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Tuesday, September 27, 2011

BD Economy in tangles

Mr. Inam Ahmed from the Daily Star writes an article on the recent development of the Bangladesh economy and rightly finds it in distress.

Here is the link of the article.

Some important points from this article:
 1.    Monthly mortgage payment of a borrower has been raised in response to the central bank's tighter monetary policy to fight inflation.

2.    The government had no way but to increase fuel price. ….. But one may ask if the government had any alternative and what could have been the ultimate outcome of not increasing fuel price.

3.    In the last two and a half years, very little investment has taken place in sectors other than power.

Though the concerns in the article are right and timely; however explanations missed something important.

Comments on major points:
 1.    Well, why I think that the whole economy has been struggling due to ‘emotional’ monetary policy that the central bank has been following over the last few years. I have observed, the monetary policy sometimes listens to the ‘heart’ of personal wishes (based on unverified belief), then acts as the safeguard of the fiscal policy and finally had to follow the instructions from multilaterals. The result? The central bank lost its path, forgot its prime role; and the whole economy is in distress now.

2.    Alternative? A) Did the government think about cutting tariff rate on fuel import? B) Did the government think about cutting fuel import other than emergency purpose for an interim period as fuel import is the source of all problems? The best alternative: Did the government think about cutting budget expenditure (and it was done many times in history)? Please see the example of Rahman; he had to cut his budget to align with his current income-expenditure pressure. The government can act like Rahman and cut its unnecessary budget expenditures (such as, recreation related expenditure of officials in the government, and dropping ambitious projects including quick rental power projects). The Second best alternative:  Though Bangladesh is not a typical welfare state (as defined in the developed world), still it provides a large amount of subsidy in priority sectors such as agriculture. Welfare states usually impose high tax rates, and follow extremely progressive tax system because they need money to finance for welfare. When the government of Bangladesh provides large subsidy, why not it follows the strategy of those welfare states – impose high taxes on the rich?

3.    That’s true, no doubt. Then I wonder why the author didn’t question the high GDP growth that the country has been experiencing over this period. What was the source of growth in this period then? Because of increased investment efficiency despite acute power shortage?

4.    I wonder why the author didn’t ever mention IMF conditionalities on fuel price hike (or, subsidy reduction on fuel import) in his article. I think, choosing the current time for fuel price hike is closely related to IMF conditionalities and Finance Minister’s visit in World Bank-IMF Annual Board Meeting. Yet I am not blaming anybody, just mentioning.    

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