The country has been mired in a prolonged economic crisis due to a lack of reform, leading to decade-high inflation and a persistent shortage of dollars over the past two years. The economic challenges exacerbated by the conflict between Russia and Ukraine have not only impeded the recovery from Covid but also complicated the lives and livelihoods of most citizens, as noted by听Dr.听Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue. In an interview with 抖阴精品 Business magazine on March 25, conducted by Special Correspondent听厂丑补办丑补飞补迟听贬辞蝉蝉补颈苍, the prominent economist observed that the current economic situation would continue to hinder poverty reduction efforts amidst growing income inequality. Despite the International Monetary Fund loan programme, there has been no improvement in the scandal-ridden banking sector and revenue administration.
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Professor Mustafizur Rahman underlined the ominous outlook for the country鈥檚 debt sustainability due to the shortage of dollars amid capital flight and illicit financial transactions.
The distinguished fellow at the CPD highlighted that the price spikes in fuel oils precipitated the significant economic crisis of 2008, following the country鈥檚 gradual progress since the 1990s.
Reflecting on the nation鈥檚 history, he noted that in addition to the challenges faced during its early years of independence in 1971, the crises of 2008 and the ongoing ones should be considered the major economic hurdles of the past three decades.
The unprecedented surge in fuel oil prices in 2008, amidst the global financial turmoil triggered by losses in mortgage-related financial assets in the US, adversely affected the country鈥檚 economy, along with many others worldwide.
Mustafizur Rahman pointed out that during this period, the price of rice, the primary staple in the densely populated and poverty-prone country, doubled in the local market, reaching Tk 34 per kilogram from Tk 17.
However, the adverse effects of the rice price hike, compounded by two rounds of crop losses due to floods and the super cyclone Sidr in 2007, were temporary.
Stability ensued when the price of crude oil, which had surged from $50 per barrel in early 2007 to $140 per barrel in mid-2008, plummeted to $40 per barrel in early 2009.
Regarding the current economic crisis, Mustafizur Rahman emphasised its roots in the global market鈥檚 fuel oil price hikes following the outbreak of the war between Russia and Ukraine in February 2022.
In the same month, crude oil prices surged past $110 in the global market as Bangladesh, along with other countries worldwide, was in the process of recovering from the Covid pandemic.
Within six months, the price of fuel oils plummeted by $90 per barrel. Since then, it has remained around $80 per barrel.
Despite the decline in fuel oil prices globally, the country鈥檚 economy has been unable to capitalize on this as it did during the economic shock of 2008, noted the CPD distinguished fellow.
鈥楾he economic crisis persists,鈥� he said, attributing the accumulation of problems to a lack of reform, which has eroded economic resilience.
听鈥楾he economic resilience has been deple ed, he observed, highlighting that the gradual reforms undertaken in the 1990s and 2000s were crucial in bolstering economic strength through the country鈥檚 integration with the global economy.
He expressed regret that the government had been urged to implement reforms to address issues such as loan thefts, wilful loan defaults, capital flight, hundi transactions, non-feasible projects, and the misallocation of public funds.
Ensuring competitive bidding in power and other sector projects was emphasised as imperative for strengthening the economy to withstand both internal and external shocks.
The delay in adjusting the monetary policy stance, reluctance to allow the inevitable depreciation of the local currency Taka against the US dollar, maintaining a high nine per cent interest rate on lending, and resorting to money printing have worsened the overall situation, particularly impacting foreign exchange reserves, he explained.
He outlined how various factors influenced the cost of doing business and contributed to soaring inflation over the past two years, despite forex reserves reaching an all-time high of $48 billion in August 2021.
However, with the onset of the war between Russia and Ukraine, forex reserves plummeted to $36 billion.
Upon the arrival of the IMF, at the government鈥檚 invitation to address the economic crisis, the Bangladesh Bank (BB) adjusted forex reserves to $25 billion, he noted.
He also mentioned that the BB allowed the local currency to depreciate by around 30 percent, from Tk 86 to Tk 110, during the financial year 2022-23, as global prices of essentials surged.
The country has been grappling with imported inflation to some extent, which has had repercussions on the cost of doing business and competitiveness.
鈥楽o, the pressure on forex reserves has persisted due to the creation of a vicious cycle,鈥� he explained.
While many other countries have managed to contain inflation, Bangladesh has been experiencing over 9 per cent inflation on average for the past two years.
Mustafizur Rahman attributed this to the lack of effective market monitoring regarding supply and demand, price manipulation by intermediary groups in supply chains, and inconsistencies in data, which have contributed to persistently high inflation.
He emphasised the need for proactive market monitoring by government agencies, suggesting the imposition of stringent penalties, including imprisonment, for violators of laws.
He criticised the nominal fines imposed by government agencies, which fail to deter price manipulation, leading consumers to pay billions of taka extra.
He recommended diversifying sources for daily essential commodities, citing India鈥檚 recent export ban on onions, which has affected Bangladesh due to its reliance on Indian onions to meet its deficit.
The noted economist also proposed establishing an Agriculture Commission, similar to India鈥檚, to evaluate supply and demand situations accurately, addressing inconsistencies in data between the agriculture and food ministries.
He underscored the importance of ensuring a level playing field between marginalised farmers, small manufacturers, and large corporate groups to curb price manipulation and protect the interests of the growing consumer class.
According to Mustafizur Rahman, the adverse impact of the price spiral on essentials is particularly significant for fixed and low-income groups, as they have limited opportunities to increase wages and salaries.
However, even the lower-middle-income group has been affected by the persistent high inflation over the past two years, hindering poverty eradication efforts amidst growing income inequality.
Describing poverty as a multidimensional issue, he emphasised that it should not be evaluated solely based on calorie intake.
He pointed out discrepancies in poverty assessment methods, citing the Bangladesh Bureau of Statistics鈥� overall poverty rate of 18.6 per cent in 2022, which contrasts with another BBS survey indicating that around 22 per cent of households faced food insecurity from January 2022 to December 2023.
Additionally, the World Bank reported that 71 per cent of families in Bangladesh were worried about food security due to the escalating prices of food items.
Highlighting the queues for subsidised food items, he underscored the profound impact of inflation on people鈥檚 lives.
听鈥楾he purchasing power of most individua s has diminished,鈥� he remarked, noting the significant number of informal secto workers lacking post-service benefits.
He observed that a substantial portion of society is vulnerable, pointing to growing income inequality as evidence that economic gains over the years have disproportionately accrued to a select few.
The Gini coefficient of income inequality, which gauges the extent of income concentration, has shown a concerning trend, escalating from 0.39 in 1990-91 to 0.46 in 2010, and further to 0.49 in 2022.
The share of wealth held by the bottom 10 per cent of the population has dwindled from 2.58 per cent of national income in 1990-91 to 2.0 per cent in 2010, and a mere 1.31 per cent in 2022.
Conversely, the share of wealth owned by the top 10 per cent has surged from 29.23 per cent and 35.85 per cent to 40.92 per cent during the same period, indicating a widening gap.
According to BBS data referenced by the CPD distinguished fellow, income disparity has ballooned, with the income of the richest 10 per cent compared to the poorest 10 per cent soaring from 11.3 times in 1991-92 and 17.9 times in 2010, to an alarming 31 times in 2022.
Mustafizur Rahman highlighted the failure of successive governments to effectively employ traditional methods in combating income inequality.
He cited taxation, fiscal-budgetary policies, and public expenditure as conventional tools utilized by many countries to address income inequality, lamenting poor revenue mobilisation in Bangladesh as a major concern.
Explaining further, he noted that Bangladesh鈥檚 domestic resource mobilisation, at less than nine per cent equivalent of the country鈥檚 annual GDP, ranks among the lowest globally.
Consequently, with a fiscal deficit of about four to five per cent of GDP, public expenditure remains exceedingly low, accounting for approximately 13-14 per cent of GDP.
This meager allocation leaves policymakers with limited room to meet the necessary allocations for social sectors.
Musrafizur Rahman further elaborated that the share of direct taxes in Bangladesh is significantly lower, comprising only about one-third of total revenue earnings. This imbalance has critical implications.
Firstly, the current taxation system fails to make significant strides in reducing income inequality, as the burden of indirect taxes, the primary component of revenue earnings, disproportionately affects the lower-income group.
Secondly, the government鈥檚 ability to invest in people鈥檚 welfare is curtailed due to insufficient resources for public expenditure.
According to the CPD distinguished fellow, income inequality will persist and worsen unless measures such as property tax, inheritance tax, universal minimum wage, and universal social security are implemented in the country.
He emphasised the critical role of transparency, accountability, and good governance in economic management, both in policymaking and policy implementation, to address the inequality in opportunities stemming from disparate incomes.
Discussing the reform in the banking sector initiated by the Bangladesh Bank, he stressed the importance of transparency and accountability, referencing a recent memorandum of understanding signed between two local banks for a merger.
One of the banks involved is EXIM Bank, while the other is scam-hit Padma Bank, formerly known as Farmers Bank until 2019.
Farmers Bank Limited, established in 2012 among other fourth-generation banks, was granted a license on political grounds despite widespread protests.
Mustafizur Rahman highlighted the negative consequences of politically motivated banking licenses, citing the example of Farmers Bank, which nearly went bankrupt within three years of operation due to unethical banking practices.
In 2016, the Bangladesh Bank appointed an observer to Farmers Bank Limited due to irregularities in the distribution of a Tk 400 crore loan, and the bank was allowed to change its name in 2019.
Despite efforts such as a bailout fund worth Tk 715 crore provided by the state-owned Investment Corporation of Bangladesh and three state-run commercial banks (Sonali, Janata, and Agrani), no significant progress was made in addressing the bank鈥檚 weaknesses.
Regarding the proposed merger of Padma Bank with EXIM Bank, Mustafizur Rahman emphasised the need for transparency, urging the Bangladesh Bank to ensure clarity on how Padma Bank鈥檚 bad loans would be absorbed by the other bank.
He raised concerns about whether taxpayer money would be used to absorb these bad loans, questioning the implications for public funds.
He emphasised that the proposed reform in the banking sector should not solely focus on meeting loan instalments from the IMF.
鈥楾h government has formulated new laws but has struggled to implement them effectively due to political-economic factors,鈥� he noted.
Turning attention to the issue of Least Developed Country (LDC) graduation, the CPD distinguished fellow highlighted that Bangladesh had secured a two-year deferment to 2026 from 2024 due to the impacts of Covid-19.
However, he expressed concerns that the current economic crisis, low revenue generation, and limited export diversity could hinder a smooth transition.
He underscored the potential loss of preferential trade benefits from both developed and developing countries upon graduation and stressed the necessity for diversifying the export basket, currently dominated by ready-made garments.
Mustafizur Rahman pointed out opportunities for the pharmaceutical and leather sectors to contribute significantly, lamenting the delay in establishing a park for active pharmaceutical ingredients in Gazaria over the past decade.
He also criticised faulty effluent treatment plants in the Savar leather industrial area, which have hampered the export potential of the leather sector.
The senior economist suggested that RMG exporters could enhance export diversity by increasing the share of man-made-fibre-based apparel products, which currently account for one-fourth of the country鈥檚 annual RMG exports, totaling around $46 billion in the past financial year.
He identified the augmentation of direct tax as the most significant challenge for ensuring a smooth LDC graduation, emphasising its essential role in meeting the investment requirements for the country鈥檚 advancement from the LDC status.
He highlighted that the tax-GDP ratio had fallen below double digits, contrary to the projected 14 per cent in the expired five-year plan of 2020.
Moreover, he pointed out that the low revenue base poses challenges to government debt sustainability, particularly in foreign loan repayment, amid a shortage of dollars exacerbated by hundi transactions and capital flight.
He pointed out that the inflow of remittance did not match the outflow of overseas job seekers, as a significant amount of remittance was being exchanged through unofficial channels. Additionally, vested interests were actively involved in capital flight.
Mustafizur Rahman stressed the importance of zero tolerance towards unethical financial transactions, a concern previously highlighted by the US-based Global Financial Integrity (GFI). According to a GFI report released in January 2019, illicit capital outflows from Bangladesh amounted to $81.74 billion between 2006 and 2016, primarily due to trade-related misdeclaration.
While the exact amount lost to hundi transactions remains unknown, the Bangladesh Financial Intelligence Unit recorded a significant increase in suspicious transaction reports and activities, with 9,769 reports and 4,337 activities documented in FY23, representing a growth of 64.58 per cent within a year.
He cautioned that foreign loan repayment was on the rise and could emerge as a major issue in the coming year, citing reports in the media.
A new projection by the Economic Relations Division revealed that foreign loan repayment is expected to surge by 53 per cent to approximately Tk 57,800 crore in the next financial year of 2024-25, compared to Tk 37,775 crore in the outgoing 2023-24 period.
The rise in foreign loan repayment between 2023-24 and the upcoming fiscal year is projected to be around 38 per cent, according to ERD estimates made for the budget-making process.
He highlighted that the government鈥檚 outstanding foreign debt stood at $62.4 billion until 2022-23, marking a more than threefold increase over 14 years.
This increase in debt was attributed to the implementation of mega projects such as the Rooppur Nuclear Power Plant, the Padma Bridge Rail Link Project, the Karnaphuli River Tunnel, the Metro Rail Line Project, the LNG Terminal in Maheshkhali, and the Payra Sea Port.鈥�
