Limited progress on people's economic hopes

After assuming office, the interim government formed a committee to prepare a white paper to understand the real state of the country's economy. The committee has already officially handed over its report to the chief advisor. The information about corruption and irregularities revealed in the white paper will alarm any conscientious person. It is undeniable that the country's economic condition is far from good. On August 5, following the student movement, former Prime Minister Sheikh Hasina resigned and left the country, and on August 8, the interim government assumed power.

The public has high expectations from the interim government, particularly regarding improvements in law and order situation and the revival of economic activity. However, there has been little progress in fulfilling those expectations so far. From the current situation, it seems that the interim government will have to face numerous complex issues ahead. It can be surely said that the interim government's path will not be smooth, and they will have to overcome various problems and challenges to move forward.

Generally, when a government is overthrown or changed through a popular movement, the law and order situation deteriorates immediately but typically stabilizes within a short time. However, this time, the situation is not improving as expected. Even after almost five months since the change in government, the law and order situation in the country has not returned to normal. Clashes, meetings, and processions continue in various areas. Incidents of theft and robbery have increased, and there have been several instances of murder. Fights between different groups are occurring, and in many cases, organized violent clashes are being incited. In summary, there is no clear sign of improvement in the overall law and order situation. It cannot be said that the current law and order situation is satisfactory. Without a stable law and order environment, no development activities can proceed smoothly. If social security is disrupted, the country's overall progress and development will inevitably be at risk.

According to the World Bank's last "Ease of Doing Business" index, published a few years ago, Bangladesh ranked 176th out of 190 countries. Since then, there has been little improvement, and in some cases, the situation has worsened. The publication of the World Bank's "Ease of Doing Business" index has been halted for the past few years. In its place, the organization has introduced a new index called "Business Ready," based on data from 50 countries. Bangladesh scored 53.86 out of 100 points, ranking it in the fourth tier. This indicates that Bangladesh's business environment has still not improved. If this situation persists, attracting foreign investment will become very difficult. Given the current law and order situation, the business environment in the country may further deteriorate in the future.

Bangladesh’s infrastructure sector has many weaknesses. The quality and effectiveness of the infrastructure that has been built remain questionable. The cost of infrastructure construction in Bangladesh is also significantly higher compared to neighboring countries. Most infrastructure projects are not completed within the scheduled time frame. As a result, both costs have increased, and people have been deprived of the benefits these projects were supposed to bring. Another complex issue facing the country's economy is the weakness in port management. There are significant delays in loading and unloading goods, leading to higher costs. Additionally, transportation issues exist, meaning that once goods are unloaded at ports, there are further delays in reaching their destinations. This increases transportation costs.

As a result, private sector investment in the country is not growing at the desired level. The GDP-investment ratio has been fluctuating around 22-23 per cent for many years. Except for the first three months of 2015 and July-August of this year, there was little political instability during the previous government’s tenure. However, a sense of uncertainty has always prevailed. When there is uncertainty in the political and social landscape, both foreign and local investors become hesitant to make new investment decisions. This is the situation we are witnessing in Bangladesh. During the last five-year plan, the target for private sector investment was set at 28 per cent of GDP, but this target was not achieved. The current national budget aims to raise private sector investment to 27 per cent of GDP, but there is no possibility of meeting this target. Without a promising increase in private sector investment, GDP growth remains low. Furthermore, without sufficient private investment, adequate employment opportunities cannot be created.

If employment opportunities do not increase, the number of unemployed individuals in the country rises, thereby disrupting poverty alleviation efforts. The growth of private sector investment is crucial for the country’s development. International organizations like the World Bank, IMF, and Asian Development Bank have downgraded Bangladesh's projected growth rate, indicating that the country will not meet its GDP growth target for the current fiscal year. Political instability began in the first month of the fiscal year and has yet to subside, which will prevent most economic indicators from achieving the desired growth this year. Projections made by international organizations about the economies of various countries are generally accurate. As a result, international agencies have downgraded Bangladesh’s credit rating, which could negatively impact foreign investment.

At present, one of the most complex challenges for the domestic economy is high inflation. Although the high inflation rate did not arise suddenly during the interim government’s tenure, it has been a persistent issue for over two years. When the global economy was recovering post-COVID-19 impact, the Russia-Ukraine war began, disrupting the global supply chain and leading to worldwide inflation. In the United States, the world’s largest economy, inflation surged to 9.1 per cent, the highest in 40 years. The Federal Reserve took various measures to reduce inflation to a manageable level, repeatedly raising policy rates. While this might slow private sector investment, the Fed continued to raise rates to curb inflation, highlighting the difficulty of managing such economic challenges.

A few months ago, the inflation rate in the United States dropped to 3.2 per cent, and the Federal Reserve is now contemplating reducing the policy rate. In Sri Lanka, a crisis-stricken nation, inflation once soared to 75 per cent but has now fallen below 2 per cent. However, despite various efforts, Bangladesh has been unable to bring down high inflation. According to the latest statistics, the average inflation rate remains in double digits, with food inflation consistently above this level for several months. This rising inflation has placed low-income and fixed-income individuals in a disastrous situation, as their incomes are not growing at the same pace as inflation.

Despite Bangladesh Bank’s efforts, there are no signs that high inflation will come down to manageable levels. Several months ago, the maximum interest rate for bank loans was 9 per cent, and the policy rate was repeatedly increased. Currently, the policy rate has risen to 10 per cent, up from 5 per cent. Along with the increase in the policy rate, bank loan interest rates have been made market-based, yet these measures have not yielded significant results in controlling inflation.

In my opinion, raising bank loan interest rates is not a feasible solution to control high inflation in an economy like Bangladesh's. When the interest rate on loans is increased, the demand for private sector investment decreases, which could lead to economic stagnation. While the demand for loans may decline, the supply of loans will also reduce, potentially slowing down the economy's growth.

In an economy like Bangladesh’s, 4-5 per cent investment in the private sector is required to achieve 1 per cent GDP growth. Therefore, to achieve a 7 per cent GDP growth, Bangladesh needs to attract 28-35 per cent investment in the private sector. However, there are doubts about the authenticity of the data published by the Bangladesh Bureau of Statistics (BBS) regarding various economic indicators. Every year, the BBS reports GDP growth statistics that development partners often project to be at least 1 to 1.5 per cent lower. However, neither side revises their position at the end of the year, leading to confusion. The GDP growth rate of a specific year should not vary, which points to a potential issue. Not everyone is benefiting equally from the country’s economic growth, leading to rapidly increasing income inequality.

The number of poor people in the country is continuously rising, with many slipping below the poverty line. During the COVID-19 pandemic, many people lost their jobs in urban areas and returned to rural areas, but they failed to create adequate employment opportunities there. According to the Bangladesh Bureau of Statistics, the unemployment rate is around 2.6 million, but this does not reflect the actual situation in the country. The way unemployment is measured in developed countries cannot be applied directly in Bangladesh, as there are no unemployment benefits or welfare programs in place here. The validity of the inflation data published by the BBS is also questioned by many. The Bureau must release accurate and impartial data because reliable statistics are essential for making informed decisions and formulating effective plans.

AB Mirza Azizul Islam: Economist and former finance advisor to the caretaker government.
Transcription: M A Khaleque