribution and employment generation. Because it is the SME sector that creates jobs.
Stock market is reflecting the overall macro and growth picture of the country. The most important sector in the stock market is banking and financial sector, which is suffering badly. Return on equity coming down to one-sixth of what it was, making the banking stocks one of the cheapest. Liquidity in the stock market is not there because the financial institutions are not in a position to pump in liquidity. Experience of interest rate cap is very bad everywhere in the world including India and Kenya. Why are you going to something which is proven wrong? We were in this process too. We have seen that. There was no investment, there was no growth in 70s-80s, when rates were directed. We were going back to those days.
Another important factor is the management of fiscal policy. The government budget has been increasing very rapidly in the expenditure side, in large part due to sharp increase in salary bill, double digit growth in interest payment and similar high growth in pension benefits—none of these contributes to productivity and social development. But you have to pay, these are mandatory payments without benefits.
At the same time, the revenue growth, used to be in the range of 23-24%, has declined to low single digit, because of a lack of reform. With slower revenue growth, not such slow revenue growth seen in many years, and sharply accelerating expenditure – non-discretionary expenditure, I must say, fiscal space has significantly shrunk.
So, what is going to happen is that the government's capacity to spend in public services like healthcare, education, social protection and in the much-needed infrastructures like mega projects will be diminishing rapidly in the absence of fundamental reforms of the tax system. The main problem that lies with the tax system is huge increase in the wage and pension bills for government employees.
There might be pressure on debt servicing and repayment of foreign loans. Complicating the macroeconomic management further is our balance of payment (BoP) situation. Bangladesh used to be a current account surplus country, but in my view, we are not going to see current account surplus any time in the next decade.
Why I am saying that?
Because we have significantly increased our import content through mega projects, but we have failed to increase our receipts side of the BoP. If we look at the Bop, our export is not growing, our remittance is growing only this year, it was not growing in the last year and it may not grow next year. Because the number of people going abroad, which peaked in 2017, has been on the decline. So, we will be seeing slowdown in remittance side also.
The government's policy of exchange rate is also incompatible with the balance of payment scenario. One area that has been significantly overlooked and has not come in picture is service account. Officially, Bangladesh Bank shows the service account payments abroad is about $4 billion, which would be much higher if significant amount for health related and education expenditures were incorporated. There is no mention of any remittance of money from Bangladesh to India or Sri Lanka or Pakistan. In my view only on health account, we are probably losing out at least $4bn dollars, whereas the amount was put less than $1 million in the central bank's service account.
On the education sector we are probably losing out huge, too. There are at least 200,000 to 300,000 Bangladeshi students studying abroad. Who foots the bill for that? The country. If we say 250,000 students are studying abroad and each of them spends at least $20,000 per year, the amount would be between $4 to $5 billion on education. None is mentioned in official account. There is a mention of only $109 million spent for education related services. None of them take out money officially to avoid hassles, they buy straight from market and take it out.
Workers from India, Sri Lanka, Pakistan are working in Bangladesh and remitting money in billions are not there in the balance sheet. If you add these up, service account deficit will be at least $15 to $20 billion.
It is a huge amount. We need to address these all.
How? We have to create by investing in good hospital system for the kind of people who are travelling abroad for healthcare. Why should I go to Singapore, if I get similar treatment here—a Singaporean hospital, a Bumrungrad Hospital in Dhaka.
We need to have good university education system, which will at least stop undergrads going abroad. Going abroad for higher education is okay, it has always been there. We also went abroad for higher studies.
I don't see any problem in it. But there should not be undergrads going abroad. We need to invest in world-class health and education systems to reduce spending abroad.
These are the fundamental issues that I have raised. If we do not address these issues, and we continue like 'business as usual,' we will be approaching a situation like the one India is having. Our growth can come down to 4% or 5% level. That will be the real effect. Our unemployment will skyrocket. It is skyrocketing now and will go up further.
I will say the gains made in indicators like life expectancy, infant and maternal mortality rates are already reversing. Already on the way of reversing is early marriage, which we cannot allow.
So 'business as usual' approach is not the solution. We have to wake up to this reality that Bangladesh has already reaped the benefits that can be reaped without significant reform effort. Now we have to do fundamental reforms to get to the next phase.