Finance prepares to-do list to offset effects of global slowdown

Highlights-

• Timely implementation of mega projects
• More public-private partnerships
• Ensuring safety net reach
• Nurturing investment-friendly climate
• Redesigning tax collection strategies to boost revenue
• Foreign loans from development partners

 

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Timely implementation of mega projects, more public-private partnerships (PPP) in development work and facilitating exporters to find new markets are among the government's priorities to cushion the economy from the global slowdown ahead and the fallout of the Russia-Ukraine war, the finance ministry has said.

Measures are also being taken to maintain the growth momentum. These include setting up new economic zones, tax administration reforms and measures to improve the ease of doing business, according to a ministry report titled "Socioeconomic progress and recent macroeconomic developments in Bangladesh". The report was prepared by the Finance Division of the ministry.

The plan comes on the heels of growing fears of the spillover effects on exports and remittances – the two contributors to foreign exchange reserves – spurred by high global inflation and output contraction.

Experts have also sounded a note of caution in regards to strained foreign reserves and the impact of unbridled inflation growth and have also called for more immediate impact measures.

Despite promising growth in the first two months (July-August) of the fiscal year, Bangladesh's export may not be able to keep up the tempo throughout the fiscal year due to the global slowdown, especially in the three largest economies in the world – the USA, China and the European Union – the ministry warns in the report.

Director of the Policy Research Institute MA Razzaque told The Business Standard that the global economy was going into a major recession and global economists feared that this could be prolonged until 2030. As a result, both exports and remittances of Bangladesh will decrease, straining the external sector.

"But in the context of the Ukraine war, commodity prices, which have increased in the international market, will fall due to the recession, making the balance of payment deficit somewhat tolerable. However, exports and remittances may fall further, so the pressure on Bangladesh's foreign exchange reserves will continue. That's why we have to be careful," he said.

The finance ministry is banking on exporters' resilience, some success in revenue collection and progress in the implementation of mega projects as movers of future growth.

There still remain some short-term priorities to be addressed like a satisfactory current account balance, foreign exchange reserves and inflation, the report says.

It highlighted the overall economic situation, including the decrease in the country's foreign exchange reserves due to the increase in the import cost of food products, fuel oil and gas amid the Ukraine war.

It gauged the effect on the economy after fuel oil prices were hiked and the foreign debt situation, said the report sent to top policymakers.

'Forex first, not revenue'

The main strategy for FY23 is to increase aggregate supply while reducing demand growth.

Success in revenue collection, expected growth in per capita income, construction of the Padma Bridge, along with the implementation progress of other mega projects etc., will ensure strong recovery from the Covid-19 pandemic and help cope with the ongoing global challenges, the finance ministry's report says.

The impact of the Ukraine war on Bangladesh's foreign trade will depend on the duration of the war, its multilateralism and the economic sanctions imposed on Russia by the US and its allies.

"However, Bangladeshi exporters are resilient enough to ride the current and future challenges. With support from the government, they are trying to both diversify the export basket and also identify new, unconventional markets for Bangladeshi goods and services," it says.

The report also stresses the need for increased automation of the revenue administration and modernisation of tax laws to earn more revenue and speed up the momentum of growth for attaining the 2041 target of the Developed Country status.

Finance ministry officials said the government is redesigning revenue collection strategy to address the existing loopholes and shortcomings, and generate sufficient revenue to support investment and expenditure plans in the medium term.

As Bangladesh is scheduled to graduate from the list of Least Developed Country (LDC) status in 2026, both the national tariff policies and the revenue administration are in the process of transformation.

"Initiatives are underway, with the assistance of the IMF, to conduct a tax expenditure study to bring in efficiency in tax collection, plug loopholes and expand the tax net," the report adds.

"Focus should be on inflation control"

Zahid Hussain, former chief economist of the World Bank Dhaka office, however, said the focus should be on controlling inflation.

"Everyone knows the problem in the revenue sector, so there is no need to do studies and bring reforms there. The most important thing to control inflation was to increase the interest rate on loans, but the government is not doing that."

He also said the pressure on exports had already started, while about six lakh workers went abroad last year and about eight lakh went abroad till September this year, meaning there was little risk of a negative impact on remittances.

Zahid Hussain highlighted that remittance had decreased in September due to the instability of the foreign exchange, saying the government's moves to stabilise forex had been successful only in controlling imports to a certain extent, but the Bangladesh Bank still has to sell dollars to meet the needs of the banks.

The central bank sold $3.20 billion last three months.

He said for overall economic stability, the Finance Division has emphasised on those issues which are good for the medium and long terms, but there was no mention of any special initiative for the current macroeconomic stability.

Current account balance recorded a deficit of $18.7 billion and the overall balance recorded a deficit of $5.4 billion in FY22, while foreign reserves fell below $37 billion.

This has created extraordinary pressure on the foreign exchange management.

"As a pre-emptive initiative, Bangladesh is also seeking foreign loans from the development partners such as IMF, World Bank, ADB, Jica etc," the report adds.

Inflation, business environment

Finance Division officials said inflationary pressure was present in Bangladesh, but the government is working to combat it.

At present, an average of Tk1,745 crore has been allocated for beneficiaries of social security allowances through mobile financial services alone every day.

Some 29% of families in the country have been brought under social security programmes, and the division expects the allocation to double in the next five years.

An effective demand management policy along with boosting the supply side are needed to check the rising trend of inflation, officials said.

"Although Bangladesh has made a strong recovery from the pandemic, economic uncertainties are still looming in the context of global economic recession escalated from the Ukraine war. High inflation has eroded the purchasing power, compromising the living standard of the people," the finance ministry report reads.

Highlighting the government's emphasis on attracting private investment in development projects, the report says of the 77 projects valued at $38.77 billion initiated under the PPP, one has been implemented and nine others are in progress.

Furthermore, to enhance productive investment, the government will strive to remove the key bottlenecks in the economy with special emphasis on power and energy, ports, communication, and the ICT sectors.

To facilitate private sector investment and improve the investment climate, various fees and charges have been slashed, while reforms were initiated to improve the ease of doing business and cut costs.

'Fiscal disciple means low debt distress'

On the much discussed external debt, the finance ministry report says the government attempts to avail only concessional loans from external sources.

Although the overall balance of payment deficit widened in FY22, the government is keen to maintain an affordable and favourable external balance of payment, it says.

Regarding debt sustainability, the report says the latest debt sustainability analysis by the IMF-IDA was conducted in February 2022 which concluded that, "fiscal discipline has kept Bangladesh at a low risk of debt distress".

According to the assessment, overall public debt-to-GDP was 41.4% at the end of FY21, which is expected to stabilise at around 41.8% by FY31 and thereafter. Besides, the external debt-to-GDP ratio is expected to settle at around 11.6% by FY42.

The external debt-to-export was 97.5% in FY21 which is expected to stabilise at 93% by FY32 and thereafter, maintaining the threshold, the report adds.

Besides, higher and targeted spending on health and education sectors and bringing reforms to relevant areas would likely increase employability and address skill mismatch.