No time to waste as new finance minister inherits wobbly economy

The economy is losing momentum. Inflation remains stubborn. Bangladesh is facing deterioration in external buffers, with official reserves falling to $20.18 billion as of January 10, less than half their historic peak in 2021. The currency shock is lingering.

The new finance minister, Abul Hassan Mahmood Ali, will inherit all these stresses after he takes over from AHM Mustafa Kamal, who is departing after helming the key ministry for five years.

The Awami League, which clinched a landslide in the parliamentary elections on Sunday, won an absolute majority, which gives it the mandate to form the government for the fourth straight term on a strong footing.

However, Mahmood Ali will face the toughest challenge among the peers since the economy has been going through one of the worst periods in recent decades, because of both external and internal factors.

The immediate task for the former foreign affairs minister will be to restore macroeconomic stability, which received major blows following the outbreak of the coronavirus pandemic and the eruption of the Russia-Ukraine crisis.

Whereas the impacts of the twin global crises have eased in many countries, the fallout has lingered in Bangladesh owing largely to inadequate policy responses.

Because of the higher outflows of foreign currencies amid an elevated level of imports against moderate export and remittance receipts, the foreign exchange reserves have fallen from as high as $41.7 billion in August 2021 to a little over $20.18 billion on Wednesday.

The prevalence of hundi meaning remitters' dollars are not entering the country while capital flight has also caused the forex reserves to plummet.

One of the glaring failures of the finance ministry in recent years has been the dragging indiscipline in the financial sector. Although the reach of the financial sector has widened riding on the higher number of branches, agent banking outlets, and mobile financial services, irregularities in the financial sector have deepened. For example, non-performing loans in the banking sector rocketed to Tk 1,56,039 crore in June, the highest ever.

Weighed down by scams, the situation in the banking sector turned so grave in the past two years that even many depositors withdrew their funds, leaving banks in a serious fund crunch.

A lack of good governance, relaxed policies pursued by the central bank, political interference and irregularities have largely been responsible for the upward trend of NPLs. But the finance ministry has not taken any significant steps to stop the build-up of distressed assets.

Similarly, wrong-doers in the non-bank financial sector, the insurance sector, and the capital market have not been brought to book.

According to the World Economic Forum's Global Risk Report 2024, top executives of Bangladesh see energy shortage, elevated inflation, economic downturn, growing inequality, mounting public debt, and unemployment as the major challenges in the next two years.

The cost-of-living crisis has eroded the purchasing power of a majority of population in the still low-middle-income and least-developed nation.

Although it is the responsibility of the central bank to curb inflation, the Bangladesh Bank, which has been headed by top bureaucrats for the past seven years, did not come up with effective measures. This might be because either it could not operate independently or was largely influenced by the policies of the government.

For example, the BB does not have full control over the state-run banks, which hold a majority of bad loans. A 9 percent lending rate cap had prevented the country from tackling the raging inflation, which has been running at more than 9 percent for nearly a year.

The new finance minister will have to put the economy on a higher growth trajectory from the current lower trend to put Bangladesh on track to becoming a higher-middle-income nation by 2031 and a developed nation by 2041.

According to the World Bank, the country's gross domestic product growth is forecast to slow to 5.6 percent in 2023-24. If the forecast translates into reality, it would be the lowest economic expansion in more than a decade if the Covid-hit 2019-2020 is excluded.

Another major failure for the finance ministry has been to raise enough taxes to keep the government operational without requiring it to resort to borrowing, a situation that has limited the country's scope to spend when needed the most.

For the 11th consecutive year, the National Board of Revenue has missed its tax target in the face of slowing growth of collections. As a result, the government has been forced to turn to the central bank and commercial banks to meet the budget deficit although such borrowing has stoked inflationary pressures and crowded out the private sector.

"The new finance minister is going to take over at a time when there will be no time for him to wander around. He will have to get down to work immediately. There is such an urgency at the moment," said Zahid Hussain, a former lead economist of the World Bank.