Financial sector weaknesses, labour unrest pose short-term risks: Finance ministry to CA

Infographics: TBS

Weaknesses in the financial sector and labour unrest could pose short-term risks for the interim government, the finance ministry has warned in a presentation to Chief Adviser Muhammad Yunus.

"In addition to curbing inflation, restoring discipline in the financial sector and addressing labour unrest before it escalates should be top priorities for the interim government," reads the report presented by Finance Adviser Salehuddin Ahmed.

Meanwhile, Bangladesh's GDP expanded at its lowest rate in four years, at 4.22% for the fiscal 2023-24, according to the Bangladesh Bureau of Statistics (BBS). 

The growth is 1.6 percentage points lower than the earlier estimate of 5.82% made in May last year. The previous lowest economic growth of 3.45% was recorded in FY20, which bore the brunt of the coronavirus pandemic.

The latest revision by the BBS was formally presented to Yunus yesterday, Chief Adviser's Press Secretary Shafiqul Alam told The Business Standard after a press conference at the chief adviser's official residence Jamuna yesterday.

As a result of the revised GDP, per capita income stood at $2,738 in FY24, down from the preliminary estimate of $2,784.

The finance ministry report titled "Bangladesh's Economy: Recent Challenges and Future Actions" outlines the current economic situation, government measures, and recommended actions.

It said due to high inflation, it is currently not possible to adjust prices for electricity and fertiliser. The report stated that reducing the inflation rate below 10% was a major challenge, which has now been achieved. By June, inflation is expected to fall to 8%, and if it drops below 6.5% in the future, the government will consider reducing subsidies by raising gas and electricity prices.

"Although the economy faced some adverse conditions in the short term due to the change in the political landscape in August 2024, a positive trend is already being observed in the economy as a result of the well-thought-out monetary and fiscal policies of the interim government," reads the report.

The report, which mentions that "the possibility of inflation due to imports is low", states that inflation in China and India, Bangladesh's main import source countries, is less than 4%, and the current exchange rate of the taka is somewhat stable. 

The finance ministry has blamed the weakness of the supply chain for the high food inflation.

The finance adviser told Professor Yunus that if the existing flaws in the supply system can be resolved quickly, inflation will be controlled, and the economy will regain momentum.

Recommending strengthening the Competition Commission to prevent abnormal price increases, the ministry said, if necessary, expanding its activities at the district and upazila levels could be considered. 

The finance ministry has emphasised ensuring the necessary fertilisers, seeds, and advisory services to increase agricultural production.

While efforts to control inflation through monetary and fiscal policies have been made, existing flaws in the supply system continue to undermine these measures, says the report. 

"To address this, the government will deploy special mobile courts at the divisional and district levels for the next month as a demonstration effect," reads the report.  

Additionally, all types of warehouses for daily necessities, including cold storage facilities, will be placed under strict supervision, it adds.  

The report states that to reduce arrears in the power sector, the subsidy has been increased from Tk40,000 crore to Tk62,000 crore in the revised budget for the current fiscal year.  

Measures have been taken to control subsidies by lowering production costs without raising electricity prices for consumers, resulting in projected savings of Tk11,444 crore – about 10% of the sector's total expenditure, it added. 

The finance adviser informed the chief adviser that steps are underway to renegotiate electricity purchase prices in existing contracts and implement energy audits to reduce production costs to a reasonable level.  

The report also outlines plans for a new bidding round for deep-sea oil and gas exploration contracts and aims to lower electricity production costs by shifting from oil-based to gas-based fuel.

The finance ministry has also suggested increasing the capacity to store and refine fuel oil and promoting the use of electric vehicles and equipment with modern, fuel-efficient technology.

The report states that at least 10 banks are facing severe risks due to financial sector mismanagement under the previous government. 

The Finance Division stated that the banking sector's non-performing loans totalled Tk2,84,977 crore as of last September, highlighting significant risks to the financial sector.

It recommends a rapid asset quality review to assess the banks' actual conditions and, if necessary, implement mergers and acquisitions to mitigate risks. 

This would require enacting relevant laws and regulations, including a bank resolution ordinance.

The report highlights a decline in foreign investment in Bangladesh, with foreign direct investment (FDI) falling by one-third in the current fiscal year compared to July-December of last fiscal year. FDI has dropped to $213 million from $744 million a year ago.

Emphasising the need to improve the investment environment, the finance ministry noted that in 2023, net FDI in Vietnam was $18.5 billion and in Thailand, $6.5 billion. 

It suggested using the experiences of Thailand and Vietnam to boost FDI in Bangladesh, with foreign investors' opinions considered to identify and address challenges. 

The report also highlighted the need to improve not only infrastructure but also the country's regulatory environment to protect foreign investments.

Regarding industrial sector challenges, the report highlighted the ongoing unrest involving around 40,000 Beximco Group employees, with road blockades, vandalism, and arson affecting nearby factories.

The finance ministry has recommended closing Beximco factories and selling their assets to settle all outstanding dues in order to address worker unrest.

It noted that factories owned by individuals facing corruption or money laundering charges – many of whom are absconding or abroad – are either shut down or struggling to pay salaries, fuelling worker dissatisfaction.

The report also warned that vested interests are aggravating the situation, leading to deteriorating law and order, worker unrest in industrial areas, and student protests in educational institutions.

The finance ministry has emphasised the need for proper monitoring by law enforcement and intelligence agencies to prevent the spillover effect of labour unrest.

Regarding food security, it reported a shortfall of 13.13 lakh tonnes in Aush and Aman production compared to the target, and government warehouses currently hold 1.3 lakh tonnes of food, 23.6% less than last year.

To maintain normal food stocks and supply, initiatives have been taken to import an additional nine lakh tonnes this fiscal year, said the finance adviser. 

He also noted that the allocation for fertiliser subsidies has been increased to Tk28,000 crore in the revised budget. Additionally, Tk8,059 crore has been allocated for food subsidies to support open market sales (OMS) and the Trading Corporation of Bangladesh (TCB) throughout the year.

To ensure food security and boost agricultural production, the finance ministry has stressed the importance of ensuring fair prices for farmers and finding an effective method to deliver produce directly from the field to consumers. 

It also recommends projecting medium-term demand and outlining the supply of essential food items, such as rice, pulses, oil, and potatoes, through a comparative analysis of annual demand and current stocks.

Regarding revenue collection, the report highlighted that customs duties will be reduced following the country's transition from least-developed status. As a result, increasing revenue from income tax and VAT is crucial. 

To achieve this, the ministry emphasises the complete automation of the income tax and VAT departments.

The report further stated that income tax collection could be extended to the grassroots level by establishing income tax offices nationwide. 

It also recommends rationalising tax and expenditure levels and separating tax policy from tax collection, with efforts already underway.