Interim government must implement economic reforms despite political pressure

After Prime Minister Sheikh Hasina’s resignation, the country was effectively without a government for four days. During this period, a group of miscreants caused widespread destruction in various locations, resulting in significant loss of life and property. In his speech, the Army Chief stated that every killing will be brought to justice. As citizens, we also demand that those responsible for each murder and the destruction of state infrastructure be identified and brought to justice. It must be ensured that no wrongdoer escapes punishment, while also ensuring that innocent individuals are not wrongfully punished or harassed.

Four days after Prime Minister Sheikh Hasina's resignation, an interim government was officially formed. On the night of August 8, a 17-member interim government, led by internationally renowned economist and Nobel Peace Prize laureate Dr. Muhammad Yunus, was sworn in. It is expected that the interim government will quickly restore law and order in the country. Once the situation stabilizes, the immediate priority should be to restore momentum to economic activities. During the movement, the country’s production and communication systems were completely paralyzed, and the internet shutdown severed Bangladesh's connection with the outside world.

The student movement we recently witnessed is noteworthy for several reasons. This movement was quite prolonged, starting on July 1 and ending on August 5 with the resignation of Prime Minister Sheikh Hasina. However, the protesters are still in discussions with the authorities to form a government of their choice. In his speech to the nation, the Army Chief mentioned forming an interim government comprising representatives from all political parties. This interim government will hold national elections within a specified period and transfer power to the newly elected government. This might be how the quota reform movement concludes.

In addition to the significant loss of life, the economic damage caused by the quota reform movement cannot be ignored. Some estimate the financial losses in production and other sectors during the movement to be between 1 trillion and 1.2 trillion BDT, but this is not a complete assessment. The government has yet to release official statistics on the damages, but there is no doubt that the losses are substantial. Besides disrupting the production system, the movement also caused widespread infrastructure damage. Several important state establishments were attacked, vandalized, and even set on fire. Bangladesh Television, the Metro Rail, the Bridge Authority Building, and other critical state infrastructures were damaged. Even police stations were attacked, and officers were killed. Repairing and restoring these facilities to operational condition will take time.

The disruption of transportation and communication during the movement severely affected export activities. Exporters were unable to deliver orders to foreign buyers on time, which might lead to the cancellation of some orders. The import of goods was also disrupted, causing delays in clearance and delivery, and leading to price increases in the domestic market. Recently, inflation has become a major issue in the country’s economy. For the past two years, Bangladesh has been grappling with high inflation, which currently averages 9.5%. Despite efforts, inflation has not been reduced to a tolerable level. The budget for the current fiscal year sets a target to reduce inflation to 6.5%, and the monetary policy for July-December also aims to bring inflation down to 6.5%. However, due to the student movement, inflation is expected to rise slightly in July, disrupting the progress made in reducing it. We will have a clearer picture once the inflation statistics for July are released.

The World Bank has already placed Bangladesh on the red list for food inflation. According to the Bangladesh Bureau of Statistics, in the last 12 months, food inflation was in double digits for seven months. In the 2023-2024 fiscal year, the average inflation rate was 9.72%, the highest in a decade. At no point during the fiscal year did inflation drop below 9%. Global inflation soared following the outbreak of the Ukraine war after the COVID-19 pandemic. During that time, the U.S. inflation rate climbed to 9.1%. However, the U.S. managed to bring down its inflation to 3.4% through effective measures, including increasing the central bank's policy rate. Even crisis-hit countries like Sri Lanka reduced their inflation from 79.8% in 2022 to 2.4%. Given the economic damage caused by the student movement, there is a risk of further inflationary pressure in the future. Therefore, the most critical issue right now is how to quickly reduce inflation. The general public is facing severe hardship due to rising inflation.

The movement also significantly reduced export earnings and remittance inflows. Efforts must be made to remove the obstacles to export activities created during the movement. To increase remittance inflows, expatriate Bangladeshis must be encouraged to send remittances through legal channels. There are concerns that remittances sent via informal channels, like hundi, have increased recently. This issue needs to be investigated and addressed. A major economic challenge is the decline in foreign exchange reserves. Over the past year, reserves have decreased by nearly 10 billion USD. According to the IMF's accounting method, reserves stood at 20.48 billion USD at the end of July, down from 30 billion USD a year ago. There is no alternative to increasing export earnings and remittance inflows to boost foreign exchange reserves. Recently, the exchange rate of the US dollar was set using the crawling peg method. Previously, the exchange rate was 110 BDT per USD, but it has now risen to 118 BDT. The increase in the exchange rate has led to higher import costs, putting additional pressure on reserves. Gradually, the exchange rate of the US dollar should be made market-based.

Effective measures must be taken to improve the country's investment climate. Bangladesh’s investment and business environment is far from satisfactory. Before making investment decisions, foreign investors thoroughly research the investment climate of the country. Unfortunately, Bangladesh’s business environment is not favorable. In the World Bank's latest "Ease of Doing Business" index, Bangladesh ranked 176th out of 190 countries. In such an investment climate, foreign investors are generally reluctant to invest. The recent violence during the student movement will likely send a negative message about Bangladesh’s investment climate internationally. Therefore, improving and making the investment environment more attractive should be a top priority. Otherwise, it will be challenging to attract the desired level of foreign investment.

In the current fiscal year's national budget, the target is to increase private sector investment to 27% of GDP. However, achieving this target seems unlikely. The Policy Exchange, in collaboration with the Metropolitan Chamber of Commerce and Industry (MCCI), conducted the Business Climate Index survey for the third time, providing relevant information on the country’s business environment. The survey indicates that the business climate has deteriorated in the 2023-24 fiscal year compared to the previous year. Overall, in 2023, Bangladesh's business climate index scored 58.75 out of 100, down from 61.95 in the previous year. This downward trend in the business climate index sends a critical message about the country's economy. Despite efforts to improve the business environment, conditions are worsening instead of improving.

The country's stock market is not performing well and needs attention. Measures should be taken to encourage good companies to list on the stock market. State-owned enterprises should be brought to the capital market quickly. During my tenure as the Finance Advisor of the caretaker government, I successfully listed several state-owned and privately-owned enterprises on the stock market by engaging in discussions with the relevant authorities.

Bangladesh's tax collection rate is very low. Among South Asian countries, Bangladesh has the lowest tax-to-GDP ratio. Globally, Bangladesh is one of the countries with the lowest tax-to-GDP ratios. Efforts must be made to increase tax collection at any cost. Rather than imposing high tax rates, relatively lower rates could be implemented. At the same time, the tax network must be expanded, and it should be ensured that taxes are collected transparently and accurately.

The stability of the interim government will depend on several factors. If the interim government is short-term, they will likely focus on holding elections and may not be able to undertake economic and other reforms. However, if the government is long-term, they will have the opportunity to implement reforms in various sectors. Often, political governments struggle to implement reforms effectively. However, since the interim government will not be under political pressure, they can carry out economic and other reforms if they choose.

Author: Economist, Professor and former Finance Advisor to Caretaker Government.
Transcribe: M A Khaleque