Smart policies needed to deal with current economic shocks

The world is facing an unprecedented time as countries desperately try to recover from the fallouts caused by two years of Covid, followed by the newly raised geopolitical tensions due to the Russia-Ukraine war. With the rage of the pandemic weakening, economic activities around the world have started to gain momentum. This has led to higher demand for goods and services. However, as the supply is not yet able to keep pace with increased demand, prices of goods and services continue to rise. The ongoing war between Russia and Ukraine has worsened it further. Bangladesh feels its impact, too.

To deal with such circumstances, appropriate economic policymaking will play a critical role. The national budget, which is an important tool to implement the priorities of the country through certain fiscal measures, can stimulate the economy in a given financial year. The budgetary process is not a mere exercise of target settings for expenditure and resource mobilisation—it is an important medium towards contributing to the government's ongoing development activities. The upcoming national budget for FY2022-23 should prioritise resource allocation for the affected people and sectors, and extend guidance for smooth recovery from the existing economic challenges.

Currently, the economic stress that Bangladesh is going through is being reflected in a few important indicators. Prices have skyrocketed, resulting in distress not only for the poor and low-income people, but also the fixed income groups. Though food inflation is around 5.3 percent at present, the ground reality paints a different picture. Prices of many essential commodities have increased by more than 25 percent. About 30 percent of Bangladesh's economy is integrated with the global economy through exports and imports. Hence, high global prices are passed on to our domestic consumers. But price hikes in our local markets are not entirely fuelled by high import prices—market manipulation by a small group of traders is also a major reason for such hikes at times of crises.

Other concerns include current account deficit and negative trade balance. Since July 2021, our export growth has been robust. But imports grew at a higher rate than exports. During July-February of FY2022, export growth was 30.9 percent while import growth was 46.2 percent. Remittances have seen a sharp decline since May 2021. During July-February of FY2022, remittance growth was negative (-) 19.5 percent. Hence, the current account deficit reached to USD 10 billion during July-January of FY2022, compared to USD 1.5 billion in the entire FY2021. This is also creating a pressure on the foreign exchange reserve, and it is expected to increase in the coming months given high import payments and low remittance inflow. In June 2021, Bangladesh had the forex reserve equivalent to about 10 months of import payments. This has now come down to 5.5 months due to high international prices and low remittance inflow. High demand for foreign currency has appreciated the US dollar against the Bangladeshi taka. The Bangladesh Bank has intervened in the forex market to keep it stable by pumping dollars into the market. However, the exchange rate of USD in the interbank money market has been increasing since August 2021. There is a demand for devaluation of taka against USD to support exports and remittances.

The recovery of Bangladesh's economy will depend on how the global economy does in the coming months. The challenges that have emerged are not only immediate in nature, but also have medium- and long-term implications. Advanced economies have been on the recovery path even though they have also been facing pandemic inflation. With the Russian invasion in Ukraine, production and supply disruptions could reduce growth. Therefore, the global economy might experience stagflation, which occurs when there is high inflation but low growth. This is a situation the world economy has not experienced since the 1970s. So, if the growth of large economies stagnates, other countries will also face a similar situation, resulting in unemployment and further inequality.

In Bangladesh, these circumstances call for effective government interventions on many fronts. The purchasing power of people will have to be enhanced by putting money into their hands. It will boost aggregate demand in the economy. Higher government expenditures on productive activities are required so that people have employment with decent income. With expansion of the economy, the demand for higher public expenditure has increased. In recent years, large investments have been made on infrastructures, which have created job opportunities. In the current circumstances, public projects which are going to be completed soon should be prioritised. However, public expenditure must be made judiciously, and wastage of public resources should be curtailed.

The government should also extend higher support to the poor and low-income households through increasing supplies of commodities in the market. Along with adequate public spending in social sectors, the delivery system should be made efficient and corruption-free. Stimulus packages should be continued to the poor and small enterprises.

During the first six months of FY2022, there has been fiscal surplus in the budget due to slow expenditures. The government can use this resource for direct cash transfer to the poor, and provide subsidies to important sectors such as fuel, power, and agriculture for a few months. Of course, there is a need for subsidy rationalisation, and a gradual attempt must be made to withdraw subsidies since it distorts markets and encourages wastage of resources. Most importantly, fuel and energy subsidies are harmful for the environment and contribute to climate change.

In the coming FY2022-23, the government will have to work hard to enhance revenue generation to finance the increased resource requirements. In this regard, revenue targets set out in the national budget will have to be fulfilled through strong monitoring and enforcement mechanisms. Most importantly, the unfinished agenda to reform the tax system needs to be addressed.

Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author's own.