The eight challenges identified by the finance ministry are reasonable from the government's point of view. However, it is not a big challenge to administratively keep the lending rate at 6% which is now 9% – the government can simply fix it. But it is best to maintain it through the market system. That is, the rate be kept free and the free rate will stay below 9% – such an environment must be created.
In many countries of the world, lending rates are not fixed but remain in single digits. So, the government has to think about how to reduce the rate through the market system by eliminating the fixed rate.
For example, in the case of exchange rates, the government ultimately made the rates free. Now the main challenge will be how to keep this free exchange rate stable. If the rate is 95 or 100, then it should be stable within that range. The exchange rate should be stable wherever it goes. Stable does not mean unchangeable. Stability means the rate does not unnecessarily go up and down. These are the challenges that need to be addressed.
All the challenges identified by the Ministry of Finance are reasonable. However, these need to be achieved through proper policy, management and creation of the environment.
If effective measures are not taken, the revenue will not increase and even if effective measures are taken, it will not be effective within a year. Therefore, the challenge of revenue will remain. The tax-to-GDP ratio will not increase either. There is no talk of reforms this year. It takes two-three years to reap the benefits of a reform program.
It will be very difficult to reduce the budget deficit by maintaining oil, gas and fertiliser subsidies in full. I am not saying that all the subsidies should be removed, but the subsidies should be reduced. Even in the case of fertilisers, subsidies need to be reduced. Earlier Tk40 priced fertiliser was given at Tk15, now should Tk100-110 priced fertiliser be given at Tk15 as well? The increased amount of subsidy should be gradually reduced.
It will be difficult at this moment to address the challenge of job creation by increasing private investment. Because, stabilising the macro economy may increase private investment and create jobs. But if we do not stabilise the macro economy, we will be disappointed. Necessary initiatives need to be taken in the budget for stability.
And for this stability, the value of money has to be increased by removing the cap of interest rate. After the LDC graduation, we will need to negotiate bi-lateral FTA. Ultimately we have to reduce imports, which we are increasing at the moment. It is counterproductive and we need to reduce imports. Imports are increasing due to a temporary situation but it should be reduced soon.
For stability, the price of oil and fertiliser should be increased at least a little. The price of gas will have to go up a lot. This will have an impact on demand and increase the inflation but it will then be fixed gradually. However, if the macroeconomic situation is not rectified by reducing subsidies, prices will rise and the situation will not improve.
[The Business Standard Special Correspondent Abul Kashem took the interview over phone Saturday.]
Ahsan H Mansur is the executive director at Policy Research Institute of Bangladesh