The protracted downward economic pressure, deinstitutionalisation and political centralisation

The chilling protracted downward pressure has set in, shivering down the spine of the country's economy. The three units of the economy — households, firms and state — are in want of cash to stave off the predicament of headwinds. 

The Russia-Ukraine conflict (before the Covid-19 pandemic could even fully come to an end), dwindling foreign exchange reserves and, above all, the rising cost of living are conjuring fear among people. The fear is that the country's economy is at risk, likely to step into a state of "stress", and from that stress, will move into a crisis. 

After the world economy plunged into a recession due to a massive collapse in supply and demand due to the spread of the coronavirus, the supply chain has yet to become fully operational. Meanwhile, the prices of goods and services continue to go up.

What happened in Bangladesh 

Six months before the Ukraine conflict, the depletion of reserves in Bangladesh began. Reserves are decreasing due to lower foreign exchange earnings, having dropped from $45.26 billion in January last year to $33.63 billion as of January 4 this year, despite multiple belt-tightening measures to stall the fall. After excluding the investment, the net reserve can cover three and a half months of import expenses.

The purchasing power of the middle class has plummeted. Low-and fixed-income families have been hit hard, plunging into cost-of-living vulnerabilities due to significantly reduced wages, especially for those in the informal sector. 

Wage growth in Bangladesh fell to a seven-year low last fiscal year. Most people are spending their meagre savings as real wages take a dip. Some of them are borrowing for daily expenses. At some point, they may lose their ability to seek loans, pushing them below the poverty line. 

The number of "new poor" in Bangladesh has not decreased despite the restart of the economy. The inflationary pressures have caused many not to be able to buy food according to their need, forcing a reduction in food intake and nutrition levels. Some have been compelled to reduce non-food expenditures such as medical and children's education expenses. 

There is also a risk of decreased agricultural production next year due to an increase in the price of agricultural inputs, less supply than demand and natural calamities.

The poverty rate has risen to 29.5% from the pre-Covid level of 20%, according to the government's statistics agency. But this rise in poverty and the decline of the middle class are only visible fragments of the economic downturn. The real concern is the lack of progress on crisis management in the short term and recovery management in the medium term.

The businesses are facing the brunt of the depreciation of the dollar and commodity prices in the international market. With the prices surge, the bank loans of the firms are proliferating. According to the Bangladesh Bank, the private sector credit growth reached 13.97%, for the first time surpassing the target of 13.6 in many years, compared to 10.11% in the corresponding period.

On the other hand, deposit growth in the banking sector has almost halved. In comparison to July-October of the last financial year, deposits have decreased by Tk18,982 crore in the same period of the current financial year. The rate of growth in advance in June 2022 is 14.4% compared to 13.4% in the previous quarter. 

Despite the central bank's fixed maximum interest rate of 9%, seven-day term deposits at that rate are not available in the money market. Banks are forced to borrow liquidity at a higher rate to maintain their cash deposit reserve ratio (CRR) and statutory deposit ratio (SLR). The situation has reached the stage, leading to the question if  Bangladesh Bank has control over the currency market.

The recovery, in spite of many cushions, of large defaulted loans is conspicuously absent. The non-performing loans in the country have increased more than three times in the last 10 years. In the first three months of the current financial year 2022-23, the amount of defaulted loans stood at Tk1.34 lakh crore. In 2012, the amount of defaulted loans was Tk42,725 crore.

Of trade vulnerabilities and other challenges 

Developed countries are following contractionary monetary policy to rein in inflation, pushing the economies into recession. The exporters fear a slowdown due to reduced purchasing power. At the same time, the inflow of remittance is not promising after witnessing negative growth in the last financial year, creating a current account deficit of $5.67 billion, with the overall balance of payment at the negative territory of $6.384 billion while the country boasted a surplus of $9.274 billion at the end of June 2021. 

The firms complain of a shortage in the supply of gas to run factories. Lack of foresight has put pressure on energy security. Power and energy are not foreseeing an immediate solution due to import dependency for the supply of basic energy, lack of gas extraction, timid progress in renewable energy and inadequacy in investment in transmission systems despite high rent-accruing production setup. 

Productivity in agriculture has sunk and costs of production have soared. The fertiliser market is also going through volatility. Farmers need financing, despite having the best track record in loan repayment. Small and cottage industries are still neglected despite creating the most employment opportunities.

Private sector investment stagnated as a proportion of  gross domestic product (GDP) before the Covid-19 pandemic. The growth elasticity of employment is negative, witnessing jobless growth while the growth elasticity of poverty is weakened due to lack of gainful employment.  

A part of the growth came from government spending, but it is currently on a downward trend. More importantly, the return on capital is high compared to the return on labour, widening income inequality. Wealth inequality has been accelerating at a high pace, partly due to the extraction of rent. Given much of the population is on the downside of the spectrum, savings as a proportion of GDP is declining in recent years, putting a toll on investment. 

The sluggish growth in the collection of value-added tax (VAT) indicates a slowdown in economic activities. The exhibited paltry increase in the consumption tax is due to a rise in prices. The collection of import duties has started to slow down, with the tightening of imports and lack of availability of foreign currency in the banks to cover letters of credit. When the price of goods increases so does tax evasion, and in particular in trade, with higher intensity. There are reports of money laundering, in the form of over and under-invoicing.

The best way for the government to gain fiscal leverage is to curb the rampant tax evasion in Bangladesh, focusing on an endogenous tax reform programme. Due to low tax collection, the fiscal space has been compressed. 

The government's loan from the central bank has risen to a record of more than Tk1 lakh crore. Printed money is entering the market as the government borrows from the central bank. Inflation may rise by further increasing consumer price levels. The public sector credit stands at Tk3.34 lakh crore, with a growth of 23.98%. 

Debts, loans and ways forward 

Needless to say, foreign debt repayments will be most affected by the appreciation of the dollar. At the end of the fiscal year 2020-21, the foreign debt of Bangladesh was $60.15 billion, up from $51.13 billion in the previous financial year, which increased by about 18% in a year. It is estimated that Bangladesh's external debt will climb to $115 billion by the end of 2023. 

If this trend continues, by the end of 2024, Bangladesh will have a debt burden of $130 billion. Due to various reasons including a lack of myriad understanding of conditionalities and irregularities in project preparation, approval, implementation and supervision, there is unused $50.34 billion in the pipeline. 

Besides, there are questions about the efficacies and cost overrun of development expenditure. Projects can become burdensome if the spending rush is not contained.

People need cash in hand as well as firms and the government  requires a lot of cash. Adequate foreign exchange reserves are required to meet import bills. The IMF loan of $4.5 billion dollars is not enough to mitigate the risk. Effective investigation of money laundering and adoption of a zero-tolerance policy is a much-vaunted demand. 

The National Board of Revenue can help build the fiscal space if it achieves its espoused goal of collection from income tax as the number one source of domestic resource mobilisation. Discarding the current ex-ante system, performance-based ex-post incentive schemes should hallmark the policy, with the condition that such is only admissible, predicated to employment creation and/ or export earnings.

The poverty rate has risen to 29.5% from the pre-Covid level of 20%, according to government data. But this rise in poverty and the decline of the middle class are only visible fragments of the economic downturn. The real concern is the lack of progress in crisis management in the short term and recovery management in the medium term.

It has been said over the years that safety net programmes should be brought under an integrated administrative umbrella to overcome livelihood crises. Those who have done the national identity (NID) cards successfully can be deployed by making it a national imperative to build a national population database to ensure that the combined huge sums of the programmes go to the appropriate households, addressing the current massive inclusion and exclusion errors. 

Currently, the economy is under protracted downward pressure. Dealing with and transitioning from prolonged downward risk requires a shift away from rhetoric and complacency, recognising the importance of the challenges, identifying the pressure points and formulating effective, implementable strategies. 

The signal should go, the government is taking necessary steps to deal with the protracted downward pressure in averting the economy from slipping – first  from risk to stress and then from stress to crisis. The decision is entirely political, and a misstep in the political settlement may trigger social unrest.

Ails of the consumption-led model 

Bangladesh may witness slower economic growth in the coming future if it continues to rely on the consumption-led model in its current phase of development trajectory, and such a pathway will also exacerbate the widening inequality. Although the country's economic development is considered by certain quarters as a 'miracle,' the growth has largely been led by consumption, and not due to an increase in savings or an increase in investment. It is not a sustainable path of development.  

The driving force behind the growth is migrant workers, with high participation of women from marginal areas and farmers who have continued to work tirelessly in their green croplands. 

Consumption-led growth relies on higher consumer spending to raise aggregate demand while investment-led growth creates new production capacities, on the other hand. This, in turn, creates more jobs and higher demand. If a developing country becomes a consumption-based one, its import demand remains very high but the growth in job creation slows, with much of the labour force depending upon the informal sector, which has a lesser capacity to withstand external shocks. Finally, such import pressure causes problems in the country's balance of payment as has been the case in Bangladesh. 

Like the sources of the challenges in real sectors are structural too. There is a fall in agricultural productivity since most of the owners of the lands sans peasants are not cultivating but rather renting or mortgaging since land is being treated as a store of value and status. The smallholders involved in the cultivation of crops cannot buy the land due to decreased or negative profitability, stemming from high input costs and their surplus syphoned by intermediaries. Due to the rise of population, the land is shrinking or split into several parcels. 

The conventional land reform and small farmerist policy is not tenable in the backdrop of diseconomies of small scale and associated coercion and distress. So, the choice seems to be binary - either to go for collective cultivation which is contingent upon political decision or a large-scale contract farming – to address economic rent and drop in productivity, besides being mindful of environment concerns due to intensive unsustainable practices. 

The deindustrialisation has set in prematurely, with negative employment creation in manufacturing in the country. Deindustrialisation results in informalisation, having negative implications for long-run growth, given the growth-pulling properties of manufacturing. For a reversal, industrialisation as the transformative pathway, a strategic  direction is required to infuse into shifts in the levels and shares of employment in manufacturing, the share of manufacturing in GDP, the growth of manufacturing value-added and the labour intensity of manufacturing production.

Exposed fractures 

The Covid-19 pandemic has revealed cracks in the structures of Bangladeshi society well beyond the contraction of its economy. The pre-existing systemic faults in public goods provision such as healthcare, social protection, education and employment opportunities have further polarised the society. The fractures were exposed in the processes of dispossession and have triggered pauperisation. A volte-face necessitates a strategy of universalisation of social security and public provisioning to avert the K-shaped recovery.  

A country cannot withstand any external shock if it is plagued by patron-client politics, power asymmetry and rent-accruing by the powerful quarters at the costs of limited access orders for ordinary masses. Power in the form of political settlement affects the outcome of the economy. Centralised power automatically creates autocracy. Centralisation of state power makes policies ineffective at the implementation level as well, which widens inequality and slows the rate of poverty reduction. Under such circumstances, authoritarianism takes shape in the government which ultimately leads to creating an unjust society. 

The state has been repressive since its inception. When the political settlement does not belong to most of the people (median, not majority), clientelism takes root, amassing resources (rent). The resource-dependent syndicate eats away banks and other systems through deinstitutionalisation and political centralisation. As a result, institutions falter to provide services to citizens, and the idea of a citizen-state becomes a far cry.

From 1991 to 2005, positive indicators were increasing at an increasing rate (acceleration).  But later the positive ones slow down (deceleration) and negative indicators start to escalate. These movements have a causal relationship with a political settlement. Authoritarian clientelism thrives through a resource-based syndicate, which accumulates power and resources. 

The ever-increasing hunger for accretion of economic rents warrants an exclusive political system to spread all over the horizontal and vertical levels, creating a culture of occupying a position — from members of parliament down to the union parishad — uncontested or without any competition. With the absence of strong institutions, the coterie grows and acts in unison for the incumbent to cling to power. The outcome of such a relationship is long-lasting, including bank defaults, capital flights and tax evasion. 

The process of fear and exclusivity also triggers a sense of low business confidence, which results in depressed investment demand, leading to lower job creation.

Besides the conventional economic drivers of growth, political settlement plays the critical role of sufficient conditions. The prevalence of extractive institutions as well as little room for competitive representational political systems has been the major bottleneck in transforming growth, thus leaving various impedances to realising the full potential of the economy. And the assertion of the trade-off between democracy and development, citing a false perception of some of the southeast and far eastern Asian countries, is fallacious.

The growth in Bangladesh is not a surprise, conundrum or paradox. If the necessary conditions are met, quantitative achievements might occur and start to contract again. Rather, sufficient conditions for growth understood as institutions and political settlement can transform the economy into the desired form. 

In order to achieve transformational and sustainable growth, inclusive institutions and competitive political systems are a must.

Dr Rashed Al Mahmud Titumir is professor and chairman of the Department of Development Studies, Dhaka University, and chairperson of Unnayan Onneshan