Economic reforms: Let the dust settle in

Monetary measures alone will not be sufficient to reduce inflation in Bangladesh. Photo: Rajib Dhar

Let the dust settle in and then see what happens – this is how the policy being implemented by the central bank governor in tackling the economy can be summarily described. The policy rate has been raised several times since 5 August. It now sits at the 10% mark, leading to a significant spike in commercial lending rates.

The printing of currency has been very particular; apart from dire necessity, no additional money will be injected into the economy. Most importantly, the political stability and law and order situation are yet to be restored, which will hinder new investment and the expansion of businesses and enterprises.

All these things indicate a certain trajectory: a significant slowing down of the economy or even contraction. The business community is wary of a bleak future. Some of them, meanwhile, are upbeat about the central bank's course. Even at the expense of expansion, they are correctly prioritising stability, which entails cleaning out the gutters. 

They want the business environment to significantly improve in the interim. We are all aware that, according to the World Bank's last report on the ease of doing business, Bangladesh trailed much behind in the ease of doing business index, particularly when it comes to international business.

Recently, in a conversation with me, a prominent business leader of the country said, "When you are on a stabilising course, you must sacrifice growth." 

Given that our growth statistics were largely inflated and there needed to be more consistency between growth data and other macroeconomic indicators, growth figures hardly matter in crises. It is people's quality of life that matters most.

The correction to the statistical course has already started. With little further effect on people's lives, the growth rate in the final quarter of the previous fiscal year has decreased. Nonetheless, the foreign exchange reserve has somewhat improved, and the currency exchange rate has steadied.  

The economy of Bangladesh has expanded dramatically over the past 15 years. For a long time, the former regime's narrative was centred around the term "development," yet dissidents and economists have long questioned the veracity of growth statistics. 

Since Covid-19, the stark disparity between the various data sets has been even more apparent. Although there was a lot of increase, the employment figures did not corroborate the numbers. 

Stagflation can't be effectively controlled without compromising economic expansion. When inflation hits 14%, authorities are faced with a tough decision: either restrict interest rates to lower output and aggregate demand, or let inflation rise further by expanding the money supply to sustain growth. 

Preventing a currency depreciation has been the main accomplishment of the interim government. An important achievement is that the exchange rate has stayed steady at 120 for three months. By keeping policy rates under control, the currency's value has not decreased.

Nonetheless, we must recognise that reducing demand and production overall is a deliberate choice.

Given the strain on Bangladesh's economy since the pandemic and the currency's depreciation from 84 to 120, it is imperative to control the currency's value and slow inflation through contractionary monetary policy. Perhaps many of us are not aware that raising policy rates serves the dual purposes of stabilising the value of the currency through interest rate management and lowering inflation. 

However, monetary measures alone will not be sufficient to reduce inflation in Bangladesh. We require a coordinated approach that includes market, income, and monetary control systems.

Raising policy rates was the only way to keep inflation under control and stop the currency from depreciating. The people in charge of the banking industry should be commended for this audacious and controversial choice. 

As seen by the modest run on the bank on 5 August, the tendency of those in positions of authority to exaggerate can, regrettably, result in a breach of public trust.  

Reserves will rise when the currency's stability returns, which is thought to boost growth, output, and enthusiasm. However, there was no way out of the agonising time we had to endure before then. On multiple occasions, Central Bank Governor Ahsan H Mansur reaffirmed his position in this manner.

A significant concern is the emergence of an oligarchy in the country over the past 15 years. This powerful group exerted undue influence on decision-making processes, fostering an uneven playing field for businesses. While not all were complicit, the resulting inequality cannot be ignored. The cronies have left the country, and it's uncertain whether they will ever be brought to book.  

The government's efforts to reform the banking sector are a positive step, but comprehensive business reform is crucial. New enterprises should not be hindered by bureaucratic obstacles. Large corporations possess established networks and resources to navigate challenges effectively. 

In contrast, systemic obstacles are frequently insurmountable for small enterprises. Their primary business operations will inevitably suffer if they are always distracted by fixing problems from outside sources. Only the banks and economy have seen reform initiatives thus far. 

There is already a white paper on the economy that includes suggestions for long-term changes. However, such reforms require wider political and elite support, as was the case with the 1/11 government, many of which were abandoned by the Awami League government that followed.

The interim government's internal narrative is also not a happy one, as they have already begun to struggle with a number of problems and appear to be at odds on a number of matters. 

While short-term and medium-term economic reforms have been undertaken, like stabilising exchange rates and increasing reserves, the implementation of crucial long-term measures, including revenue system reforms and increasing the tax-to-GDP ratio, remains elusive.

Protik Bardhan is a senior sub-editor at the Daily Prothom Alo. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.