Now time to spend more and get same yield

The creeping high cost of doing business induced by a runaway commodity price hike is bound to have a knock-on effect on the economy in a paradoxical way.

More money will have to be spent to get the same job done. And although more money will be employed, the number of workers will not increase as the task will remain the same.

The GDP will increase but not employment.

Since a huge load of infrastructure work is going on, public finance management can be a tricky thing with inflated work costs.

And this is the situation we are likely to be in until the middle of next year, as economists worldwide predict.

The upward price pressure felt worldwide ranging from car chips to smartphones to steel is likely to persist and with the Chinese New Year holiday ahead, there is little chance for things to ease up in the next six months.

Bangladesh will not be immune from this global trend.

Public expenditures look set to go up in both ways – in ongoing and future projects. Costs of existing projects need to be readjusted if those unusually go beyond the admissible ceiling in the contracts and any new projects would have to be negotiated on revised rates, says economist Prof Mustafizur Rahman.

"This is happening at a time when Bangladesh is making investments in huge infrastructure projects. It will obviously have implications on costs, budget and our financial capacity," he adds.

He, however, hopes that the strategic oil reserve orchestrated by the US and five other countries (including the UK, China, India) can hold back the market from growing further volatile. "I think this initiative will help ease the rising trend to some extent. Prices may remain more or less at the present high levels, but may not go higher."

But the existing price levels are high enough to cost economies dearly both at enterprise and consumer levels, and the situation will continue for some more time, as global forecasts hint, said Prof Mustafizur, distinguished fellow of the Centre for Policy Dialogue (CPD), a local research organisation.

Economist Dr Selim Raihan explained how escalated costs could limit return on investment and produce less-than-expected jobs. If the prices unusually rise beyond the range anticipated earlier and less likely to be normal soon, there are reasons to be worried about, he said.

"If the situation persists and additional costs cannot be internalised, this will definitely have negative impacts on our economy," he felt, suggesting a quick review of projects to look for ways to cut internal costs and prevent overall costs from spiralling beyond range.

If overall costs go up abnormally, it will reduce the return on investments, lower the expected contribution to the real GDP. "We will have the same level of employment from a much higher investment," said Dr Selim Raihan, who teaches economics at Dhaka University and heads the research organisation Sanem.

"We have been voicing our concerns about jobless growth over the years. Price volatility, both global and local, is aggravating the situation further," he said, referring to the growing trend in capital investment in technology which eventually would see less jobs for unskilled workforce.

Public investment in infrastructure projects would not create many jobs immediately, but those are expected to facilitate future growth, he pointed out.

Civil engineer Dr Shamim Z Basunia feels that rates quoted in the tender document are based on 2018 prices and a revision of those rates was overdue. Now the recent price hike of construction materials has made the revision almost relevant, he said.

And any rise in cost tends to have negative impacts on quality and volume of work, which must not be compromised in any case, said the former professor of Bangladesh University of Engineering and Technology (Buet).

Central bank data shows a rising trend in loan disbursement and a surge in inter-bank transaction rates, reflecting a rise in demand for cash from the private sector.

But the demand is more to meet the running expenditure than to put in new ventures.

Tareq Alam, managing director of the country's largest real estate company Concord, says the sector is more affected by cost rise in ongoing projects than by new investments.

"With the Covid-19 situation easing, most of the real estate companies have resumed work on their stalled projects. Many are even taking up new projects. But, every company is struggling with their old projects as prices of construction materials have risen 10-30%," Tareq told The Business Standard.

"This has had an impact on the banks' call money rate. That is why people are taking loans," he added.

Fazlee Shamim Ehsan, vice-president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said apparel exporters are doing business at a nominal profit margin – in some cases, even below the breakeven cost – as yarn price has increased about 100%, freight cost over 300%, and the prices of other raw materials and the overall cost of doing business are increasing significantly.

Economist Dr Zahid Hussain said additional spending will contribute to GDP and may result in some job creation, but it will not raise the employment ratio as most of the additional money will be spent to meet the rise in input costs.

Nominal growth in the private sector credit or a rise in loan disbursement does not mean recovery. Output growth is less likely as businesses will now need to spend more money to get the same amount of production, he said.

In response to demands from contractors to revise project costs upward due to rising prices of raw materials, the former lead economist of the World Bank's Dhaka office said the government has to be prudent in deciding how much of the cost should be revised upward. "You cannot raise the cost for the next three years because the present price levels may not persist that long," he pointed out.