[🇧🇩] Monitoring Bangladesh's Economy

[Saif]

Increased remittance inflow encouraging

Upskilling workers, easier migration process can further increase it.

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Increased remittance inflow encouraging
Upskilling workers, easier migration process can further increase it

We are encouraged by the recent increase in remittance inflows into the country at a time when our economy is under significant pressure due to dwindling foreign exchange reserves and various external payment obligations. According to Bangladesh Bank data, in October, remittances sent home by our migrant workers rose 21.31 percent year-on-year to $2.39 billion, following a 40 percent increase in August and 80 percent increase in September. Reportedly, from October 1 to October 26, Islami Bank Bangladesh received the highest amount of remittance at $371 million, followed by Agrani Bank at $185 million, Sonali Bank at $143 million, and BRAC Bank at $122 million. We now hope that this upward trend in remittance inflows will continue in the coming months, which will eventually help ease pressure on our forex reserves.

This achievement, of course, would not have been possible without the hard work of our migrant workers, who toil in foreign lands, often under unfavourable conditions and with low pay. Since our economy is heavily dependent on the remittances they send, it is our responsibility to ensure their rights are protected, both at home and abroad. The high cost of migration has long been a barrier for aspiring migrant workers, which the government should address urgently. Moreover, it is concerning that the number of workers who went abroad between January and September this year was significantly lower than during the same period last year—while 989,685 workers migrated in 2023, the figure dropped to 698,558 this year. The Ministry of Expatriates' Welfare and Overseas Employment must investigate the reasons behind this decline and take proactive measures to address them.

Currently, Bangladesh faces substantial challenges in paying its external debts and importing essentials such as gas, fertiliser, and raw materials for the garment sector due to the dollar shortage. Adani Power, for instance, has recently warned Bangladesh of a potential suspension of supply if overdue payments of around $850 million are not cleared. Therefore, it is crucial that the government take all necessary steps to increase our forex reserves. To this end, the government should find new markets and focus on sending more skilled workers abroad to secure better jobs and enhance remittance flows. Additionally, it should promote the use of formal channels for remittance transfers. Previously, the gap between official and unofficial exchange rates led many migrants to favour informal channels, but this practice needs to change.

However, the government should not rely solely on remittances to alleviate the ongoing pressure on forex reserves. Simultaneously, it must also work to boost export earnings.​

 

[Saif]

WB agrees to lend $400m for bankrolling project

A latest World Bank financing worth US$400 million is expected for strengthening financial-safety net and crisis preparedness in Bangladesh, officials said about the funding that specially focuses tidying up the banking sector. The money will go for bankrolling the Financial Sector Support P

thefinancialexpress.com.bd

WB agrees to lend $400m for bankrolling project
Siddique Islam
Published :
Nov 06, 2024 00:14
Updated :
Nov 06, 2024 00:14

A latest World Bank financing worth US$400 million is expected for strengthening financial-safety net and crisis preparedness in Bangladesh, officials said about the funding that specially focuses tidying up the banking sector.

The money will go for bankrolling the Financial Sector Support Project (FSSP) -II. Total tenure of the project will be five years.

Under the proposal, Bangladesh will achieve at least six outcomes that include enacting Distressed Asset Management Act (DAMA) and stress test based on AQR (Asset Quality Review) for all the scheduled banks within the second and third years of the project.

Non-performing loans (NPL) resolution guidelines will be issued and enforcement departments will be established at the central bank during the period under the review.

Besides, two acts - Financial Stability Act and Deposit Protection Act -will be issued under the project.

However, the banking sector, particularly enhancing deposit insurance system (DIS), strengthening bank restructuring and resolution will be focused with financing worth around $300 million.

These are performance-based credits (PBCs) under a new concept introduced by the World Bank under the project, according to a central banker.

He also says an alternative to these PBCs may be inclusion of an on-lending component like previous project (FSSP) of the World Bank.

"There are also requiring enacting some new laws which will be combined efforts of the central bank and the government," the Bangladesh Bank official explains.


The DAMA will be enacted in line with the World Bank recommendations and international practices.

Another $100 million will be invested in IT, databases and systems for modernizing financial-market infrastructure of the central bank of Bangladesh along with capacity building of the BB officials for dealing with financial issues in this critical era.

"We're now working to formulate TPP (Technical Project Proforma) for the project," Spokesperson for the central bank Husne Ara Shikha told the FE.

Ms. Shikha, also an executive director of the BB, said formal discussion with the World Bank in this connection had already been completed.

"We hope that the formulation of TPP will be completed by June 2025," she said, adding that the loan proposal is expected to be submitted at the World Bank board meeting in September 2025 for approval.​

 

[Saif]

‘Business-friendly environment remains elusive’

A congenial business environment is yet to be restored under the interim government, said Tapan Chowdhury, managing director of Square Pharmaceuticals.

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‘Business-friendly environment remains elusive’

Tapan Chowdhury

A congenial business environment is yet to be restored under the interim government, said Tapan Chowdhury, managing director of Square Pharmaceuticals.

Until that happens, fresh investment or business expansion plans would be on hold, Chowdhury told The Daily Star in an interview recently.

"Square Group also has plans to expand the group's business both at home and abroad, but this is not the time for investment as the congenial and business-friendly environment is absent now."

Regarding the recent labour unrest, he suggested minimising the communication gap between the factory owners and workers.

"There should be regular interactions between the workers and owners -- if there is any grievance of the workers, their views should be heard."

Only police and the army cannot manage the problem of worker unrest, he said, adding his pharmaceutical factory was also attacked during the time of weak law and order situation.

Chowdhury is also a director of the Nirapon, which was earlier the North American garment factory inspection and remediation platform Alliance.

Nirapon has been urging the local factory owners to implement a living wage and ensure freedom of association through trade unions.

However, international brands and retailers are reluctant to raise the prices such that the factory owners could pay a living wage to workers.

"When the question of price hike is raised, they [the international clothing retailers and brands] say that they cannot do it as it is a matter of competition."

Chowdhury gave an example of freedom of association and industrial relations.

"Many years ago, at our Pabna industrial plant, the workers demanded a salary hike and the then chairman of the group Samson H Chowdhury doubled the salary although the workers demanded half of the salary hike. That made the workers very happy. It was possible because of a warm relationship between the workers and owners."

Similarly, whenever and whatever the workers demanded something, the chairman honoured that.

"People think the majority of businessmen made money in the wrong way -- that perception needs to be changed. Businessmen are seen as villains here. It is true that many have done bad things but all are not bad. Few big groups of companies made money through corruption and they did these things in connivance with the government and in public. They do not represent the whole business community."

But it is also true that many factory owners do not pay their workers on time.

"But they are buying new cars and enjoying the life of luxury."

About the banking sector, Chowdhury questioned the logic behind having so many banks.

"In which country are there so many banks?"

With the money deposited by poor people, some are claiming themselves to be bank owners.

"Had the government not patronised them, they wouldn't have had the chance to become such monsters."

Chowdhury also touched upon the health sector, which is going through a tough time.

"It is difficult to negotiate with the current government as they do not know what is the priority of the government and there is a huge gap between businessmen and the government."

For instance, the government has been reforming the pharmaceutical industry, which may affect the prices of medicines.

"Many things are being touched in many areas simultaneously. You cannot do reforms in one day -- reforms should be made step by step. Why are the people going to private hospitals? The government should realise it. This government did not do anything to revive the government hospitals. The hospital which was supposed to be built with Tk 500 crore was made with Tk 1,000 crore and no doctor could be found in those hospitals. The government should address it."​

 

[Saif]

Crony capitalism stifled investment and growth in Bangladesh

Crony capitalism is deeply ingrained and has gotten in the way of a truly dynamic and inclusive economy in Bangladesh.

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Crony capitalism stifled investment and growth in Bangladesh

Crony capitalism essentially cannot avoid giving more undue privileges to the chosen few in business at the cost of a majority of private investors. VISUAL: ANWAR SOHEL

During the last decade, under the immediate-past Awami League government, the economic landscape of Bangladesh was defined by deepening crony capitalism, a situation in which business success is not determined by competitive advantage but by political connections and favouritism. Crony capitalism discouraged the growth of private investments on both domestic and foreign fronts. At the heart of crony capitalism lies the fact that business entities that enjoy intimate company with political elites always turn out to be at an undue advantage. These advantages range from preferential access to government contracts and resources to leniency in regulation and tax exemptions.

The quintessential example is the banking sector, in which a few politically connected conglomerates grabbed a disproportionately large amount of loans by showing little or no collateral. Lack of proper regulatory oversight resulted in increased non-performing loans (NPLs), which now stand as one of the major potential risks to the financial sector's stability. Furthermore, there were instances of a high level of contractual agreements in the power and energy sector, with firms having obvious political connections, irrespective of their doubtful feasibility or efficiency, especially regarding IPPs.

Crony capitalism essentially cannot avoid giving more undue privileges to the chosen few in business at the cost of a majority of private investors. This uneven playing field thus discourages genuine entrepreneurs who don't have any political connections from competing effectively. Small and medium enterprises (SMEs), which are crucially important for employment generation and diversification of the economy, usually cannot scale up because of exclusion from lucrative markets dominated by politically connected firms.

This is not easy for foreign investors either. They are eager to invest in those sectors that offer high growth possibilities, but they keep away because the playing field is never really level. A lack of transparency in regulatory matters and the threat of arbitrary policy changes persisted during the previous regime, which prevented the emergence of a favourable business environment for foreign investors. This is one of the reasons why foreign investment didn't register pace in Bangladesh.

Inefficiencies in regulatory mechanisms and bureaucracy, along with non-transparency of systems, posed serious problems concerning doing business. For example, essential permits, licences and approvals took a long time and involved excessively high costs unless moved by political patronage.

Besides, the legal system related to the protection of intellectual property rights and enforcement of contracts remained weak—a fact that is of primary concern for both local and international investors. In a nutshell, without strong legal protection, companies risk losing their investments or intellectual property to powerful competitors who could utilise their political networks for their benefit.

Several policies and practices were tailored to benefit politically connected businesses at the expense of the broader economy. The banking sector saw a lot of new licences, many of which were given to businesses close to power, which therefore enjoyed preferential credit access, leading to increased NPLs. Defaults were all over the place due to inadequate due diligence, with hardly any consequence for the high-profile large defaulters. Tax evasion was a common feature, with selective enforcement allowing politically linked businesses to escape through waivers and amnesties. In the power sector, independent and quick rental power producers were given privileged treatment on account of political connections, while megaprojects of infrastructure construction were usually awarded in a non-transparent manner to politically favoured companies. Real estate dealings had preferential land allocations, while strong groups manipulated the stock market. Politically connected industries benefited from export incentives and trade policies, which disadvantaged smaller competitors. This dominance of crony capitalism was facilitated by a strong "anti-reform coalition" among corrupt political elites, corrupt business elites, and corrupt bureaucrats.

One of the more disquieting features of crony capitalism in Bangladesh was the degree to which the politically connected businesses were able to influence policymaking, a phenomenon often referred to as "state capture." Examples of state capture include those in industries such as telecommunications, RMG, banking, real estate, and energy, where major policy decisions were doled out to a few select players.

The policy distortions favouring cronies led to an economy that is less diversified and more dependent on a few sectors dominated by a handful of influential players. This concentration of economic power stifled competition by raising barriers for new entrants and inhibited the growth of sectors that could otherwise drive economic diversification and sustainability.

Corruption in Bangladesh has been all-pervasive and acted as a facilitator for the emergence and consolidation of crony capitalism. Paying bribes or kickbacks has been a common practice for receiving contracts, as well as for hastening bureaucratic processes or evading regulatory fines. Such an atmosphere discourages ethical business practices, besides increasing the cost of doing business for those who do not indulge in corrupt practices.

Corruption has led to wealth from the public sector being syphoned off, since money that would have been used to build infrastructure, healthcare or schooling was instead spent on self-serving interests. Resources that ought to be contributing to inclusive economic development has been misallocated.

The solution to the problem of crony capitalism needs to be multifaceted. First, there needs to be a far greater commitment to the rule of law. Anti-corruption measures have to be enforced; regulatory bodies must be given full independence to do their job without any kind of political interference. In that way, enterprises will have equal opportunities to compete with each other, where success will be determined by competence and competitiveness rather than by political relationships.

Second, government procurement and policy formulation processes must be made more transparent. E-procurement systems reduce personal contact between businesses and officials, thereby reducing avenues for corruption. Besides, policies should be aimed at encouraging fair competition, innovation, and investment across all sectors, not just chosen sections.

Third, institutions involved in monitoring the financial system need more strengthening. Banking regulations have to be tightened, and the Bangladesh Bank must have the authority as well as resources to enforce compliance without discrimination. The NPLs will require not only financial restructuring but are also underlined for future fresh lending to be based on full transparency and risk-based criteria.

It is equally important to outline a culture of accountability among political leaders and business elites, and they must be made accountable for unethical practices, while at the same time, civil society organisations must be encouraged to raise their voices for greater transparency and reform. A strong legal framework that punishes corrupt practices and protects whistleblowers would go a long way in undermining the structures of crony capitalism.

Crony capitalism is deeply ingrained and has gotten in the way of a truly dynamic and inclusive economy in Bangladesh. Unless the structural issues that create and sustain crony capitalism are resolved, a propitious investment climate cannot be achieved and sustainable economic development through broad-based domestic and foreign investment cannot be ensured.

Dr Selim Raihan is professor at the Department of Economics in the University of Dhaka and executive director of South Asian Network on Economic Modeling (SANEM).​

 

[Saif]

Forex reserves cross $20b after 2 months

Reserves were $19.87 billion a week ago

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Forex reserves cross $20b after 2 months
Reserves were $19.87 billion a week ago

Bangladesh's foreign exchange reserves have grown to go past $20 billion after nearly two months thanks to migrants sending increasing amounts of funds as remittance.

The country's foreign exchange reserves, as per the calculation method of International Monetary Fund, went past $20 billion today, rising from $19.87 billion a week ago, according to the central bank data.

"This is the impact of increased flow of remittances," said Husne Ara Shikha, spokesperson of Bangladesh Bank (BB).

Bangladeshis living and working abroad sent a total of $8.93 billion in remittance in the July-October period of fiscal year 2024-25, up 30 percent year-on-year, as per the BB.

The BB data showed that gross reserves rose to $25.72 billion from $25.44 billion a week ago.

The country's forex reserves as per the IMF's calculation method were at $20.55 billion in early September this year.

It fell below the $20 billion mark after the payment of $1.37 billion in import bills for July and August under Asian Clearing Union, an arrangement for the settlement of payments among nine member countries.

BB Deputy Governor Md Habibur Rahman said the central bank has been buying foreign currencies from banks.

"Purchases will continue. We see a good supply of the US dollar, and we will buy the foreign currencies, keeping the forex market stable," said Rahman, who was previously serving as chief economist of the BB.

The central bank sold $9.4 billion of foreign currencies in FY24.​

 

[Saif]

Economy might have expanded in October: PMI

All key economic sectors of Bangladesh witnessed expansions in October, although the country continues to grapple with frequent protests, sluggish improvements in law and order and a slowdown in public administration activities, said the MCCI yesterday.

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Economy might have expanded in October: PMI

All key economic sectors of Bangladesh witnessed expansions in October, although the country continues to grapple with frequent protests, sluggish improvements in law and order and a slowdown in public administration activities, said the MCCI yesterday.

Bangladesh Purchasing Managers' Index (PMI) climbed to 55.7 in October, said the Metropolitan Chamber of Commerce and Industry (MCCI) in its latest PMI report.

This was a 6-point increase from that in the previous month, signalling a shift back to expansion after three consecutive months of contraction, according to an MCCI press release.

Bangladesh Purchasing Managers' Index climbed to 55.7 in October, said the Metropolitan Chamber of Commerce and Industry

The Bangladesh PMI is an economic indicator which helps understand the direction in which the economy is headed and based on data compiled from monthly surveys of over 500 private sector enterprises.

It was developed in 2024 by the MCCI and Policy Exchange Bangladesh, in cooperation with the Singapore Institute of Purchasing & Materials Management and supported by UK International Development.

A reading of above 50 generally indicates expansion and below that contraction.

The October reading suggests a strengthening economic outlook, with all major sectors—agriculture, construction, manufacturing, and services—posting positive trends, said the MCCI.

The manufacturing sector, a vital pillar for Bangladesh's economy, demonstrated accelerated growth across key metrics, including new orders, factory output, and input purchases, despite ongoing contractions in employment, supplier deliveries, and order backlogs, it said.

Agriculture showed its first expansion in business activity and new orders after months of downturn, although employment remained in contraction, it said.

Input costs, a key metric, rose swiftly, reflecting rising expenses across sectors, said the chamber.

Construction returned to growth, albeit marginally, as it recorded slower contraction rates in employment and order backlogs, it said.

The services sector similarly moved to an expansion phase, driven by a rebound in business activity and order backlogs, though employment contraction persisted, it added.

However, the broader economy faces domestic hurdles, including public protests, law enforcement issues, and stagnant public administration, which may affect near-term gains, said the chamber.

All sectors reported slower expansion rates in future business expectations, reflecting cautious optimism amid continued challenges, it said.​

 

[Saif]

Higher remittance makes only difference

The higher inflow of remittance on the back of a slim export growth is the major exception amid deterioration of other major economic indicators during the first quarter of the current financial year...

www.newagebd.net

Higher remittance makes only difference
Shakhawat Hossain 09 November, 2024, 00:22

The higher inflow of remittance on the back of a slim export growth is the major exception amid deterioration of other major economic indicators during the first quarter of the current financial year marked by the historic regime change.

Economists observe that the incumbent interim government led by Nobel laureate professor Muhammad Yunus is facing trying times in taming the prolonged high inflation and bringing back economy on track after assuming power at a critical juncture marked by the faltering growth in gross domestic product at 3.91 per cent in the April–June quarter of FY24.

The April–June growth rate was the lowest in the past five quarters due to late contractionary monetary policy adoption following the implementation of flawed and expansionary policies for years by the Sheikh Hasina-led Awami League regime ousted amid a student-led mass uprising on August 5.

With the interim government struggling to stabilise the law and order and the civil administration, the higher flow of remittance registering 38 per cent growth in August, and 80 per cent growth in September on a year-on-year basis brought some relief for the government.

Besides, a 5.04 per cent growth on export earnings in the first quarter—July–September period—of FY25 from 4.34 per cent negative growth in FY24 reduced pressure on forex reserves hovering around $20 billion and also on the current account balance.

But hardly any improvement has been recorded in the sluggish imports of consumer goods, capital machinery and intermediate goods, according to the ‘Weekly selected economic indicators’ released by Bangladesh Bank on October 31.

In the July–September period, the import of consumer goods decreased by 17 per cent compared with the same period of FY24; the import of capital goods saw a decrease by 24 per cent; and intermediate goods by 13.38 per cent. The scenario signals inertia in fresh business investments amid the ongoing political uncertainty and shortage of energy and power, observes former World Bank Dhaka office chief economist Zahid Hussain.

The change is huge, he continues, and has shaken the crucial baking sector following revamping of a dozen of banks’ boards, including the largest private commercial bank, Islami Bank Bangladesh Limited, securing their control from the S Alam Group, one of the most closest cronies of the previous Awami League regime.

Leakages from the banking sector have been checked, but the interim government still faces challenges to bring back the overall economy on track, according to Zahid Hussain.

Echoing Zahid, the Institute for Inclusive Finance and Development executive director Mustafa K Mujeri said that average inflation remained high at around 10 per cent in the past three months.

The interim government has cut import duties on essential goods, including main staple rice, to 25 per cent from previous 62 per cent after flash floods and massive rain in August–September affecting the cultivation of Aman, country’s second largest rice crop.

The supply situation needed improvement by removing others barriers, including extortions, MK Mujeri stressed.

To check the persistent high inflation, the central bank is also tightening the flow of money by raising interest rates, which according to businesses, discouraging for investment and private sector employment.

In October, the general inflation returned to double digit at 10.87 per cent, after it somewhat eased in September, which was 9.92 per cent.

The October food inflation recorded at 12.66 per cent by the Bangladesh Bureau of Statistics was the main factor behind that month’s rise in general inflation.

Inflation that has been prevailing at a decade-high since 2023 had hit 11.27 per cent in July, and was recorded at 10.49 per cent in August when the interim government assumed power after the fall of the Awami regime.

The private sector credit growth in the country already dropped to 9.86 per cent in August from 10.13 per cent in July amid turmoil in the banking sector and business environment.

The ‘Bangladesh Development Update’ released by the World Bank in the past month viewed that factors, including inflation, external pressure, financial sector vulnerabilities, and political uncertainty, would continue to put pressure on the country’s economy in the current FY25.

The finance ministry is mulling to cut the overall national budget of FY25 by around Tk 70,000 crore, mainly from the development allocations to offset possible revenue losses.

The National Board of Revenue’s income in the July–September of FY25 recorded 6 per cent negative compared with the income during the same period of FY24.

M Masrur Reaz, chairman and chief executive officer of think tank Policy Exchange Bangladesh, said that the foreign direct investment, export and small and medium entrepreneurs should get equal priority from the interim government.

Confidence of foreign investors needed worked upon since the foreign direct investment hit 8.80 per cent negative in FY24 from that in FY23, he said.

Besides, efforts were urgent to check factory unrest to increase the export growth, while support should be given to the small and medium entrepreneurs accounting for at least one fourth of the country’s GDP.​

 

[Saif]

Prioritising Economic Zones

The immediate past regime planned to launch 100 Economic Zones (EZs) across the country mostly on personal, political and other considerations. To that end, the Bangladesh Economic Zone Authority (BEZA), an agency to operate under the Prime Minister's Office (PMO), was created in 2010 to manage the

thefinancialexpress.com.bd

Prioritising Economic Zones
FE
Published :
Nov 12, 2024 21:39
Updated :
Nov 12, 2024 21:39

The immediate past regime planned to launch 100 Economic Zones (EZs) across the country mostly on personal, political and other considerations. To that end, the Bangladesh Economic Zone Authority (BEZA), an agency to operate under the Prime Minister's Office (PMO), was created in 2010 to manage the Economic Zones (EZs). In 2015, BEZA rolled out this highly ambitious plan of setting up so many industrial enclaves with the target of operationalising them by 2030 and gave approval to as many as 97 EZs, of which 68 were government-owned and the rest 29 were to be run privately. But given the bureaucratic sloth, the history of time overruns regarding initiation and implementation of development projects, and not to mention the complexities involved in land acquisition, activating such a large number of EZs by the set deadline of (2030) proved impractical. Also, the EZs in most cases failed to draw investors due to inappropriate site selection, among other reasons. Only a few including the Bangabandhu Shilpa Nagar in Mirsarai of Chattogram, the Japanese Economic Zone at Araihazar in Narayanganj and the Srihatta Economic Zone in Moulvibazar, for instance, could make any visible progress. In all, only 10 EZs, about 10 per cent of the total envisaged economic zones, could finally get off the ground before the previous government's ouster.

However, the interim government, according to a recent FE report, is going to take a selective approach to EZs on the basis of viability. It is going to select a smaller number of government-owned EZs and fast-track their development with clearly defined timelines in keeping with the requirements of the investors. Out of the EZs identified by the past regime, the ones that might find themselves in the priority list as prepared by the interim government include the National Special Economic Zones in Mirsarai, Sitakunda and Feni, Jamalpur, Srihatta, Moheshkhali and Sabrang Tourism Park.

Given the experience gathered on this score in the past, especially during the previous government, the investors are better given the opportunity to choose the industrial enclaves they want to invest in. In this connection, some experts are of the view that before actually prioritising the EZ plots, the BEZA might well carry out a survey to assess the investors' point of view in this regard. To have a better understanding of what particularly discouraged the potential investors in majority of the EZs opened up for them by the previous government, the new executive chairman of BEZA appointed by the interim government should have exchange of views with them. At the same time, he should listen to the complaints and grievances of the entrepreneurs who did finally invest in the EZ sites awarded to them by the deposed previous government and take early measures to address their problems.

In fact, the emphasis of the interim government should be on not to repeat the mistakes the previous government committed in this regard. Notably, many investors in the EZs are learnt to have complained that the previous government failed to provide the promised facilities including utility connections. Even some were not duly informed of the VAT they had ultimately to pay against the land allotted to them to set up their ventures. So, the main focus of the interim government should be on building trust with potential entrepreneurs who might feel confident to put their money in selected EZs.​

 

[Saif]

BEZA gets the priority right

It is good to see that the current government is sticking to its promise of moving away from multiple mega projects involving billions of dollars in foreign loans. The previous government had the grand plan of setting up nearly 100 Special Economic Zones (SEZs). Indeed, the industrial zoning scheme

thefinancialexpress.com.bd

BEZA gets the priority right
Syed Mansur Hashim
Published :
Nov 12, 2024 21:35
Updated :
Nov 12, 2024 21:35

It is good to see that the current government is sticking to its promise of moving away from multiple mega projects involving billions of dollars in foreign loans. The previous government had the grand plan of setting up nearly 100 Special Economic Zones (SEZs). Indeed, the industrial zoning scheme that had been envisaged has effectively been shelved and according to a report published in this newspaper, "developing prioritized zones on fast track with clearly defined timelines" appears to be the plan now.

Even when the grand vision of setting up 100 SEZs had been formulated, economists had raised questions about such an ambitious target. As this plan was not based on reality since foreign direct investment (FDI) has shown dismal growth year-on-year over the last 15 years. So what possessed the previous regime to come up with this fantastic number? As pointed out by a former chief economist of the World Bank, it had everything to do with political preferences, business interests becoming the overriding factor over and above SEZ selection and overlooking investors' desire on whether or not to actually invest in Bangladesh.

Hence the current shift in thinking at policy level concurs with what is actually feasible for the economy and likely FDI commitments that may be made and then developing select zones "on a fast track with clearly defined timelines." Had the previous idea been implemented, it would undoubtedly have landed the country in even greater debt as billions in foreign exchange would have had to be borrowed, much of it from foreign lenders leading to an even greater debt trap.

The new executive chairman of the Bangladesh Economic Zones Authority (BEZA) has gone on record saying that a smaller number of zones would be developed. "We will set specific timelines to address investors' needs in a realistic and achievable way," he adds. "What investors are looking for is a stable fiscal policy, not just tax cuts." The zones expected to receive priority include the National SEZ (Mirsarai, Sitakunda and Feni), Jamalpur, Srihatta, Maheshkhali, and Sabrang Tourism Park.

Indeed, it is not merely a matter of setting up a SEZ. Undoubtedly, investors are interested in state-of-the-art infrastructure, but they will also be looking specifically at the cost of doing business in the country. For years, Bangladesh has scored low on the international indices in this regard and those nagging issues need to be worked out by the BEZA. If need be, the government should think of bringing the exercise of issuing permits and licences under one roof at the BEZA, so that a prospective investor doesn't need to run around all over the place to get required permissions. If policymakers are genuinely serious in attracting greater FDI to the country, these changes must be made.

Again, simply putting up a SEZ with requisite infrastructure and even having a "one stop service" will not be enough. When BEZA authorities talk about conducting a survey amongst investors, it ought to have another survey done because foreign company / industry workers will not simply be working all day and browsing the internet during leisure time. The quality of life for them and their families in the areas where these SEZs will be located needs to be complemented with quality education and entertainment sites. There must be good communication between SEZs and major metropolitan cities so that foreign and local officers and employees can visit their loved ones easily and safely on weekends. These are all doable and if done rightly, there is every reason why SEZs will flourish.​

 

[Saif]

Can Bangladesh reduce income inequality by 2030?

In Bangladesh, challenges hindering the achievement of economic equality are: low public expenditure on education, training, health, rural development and social protection.

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Can Bangladesh reduce income inequality by 2030?

Inequality is the overwhelming centralisation of the decision-making process. PHOTO : REUTERS

The first target under Sustainable Development Goal (SDG) #10 reads, "By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average." This calls upon all nations to bolster the income of the bottom 40 percent of the population by promoting economic, social and political inclusion of all people, irrespective of their sex, age, physical conditions such as disability, religion, race, class, ethnicity, etc. The achievement of this global target requires creating appropriate and equal opportunities, empowerment of women, and reduction of poverty and inequality. The ongoing work of the interim government's public administration and constitutional reform commissions needs a focus on these aspects so that the future elected government may work to fulfil SDG 10, as Bangladesh has only six years in hand to establish substantial improvements on this global goal.

There are data challenges with regard to having a proper understanding of the income inequality situation in Bangladesh. According to UNDP data, the income share of the bottom 40 percent of the country's population is 11 percent. In sharp contrast, for the top 10 percent, the income share is 43 percent. Based on Household Income and Expenditure Survey (HIES), 2022, the income of the bottom 40 percent population grows at 7.7 percent per annum, while the annual growth rate of income of the total population is 9.1 percent. The HIES 2022 shows that the top 10 percent of households increased their share of wealth to 40.91 percent, around 2.83 percent rise since 2016. The bottom 50 percent of the households had 19.05 percent of the total income in 2022, which came down from 20.23 percent in 2016.

Even though the country achieved progress in poverty reduction, the income Gini coefficient has been on the rise. It increased from 0.458 in 2010 to 0.499 in 2022. During the same period, consumption Gini coefficient increased from 0.321 in 2010 to 0.334 in 2022. The data from surveys over the last two decades clearly shows that income and wealth inequality is growing in Bangladesh. Whether we consider the well-known measure, the Gini coefficient, or an alternative measure like the Palma ratio, and compare the income share of the top 10 percent with the income share of the bottom 40 percent, we get the same result, which demonstrates that inequality is consistently rising in our society.

The constitutional commitment of ensuring social and economic equality among the citizens of the country can sustain without resulting in major social and political unrest. However, there is no reason to assume that income and wealth inequality will come down automatically. The common strategic options that are available to reduce inequality are participatory planning and inclusive development, pro-poor budget formulation and implementation, skills development, progressive taxation of income, adoption of appropriate legislation, scrapping of discriminatory laws, realistic minimum wage fixation, improved governance, effective measures against corruption, containment of inflation, promotion of social protection measures, investment in small and medium enterprises, and greater investment in the social sector.

In Bangladesh, the major challenges hindering the achievement of economic and social equality are: low public expenditure on education, training, health, rural development and social protection; poor direct tax collection and a culture of tax evasion; high level of selection error in social protection schemes; and high percentage (12.6 percent) of female-headed households with limited assets and means of production. The benefits of economic growth in the country have gone to the upper-income groups while the poor remain marginalised. The "pro-poor growth" concept is not being applied properly. Programmes and projects that benefit the poor need to be taken up in a greater number. Micro-credit and SME loans should be increased to help accumulate assets of small entrepreneurs and create additional employment in the formal sector. The high inclusion and exclusion errors in the social protection programmes must be corrected through a bold and one-time correction of the beneficiary list. Irregularities in the banking sector, money laundering, and tax evasion must be curbed with a strong hand. Health and nutritional services must be freed from corruption and mismanagement, so that the vulnerable population gain access to the benefits of these public services.

A vital issue that exacerbates inequality is the overwhelming centralisation of the decision-making process. The politician-bureaucracy nexus is strong, and this keeps people out from participating in the governance process. Unless the attitude of the politicians, bureaucrats and policymakers change towards a more people-centric approach in planning and development as well as local governance, the level of inequality is unlikely to come down in the near future. Additionally, the political parties should be committed to the greater good of the general people instead of continuing the culture of benefiting a select few, and adopt social-democratic norms for economic development with strong emphasis on securing socioeconomic equality in the country.

Dr Nawshad Ahmed, a retired UN official, is an economist and urban planner.​

 

[Saif]

Removing hurdles to investment in SEZs

An economic zone, by definition, is a special designated area within a country's national borders. It is created with its own set of applicable laws to encourage and enhance business and trade investment, and job creation. The primary reason behind setting up such a zone is the desire to attract fo

thefinancialexpress.com.bd

Removing hurdles to investment in SEZs
Atiqul Kabir Tuhin
Published :
Nov 13, 2024 21:29
Updated :
Nov 13, 2024 21:29

An economic zone, by definition, is a special designated area within a country's national borders. It is created with its own set of applicable laws to encourage and enhance business and trade investment, and job creation. The primary reason behind setting up such a zone is the desire to attract foreign direct investment. Free zones have been popular and used for centuries to guarantee free storage and exchange along trade routes.

Modern economic zones, however, developed only in the late 1950s, initially in industrialised nations. Notable early examples include the SEZ at Shannon Airport in Clare, Ireland, and, in the 1970s, zones in Latin America and East Asia focused on labour-intensive manufacturing. China's first SEZ, the Shenzhen Special Economic Zone, was established in 1979 under Deng Xiaoping, attracting multinational investment and accelerating industrialisation in the region. These zones attracted investment from multinational corporations.

Inspired by the economic promise of SEZs, the former Awami League government launched an ambitious plan to establish 100 economic zones on 75,000 acres of land across the country by 2030. The government envisioned these zones would create 10 million jobs and generate USD 40 billion in goods and services. The vision was overly optimistic. To make matters worse, the plan was driven by political interests and corruption rather than economic viability and benefit to the people.

Consequently, despite much talk about establishing 100 economic zones, the deposed government, over a span of 15 years, made visible progress in only a few projects-such as Bangabandhu Shilpanagar in Chittagong, the Japanese Economic Zone in Narayanganj, and the Srihatta Economic Zone in Moulvibazar-while work on the vast majority remains stalled or never began.

One notable example of a misguided and whimsical approval of economic zone can be found in the Netrakona SEZ. Sajjadul Hasan, who served as the private secretary (PS) to Prime Minister Sheikh Hasina from 2015 to 2018, allegedly used his influence to secure government approval for an economic zone in his home district, Netrakona. In 2018, during a visit to Mymensingh, Prime Minister Hasina laid the foundation stone for the Netrakona SEZ, a 1.5 billion taka project. Nine years on, there has been little progress, with officials from the Bangladesh Economic Zones Authority (BEZA) now expressing doubts about its financial viability, citing political pressure as the reason for its initial approval. This is just one example among many. Reports indicate that former ministers, secretaries, and politicians have pushed through around 30 economically unviable economic zones, which has now become an albatross around the government's neck.

Speaking to the media, Ashik Chowdhury, Executive Chairman of the Bangladesh Economic Zones Authority (BEZA), recently stated that the authority will concentrate on a smaller number of government zones to better meet investors' demands. This recalibrated strategy, supported by the new leadership of two investment-promotion agencies-BEZA and the Bangladesh Investment Development Authority (BIDA)-will focus on developing a set of prioritised zones on a fast track with clearly defined timelines. Concentrating on fewer, high-potential zones offers a more sustainable approach to developing SEZs.

Apart from planned development of SEZs, Bangladesh has still a long way to go in increasing ease of doing business to attract a healthy flow of foreign investment. Vietnam's success in attracting foreign direct investment (FDI) stands in stark contrast to Bangladesh's performance. In the first eight months of this year, Vietnam secured $14 billion in FDI, while Bangladesh could not attract even a billion dollars. In Bangladesh, investors face a series of obstacles; chief among them is bureaucratic red tape. For example, in Vietnam, a new company can be up and running in just seven days; but in Bangladesh, the same process could drag on for seven months. The bureaucratic hurdles that plague businesses in Bangladesh must be addressed to create a more investor-friendly environment.

The launch of the One Stop Service (OSS) by BEZA and BIDA to support both local and foreign investors had raised high expectations about Bangladesh's investment climate. However, progress towards achieving these goals has fallen far short of expectations. While some advancements in enhancing its systems and processes has been made, OSS remains far from functioning as a true "one-stop service" for investors. Currently, investors require access to as many as 155 services across 44 institutions for tasks such as company registration, land acquisition, and utility services. Yet BIDA and BEZA can only expedite around 60 services from 23 institutions. For the remaining services, investors must still navigate cumbersome bureaucratic processes in various government offices, as the two regulatory bodies have yet to establish agreements with all service-providing agencies.

Regrettably, in many government offices, bribery remains the only way to move files from one desk to the next. For foreign investors, bribery and corruption presents an even more complex challenge, as they risk accountability in their home countries if found to have engaged in corrupt practices to establish a business abroad. Not only do they face dismissal but aso jail time. Addressing these issues with meaningful reform is critical if Bangladesh is to cultivate a truly welcoming and efficient investment environment.

Another major challenge for foreign investors is the frequency of policy changes in Bangladesh, which disrupt business operations. While policy adjustments can be necessary, in Bangladesh investors often allege that government resorts to policy flip-flop without even holding dialogue with private sector partners, leading to uncertainty and reducing profitability for investors.

According to a survey by the World Bank and Business Initiative Leading Development (BUILD), 83 per cent of businesses felt that new regulations released without prior consultation are a major barrier, while 67 per cent expressed frustration at rarely receiving feedback on whether their input has been considered in policy-making. Intergovernmental agencies also struggle to coordinate effectively, creating inconsistencies and uncertainty that harm investment competitiveness.

It is worth mentioning that foreign investors have long been demanding a consistent tax policy in Bangladesh. However, tax policy in Bangladesh changes almost every fiscal year, further complicating investors' decision-making and affecting business confidence.

So, while the interim government is planning to streamline SEZ projects, it must also address the underlying issues hindering foreign investment in Bangladesh. By implementing regulatory reforms, improving infrastructure, and ensuring political stability, the government can create a more attractive investment climate. Simply inviting foreign investors without addressing these fundamental issues is unlikely to yield any positive results.​

 

[Saif]

Hastening pace of economic recovery

A sense of uncertainty centring Bangladesh's economic situation has been persisting for months. Policymakers and economists alike are now burning midnight oil to craft suitable measures to stabilise and revive a faltering economy. After assuming power, the interim government has initiated several

thefinancialexpress.com.bd

Hastening pace of economic recovery
Mir Mostafizur Rahaman
Published :
Nov 13, 2024 21:26
Updated :
Nov 13, 2024 21:26

A sense of uncertainty centring Bangladesh's economic situation has been persisting for months. Policymakers and economists alike are now burning midnight oil to craft suitable measures to stabilise and revive a faltering economy.

After assuming power, the interim government has initiated several measures, but a significant boost appears to be elusive, and a few underlying issues are still hampering progress. The roots of the crisis lie undoubtedly in the immediate past style of governance, as a decade of cronyism, rampant money laundering, and large-scale bank embezzlement under the previous regime led to a systemic weakening of financial foundations.

Now, Bangladesh faces the urgent challenge of recovery, but achieving it will require more than reactive policy adjustments -- it will require a bold, coordinated strategy.

Economic experts believe it is high time to address fundamental challenges to growth and devise a pathway to sustainable recovery. However, one obstacle remains evident: much of the governmental machinery is caught up in distractions, focusing on trivial concerns rather than making decisive, strategic efforts to address the economy's most pressing needs. Rather than shuffling chairs on the deck, it's time to focus entirely on turning around the ship.

The current economic landscape presents a grim prospect for many in Bangladesh. Inflation has been steadily climbing, with the cost of essential goods rising month by month. This escalation hits the poor and middle class hardest, igniting fears about the future, as shrinking incomes and depleting savings erode their financial security. The plight of these households, whose purchasing power dwindles daily, reflects the larger contraction gripping the national economy. Without a clear, forceful response to inflation, the crisis may continue to deepen, and the gap between the affluent and the vulnerable will only widen.

The pro-people government, as it calls itself, could seize this opportunity to reduce colonial-style bureaucratic practices and allow people, having grass-root experiences to devise policies.

The Bangladesh Bank has attempted to counter inflation by raising policy interest rates. Yet, rather than easing inflation, this measure has stifled investment, which in turn has stymied business activity and eroded employment opportunities. The resulting atmosphere of economic contraction has deterred entrepreneurs and caused businesses to reduce hiring. Without a vibrant investment climate, Bangladesh risks a prolonged period of stagnation, unable to create the jobs needed for a young and growing workforce. Inflation management, though crucial, should not inadvertently crush the aspirations of small and medium enterprises, which are the backbone of the Bangladesh economy.

On a broader scale, the Annual Development Program (ADP) remains a key tool for economic stimulus, yet it has been mired in inefficiencies. The government has rightly trimmed the ADP to exclude politically motivated, non-essential projects inherited from the previous regime. While this streamlining will reduce the long-term debt burden, the pace of implementation has been slow, potentially derailing immediate recovery efforts. Trimming wasteful spending is sensible, but a delay in executing critical infrastructure projects could exacerbate the economy's sluggishness.

Bangladesh cannot afford complacency. The government should embrace a more holistic strategy that balances macroeconomic stability with micro-level interventions. Traditional bureaucratic approaches to combating inflation are simply insufficient; they do not address the root causes, including market syndicates and extortion practices that continue to disrupt fair competition. A more effective strategy might involve a bottom-up approach, engaging local businesses and communities to tackle price hikes through localised, demand-driven solutions.

At this critical juncture, a transformation in governance practices is also warranted. A more transparent, results-driven public sector approach, rather than top-down control, will better align policy with public need and increase accountability in executing development programs. Reconfiguring leadership structures within the government to promote merit over administrative hierarchy can empower those with the necessary expertise and local knowledge to lead recovery efforts.

Bangladesh stands at a crossroads. With inflation persisting and business activity waning, time is running out to implement the far-reaching changes needed to steer the country out of its economic malaise. Deploying the full force of government resources, both financial and human, toward a resilient recovery is not only prudent but essential.​

 

[Saif]

Govt moves to cut budget size

The interim government is going to curtail its expenditure focusing on the budget for 2024-25 in order to keep fiscal pressure within its control, contain inflation and prevent foreign currency reserves from falling further.

www.thedailystar.net

Govt moves to cut budget size

The interim government is going to curtail its expenditure focusing on the budget for 2024-25 in order to keep fiscal pressure within its control, contain inflation and prevent foreign currency reserves from falling further.

Through a circular, the finance ministry has put a stop to all types of spending for vehicle purchases, land acquisitions, and foreign tours.

Considering necessity, participation in programmes abroad can be allowed. But in that case, concerned officials would have to take permission from the Ministry of Finance.

The government has already initiated a process to prepare a revised budget, for which the circular was issued yesterday. By next January, the size of the revised budget will be finalised.

All budgetary allocations will be cancelled for new buildings except for those in the education, health and agriculture sectors, the circular said.

If over 70 percent of the construction of a building has been completed, the allocation can stay in effect.

The Ministry of Finance told all ministries that the revised budget must be limited to the proposed budget and demand for extra allocation would not be met.

It also ordered an end to fund allocations for unnecessary projects.

However, in case of foreign aid-funded projects, the government ordered to keep the same amount in domestic funds, wherever applicable, so that these projects do not face any problem in implementation.

The circular said electricity, fuel and lubricant allocations would be trimmed to around 80 percent of the existing budget.

Officials from the ministry said the World Bank and International Monetary Fund (IMF) had informed that rising inflation and erosion of foreign currency reserves cannot be tackled solely by a contractionary monetary policy.

Thomas Helbling, deputy director for the Asia Pacific Department of the IMF, earlier this month said fiscal policy should support monetary policy by tightening overall expenses.

"At the same time, they need to rebalance fiscal policy to maintain space to support the poor and support development," he added.

Inflation rose to 10.87 percent in October amid soaring food prices, especially of staples like rice and vegetables.

The foreign exchange reserves of Bangladesh dropped to $18.44 billion on November 13, according to Bangladesh Bank data.

Already, the high-ups of the interim government directed that all politically biased and prestige projects will have to be dropped.

The Ministry of Planning and line ministries are already working in tune with this.

The finance ministry will set the size of the revised budget by January on the basis of support received from development partners.

The national budget for FY25 was proposed to be Tk 797,000 crore.

However, implementation of the development budget has already slowed.

In the first three months of the current fiscal year, development budget expenditure amounted to Tk 13,215 crore, which was Tk 20,609 crore in the same period of the previous year.​

 

[Saif]

Country not in financial crisis, but faces challenges: finance adviser

Finance Adviser Prof Dr Salehuddin Ahmed has said that the country is not in a financial crisis, but there are some political and economic challenges due to the internal and external factors

www.thedailystar.net

Country not in financial crisis, but faces challenges: finance adviser

Finance Adviser Prof Dr Salehuddin Ahmed has said that the country is not in a financial crisis, but there are some political and economic challenges due to the internal and external factors.

He made the remarks while addressing a policy dialogue on "Financial and Economic Reforms in Bangladesh 2024" at Brac University in the capital today.

Brac Business School of the Brac University organised the seminar on its campus in Merul Badda in the city.

The event was addressed by Centre for Policy Dialogue (CPD) distinguished fellow Dr Debapriya Bhattacharya, Commissioner of Bangladesh Securities Exchange Commission (BSEC) Farzana Lalarukh, and Brac Bank CEO and Chairman of Association of Bankers Bangladesh (ABB) Selim RF Hussain.

Dr Salehuddin Ahmed said most of the institutions, specially, the state-owned companies, have been on the brink of collapse. There was no governance and accountability there.

"We're trying to bring good governance which is a big challenge," he said, adding, "But I'm not that much disappointed with the situation as Bangladeshis are very efficient and creative".

He said the government has been working to bring down inflation and create market stability by taking different measures like waving import duties.

"But there are so many factors -- from production to supply chain. The traders have to pay extortions at 16-17 points which push up the prices," he said.

He said due to the middlemen and extortions, for instance, the price of per kg of brinjal goes up to Tk 60 at kitchen market from Tk 10 at the production level due to such middle-interest groups and extortions. All the groups run the extortions in a mutual understanding.

"To stop this extortions and end the middle-interest groups' business, a political solution is needed," he said.

Criticising the previous regime's GDP calculations through wrong data and misinformation, the finance adviser said there was no accountability of the institutions.

He observed that there were many projects for which no feasibility study was conducted. Now it was found that the Indian Adani Group did not pay their taxes in implementing the project.

"We inherited all these and now we're repairing and reforming these with the support of people," he said.

He said this government may not be able to complete all the reforms, but leave a footprint so that the next government can follow and implement it.

Conveying special thanks and appreciation to the Brac University students and teachers for their role in the July-August mass uprising, Dr Debapriya Bhattacharya said that the previous regime has destroyed all the institutions which put the country in the challenges.

"The central bank which was supposed to oversee the banking sector actually helped the looters to loot the banks," he added.

He said the previous government had depicted a growth narrative where all the miss information and disinformation were used. The growth figure was a false figure.

He alleged that the previous Awami League regime politicised the data and information. There was no private investment, but there was GDP growth. The Tax-GDP ratio was not increased. They spent money to show the visible development

He said the previous government intentionally picked up two sectors -- financial sector and the energy sector to loot wealth.

He said an anti-reform and corrupt alliance was created among the corrupt politicians, corrupt businessmen and corrupt bureaucrats to loot the state-wealth.

BSEC Chairman Farzana Lalarukh said that the government has been working to implement reforms in the capital market.

"The first step in this regard is to rebuild the confidence of the investors. We're trying to do that," he added.

He said the BSEC will implement reforms to ensure accountability and transparency through a digital platform.​

 

[Saif]

How Bangladesh is reviving its macroeconomy

Although the reforms have just started, some positive results are already visible.

www.thedailystar.net

How Bangladesh is reviving its macroeconomy
economic reforms in Bangladesh 2024

VISUAL: SALMAN SAKIB SHAHRYAR

Bangladesh's economy has been on a downward trend since early 2022, marked by high inflation, dwindling foreign exchange reserves, depreciation of the taka, poor health of the banking sector, low and stagnant tax-to-GDP ratio, and falling public spending. GDP growth rate as well as growth in exports and investment rates have been falling too. This downslide is the outcome of poor economic management and endemic corruption, especially thefts in the banking sector and corrupt practices in public procurement.

The dwindling macroeconomy, combined with autocratic and corrupt political governance, rising income inequality and human rights violation, led to the inevitable demise of the previous government on August 5, 2024. An interim government was established, charged with the responsibility of stabilising the macroeconomy and reforming the country's political governance. The most immediate action of this government was to stop the theft-related bleeding of the banking sector by making wholesale changes in the affected banks' management. Second, it fully deregulated the interest rate policy and tightened domestic liquidity by increasing the Bangladesh Bank policy rate. Third, a broad-based fight against corruption, including efforts to recover stolen assets, was announced. Several other reforms now underway include revisiting public spending priorities to cut waste and leakages, reducing corruption and increasing tax collections through online tax filing, lowering duties on essential food imports to reduce inflationary pressure, and mobilising greater financial assistance from multilateral financial institutions.

Although the reforms have just started, some positive results are already visible. The outflow of theft-related bank resources has stopped, demand for credit has slowed, remittances have increased, and deposits are growing. October saw an encouraging recovery in exports. However, inflation remains stubbornly high, the government revenue inflows remain sluggish, and the forex reserves have declined to $18.4 billion as of November 14, down from $20.4 billion in July. This is partly explained by the increase in debt payments and a pickup in imports. Additionally, the expected capital flows from multilateral institutions has not yet materialised, pending the IMF review of the ongoing programme and the time lag in negotiating new BOP financing from the multilateral institutions.

The immediate challenge is to reduce inflation sustainably. And that requires a recovery of imports and manufacturing sector production. More generally, except for domestic resource mobilisation, the demand stabilisation measures are broadly on track. Policy attention now must shift to enhancing imports and augmenting domestic supply, which is intimately linked to the recovery of production, investment and exports.

The supply-side agenda is tough and involves both short-term (one to three years) and medium-term (three-plus years) reforms related to skills, technology, domestic investment, foreign direct investment (FDI), and export diversification. These encompass policy reforms in many areas. The most immediate reforms include:

Exchange rate management: Years of controlled exchange rate management have clearly demonstrated the futility of such a system. The sharp appreciation of the real effective exchange rate between 2011 and 2022 is a major contributor to the present balance of payment crisis. The exchange rate has been slowly liberalised since May 2024 through the unification of multiple exchange rates and adoption of a crawling peg. However, the utility of staying with a crawling peg system is dubious, and it is best to move to a fully flexible market-based exchange rate. The demand management policies in place will protect the rate from fluctuating wildly. A market-based exchange rate is the best way to provide incentives to exporters and remittance senders.

The Bangladesh Bank should also carefully review the outdated foreign currency regime that is riddled with exchange controls and other restrictive practices that impose high transaction costs for exporters and importers, while providing incentives for hundi transactions. Service exports can be boosted through a deregulated and exporter-friendly foreign currency regime.

Monetary policy: As noted, the monetary policy is basically on track. However, more work may be needed to carefully examine the working of the T-bill market. While, in principle, the T-bill market is open to the public, this has become an easy option for banks to make profit for themselves instead of doing lending operations.

Fiscal policy: This presents a huge challenge. Corruption combined with an ineffective tax system has severely constrained tax revenues in Bangladesh. Excessive reliance on indirect taxes has fed into inflation while contributing to income inequality. Similarly, due to weak revenue performance, the total government spending as a share of GDP is low by international standard. Yet, the effectiveness of this limited spending has been reduced by poor spending priorities and corruption. Public spending on health, education, water resources and social protection have been grossly inadequate, while most spending has concentrated on civil service salaries and benefits, subsidies, interest cost and large infrastructure projects. The quality of infrastructure spending has been poor owing to corruption in procurement, contributing to delays and cost overruns.

Clearly, overhauling both tax and expenditure systems is of the highest priority. This is not an easy task and will take several years of sustained effort. The interim government has started to reform both aspects. On the revenue side, it has rightly focused on overhauling the income tax system, where corruption is most endemic. The move to an online system is a smart policy step. But this alone will not yield the full benefits.

To provide incentives to tax filers, two related reforms are essential. First, the tax form must be simplified by doing away with the reconciliation of income, expenditure and wealth. This is a rent-seeking instrument for harassing tax filers and its revenue implications are dubious. Taxpayers enter negotiated settlements with the NBR staff, and the Treasury loses out. Eliminating this requirement would greatly simplify online tax filing and encourage many more filers to go online.

Second, tax audits must be automated based on pre-selected triggers and be highly selective, mostly focused on large taxpayers. Full documentation including income and wealth reconciliation become relevant during an audit review.

Regarding expenditure management, a top priority is to cut back on fossil fuel subsidies and large infrastructure projects and increase spending on health, education, water resources and social protection. In the present environment of high inflation, higher spending on social protection with a focus on the poor is essential.

Meaningful property tax: Local government institutions—i.e. city corporations and municipalities—are ineffective because of heavy resource constraints. Global experience shows that the best instrument for augmenting their finances is through the institution of a meaningful property tax system that is based on market value of properties and a meaningful tax rate. Substantial revenues can be collected from this reform that will ease the pressure on treasury transfers to these institutions.

State-owned enterprises (SoEs): SoEs are draining the scarce fiscal resources of the Treasury with poor financial performance. The total book value of SoE assets in FY2021 was estimated at 16 percent of GDP, yet the net fiscal transfers to these SoEs was in the range of two to three percent of GDP. I prepared a detailed report on how the financial performance of SoEs can be improved and shared this with the finance ministry in early 2024. The core reforms involve corporate governance and pricing policy. This is a low-hanging fruit, which the interim government may want to focus on.

Trade policy: A sharp reduction in trade taxes is essential to diversify and boost exports. Doing so will also reduce inflation. Government revenues must be raised through income taxation and VAT. The trade policy should focus on supporting the expansion of manufacturing exports and limited support for well-established import substitutes.

Investment climate: Reversing the downturn in private investment and attracting FDI will require sharp improvement in the investment climate. Establishing law and order, including protection of private property, is the topmost priority. Resolution of labour disputes is another priority. Restoring the confidence of the domestic private sector is essential to attract FDI. Easing of foreign currency regulations and imports, provision of uninterrupted power supply, and tax and trade policy reforms will all help improve the investment climate.

Dr Sadiq Ahmed is vice-chairman at the Policy Research Institute of Bangladesh (PRI).​