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Institutional weaknesses and inability to implement reform agenda have undermined COVID responses in FY2021

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The state of the Bangladesh economy, at a time when it is posed for the announcement of the FY2022 Budget, transmits some worrying signals. While the government did come up with a number of initiatives to mitigate the sufferings of the people and overcome the adverse effects on the economy in view of the pandemic, the much-expected turnaround is still not there. One conclusion that can be drawn from the analysis presented in the proceeding sections is that addressing embedded institutional weaknesses and resilient recovery have become entwined. Inherent weaknesses in the banking sector are undermining the government’s efforts to trigger economic recovery through bank-dependent stimulus packages. Attempts to trigger private sector investment through subsidies, incentives and working capital support are not being able to compensate for the inherent challenges that continue to undermine the competitiveness of the private enterprises. Reaching the marginal groups and those who are left behind are proving to be difficult in the absence of effective local-level institutions and access to real-time data. Generating domestic resources to underwrite the needed resources have been weakened in the absence of the much needed fiscal reforms.

The net outcome of the above has been that private sector investment has been below the targets set out in the plans and budget and as manifested in the negative growth of capital goods and term loan uptake and that of FDI. Revenue generation figures remain way below the targets, and redistributive functions of fiscal policies cannot be excluded because of the enforcement capacities and failure to implement long-awaited fiscal reforms. FY2021 targets for export growth remain way below targets. Even during the pandemic, the much needed expansionary fiscal-budgetary policies could not be implemented because of continuing and endemic weaknesses of implementing agencies and line Ministries. No tangible change could be brought in terms of the capacity to both earn and to spend.

These observations were shared by the Centre for Policy Dialogue (CPD) at the CPD Virtual Press Briefing on State of the Bangladesh Economy in FY2020-21. The media briefing was held on Monday 31 May 2021. As part of its Independent Review of Bangladesh’s Development (IRBD) programme, the CPD carries out an interim review of the national economy towards the end of every fiscal year. Accordingly, the third interim review of Bangladesh’s macroeconomic performance for FY2020-21 has been undertaken. In order to release this assessment report, CPD organised this virtual briefing session. Mr Towfiqul Islam Khan, Senior Research Fellow, CPD, made the keynote presentation at the media briefing on behalf of the IRBD research team.

From the approach to the design of budget for FY2022, stress has been given to pursuance of expansionary fiscal policy, and, focusing on redistribution rather than economic growth. From the public expenditure side, priority has been urged for social safety net expenditure, health and education and CSME-oriented investment-augmenting measures. Adequately, affordability and price stability has been prioritised in the discussion as regards food items. Towards this, fiscal measures, timely import, and food stock management has been stressed. In terms of reform measures setting up of Banking Commission, Agriculture Price Commission, Competition Commission, and fiscal reforms have been emphasised to create the foundations of a good-governed and well-functioning economy that will help to recover from the pandemic and build back better.

CPD presentation noted that, although growth in revenue mobilisation started to pick up, pace of public expenditure in FY21 failed to do so. In terms of growth in industrial production and manufacturing, small industries were lagging behind their large and medium counterparts. Food inflation was on the rise, while the opposite was true for non-food items. Although positive developments were observed in cases of export earnings, remittance inflow and foreign exchange reserves, disquieting trends were evident as regards overseas migration, import of capital machineries and FDI inflow.

Instead of designing a COVID-specific budget, the government largely opted for a business-as-usual one in 2020. Assumption was that managing the fallout from COVID-19 will be easy, and the economy will bounce back within a short period in FY21. Recovery from the entire fallout will take much longer than expected – susceptible to changes in the nature of COVID-19 and the availability and effectiveness of vaccines. Government needs to formulate a medium-term recovery plan.

The national budget for FY22 should focus more on equity, redistributive justice, protecting jobs and saving lives, and less on economic growth. The budget should set targets as regards employment and growth in income at the household level rather than GDP growth or per capita income.

In its report CPD emphasised that the transparency and accountability of Bangladesh’s COVID-19 stimulus plan will be key to its successful operationalisation and implementation. Liquidity support cannot be treated as philanthropy and so banks cannot provide loans to anyone on humanitarian grounds. A large portion of people, who are actually poor and in dire need, did not receive any form of support from the government—whether in the form of relief items, liquidity support or fiscal stimulus. Excess liquidity in the banking system may induce commercial banks to behave in ways which may jeopardise the stability of the financial system and make it difficult for the central bank to achieve its monetary policy goals. Stimulus packages provided through banks has created new avenues for corruption and malpractices. Liquidity support and fiscal stimulus packages rolled out without prior assessment of the ground realities may not be able to address the needs of the most vulnerable people in society.

The event began with introductory remarks by Dr Fahmida Khatun, Executive Director, CPD. She noted that the study has focused on analysing the state of the macroeconomy and highlighted two specific sectors in view of the ongoing pandemic – Food price volatility during COVID pandemic period and Banking sector. Professor Mustafizur Rahman, Distinguished Fellow; Dr Khondaker Golam Moazzem, Research Director also shared their views through responding to questions from the media. Mr Md. Al-Hasan, Senior Research Associate and Mr Syed Yusuf Saadat, Senior Research Associate were also present at the event.