Economic challenges have deepened

The challenges that emerged from the adverse impact of Covid-19 and the shock of the Ukraine war that started during the recovery period of the pandemic have deepened in the last year.

On the one hand, the purchasing power of lower and lower-middle-income people, particularly fixed earners, has decreased due to high inflation for nearly two years. On the other hand, the cost of production has increased due to fuel, energy and power price hikes and import restrictions imposed by the central bank to protect forex reserves.

The fiscal space of the government also shrunk due to revenue shortfall and high costs of operational expenditure and debt servicing. In a word, pressure from domestic and external sources pushed all units of the economy towards challenges.

Pressure regarding commodity prices, exchange rates, forex reserves, production, and supply emerged due to wrong policies, ignorance and negligence over a long period. Covid-19 and the Ukraine war have played a role in making the crises visible only.

Apart from these, there are various long-term structural pressures including lower domestic resource mobilisation capacity due to lower tax-GDP ratio, lower savings and investment ratio, inefficiency in the implementation of public spending, particularly the Annual Development Program (ADP), and mismanagement in the financial sector, including the banking sector. These problems are compounding other crises.

The major crisis that the economy is facing now is the high inflation that emerged from the post-Covid-19 period and it remained steady above 9% for over a year and a half. Food inflation crossed 12%.

The high inflation made the lives and livelihoods of low and middle-income people difficult. Their purchasing power has decreased but the salaries or wages did not increase.

We have no good signal from the external sector as earnings from our main export product RMG increased slightly with fluctuations.

Current account deficits have been observed due to lower growth in expatriate remittance. The lower flow of FDIs and the deficit in the current account made a deficit in the financial account also.

Tariffs for gas and electricity have increased frequently in the last year, which made it costly to produce goods for the domestic market and exports.

Looking at the measures by the government to overcome such a crisis, we find that the initiatives from the central bank and other government organisations are too little and too late.

Monetary tools as an immediate measure to control inflation would have required raising interest rates, which we have not done. We put a cap on interest rates for a long period and it was lifted last July to comply with the IMF's terms. 

Other countries have raised interest rates to control inflation to see if there has been any impact on inflation. As long as inflation is not under control, interest rates will continue to rise.

It is not only developed countries that reduce inflation by raising interest rates. A good example of this is our neighbouring country, Sri Lanka.

I do not think these issues will be resolved in the next six months or a year. Inflation has not eased since the interest rate hike in July. Imports are being reduced to increase foreign exchange reserves. 

Import restrictions hamper investment, employment, income, purchasing power and also export. Initiatives like reducing imports have to be implemented with great care.

The exchange rate should be left entirely to the market. Now there are so many rates and the 2.5% incentive on remittances failed to increase remittance but money is being spent from the government treasury.

Remittances will automatically increase based on competition and profitability if left at the market rate.

Such problems will not be solved unless institutional capacity is ensured. A compressive reform package to be announced and implemented to ensure transparency and accountability.

If you don't touch the root of the problem, it will not be able to solve internal problems. Solutions to problems arising from the external sector will remain far beyond reach.

The author is the executive director of the Centre for Policy Dialogue (CPD).