Policies and reality checks

The beginning of a new year is not just a moment for resolution. We are in a season that is about both reflecting on the past and looking forward to the future. 2022 ended with many unpredictable outcomes. Most worryingly, there is no end in sight in the war in a large part of Eastern Europe. We may be just one accident due to malfunction, bad aim, or deliberate provocation away from something globally cataclysmic.

Be that as it may, there is a chance that next year will bring Armageddon of the economic kind. There are worries about how developed economies will respond to the global shift towards higher interest rates and tighter monetary policy. Chinese authorities have abandoned the zero-Covid policy responsible for slowing growth and public unrest.

The unlocking of the global factory comes with the risk of an economically damaging surge in the disease. The consensus among economists is recession looms large. The question seems to be how hard or soft the landing will be.

The base case for the global economy is weak even if crude finishes the year lower than it was at end-December and the US dollar does not appreciate further.

The weaponisation of energy and the spillovers from excessive tightening of policies in the advanced economies have increased the risk of debt distress and inflation persistence in the developing economies. Post-pandemic recovery in the latter has generally lagged that in developed economies.

Central banks in developed economies are not known as good accountants of spillovers in their conduct of monetary policy. The least they need to reflect upon going forward is how to correct the angst to safety-driven bubbles in the value of the dollar flamed by loss of credibility of international monetary and fiscal coordination. Currency misalignments and mismatches risk financial stability with disproportional damage to finance for development. Reality checks are pretty much in order.  

In Bangladesh, there is a lot to reflect upon as the economy enters the new year facing macroeconomic challenges it has not encountered in recent decades. How have the variety of policy experiments introduced to deal with a sequence of economic problems fared? In this day and age when creativity is abundant with assistance from artificial intelligence, any policy can be justified a priori basedon intentions. The test of a successful policy is in whether empirically the intentions turn into outcomes. If the answer is affirmative, the policy continues. If not, course corrections, including reversals, is warranted.

Consider the financial sector. Two significant recent policies were the extension of regulatory forbearance and the imposition of a 9 per cent interest rate cap on all bank lending. The narrative justifying these measures was that it will reduce non-performing loans and increase financial inclusion by expanding access to credit. Has this held up to the test of time? Without a rigorous empirical analysis, a conclusive answer is not possible. But any casual examination of financial sector data will tell you that the answer is most probably no. NPLs have increased, and access is business as usual.

A second case is the foreign exchange market. The Bangladesh Foreign Exchange Dealers Association and the Association of Bankers' Bangladesh were moral-suaded by the Bangladesh Bank to introduce a multiple exchange rate system in mid-September 2022. It was touted as a novel out of the box solution that will bring back stability and alleviate the foreign exchange shortage. Yes, exchange rates have been stable since on the surface, but the shortage has only deepened as indicated by the accelerated depletion of BB forex reserves in the second half of 2022. The rate stability by shadow fiat is superficial when the market is not trading much. Data suggests a clear case for reversal to a float managed in cognizance of supply and demand balancing.

We have experimented with a buffet of subsidies. Exports, remittances, diesel, fertiliser, food and so on. Each of these cases deserves separate empirical scrutiny. The expectation from export subsidy was product and market diversification. Related data makes one raise eyebrows at best. The expectation from subsidy on remittances was increased inflows through formal channels. The opposite seems to be happening of late despite increase in the rate of subsidy and easing of eligibility requirements. What went awry in all these cases?

Reflections based on data must not miss infrastructure milestones such as the Padma Bridge, valued at $7 billion at inception. Anecdotal data on real estate price movements in the region associated with PB suggests value realisation is probably underway. The asset having been already built, now the policy focus must naturally shift to the "other factors", including bridge management, enabling, or constraining the realisation of opportunities opened by the bridge. There are also lessons to be learnt on project financing and implementation that may be adjudged transferable to other contexts, not to speak of the role of political commitment in the provision of a national public good.

Policies have beneficial consequences and collateral damages, intended or otherwise. Smelling the policy from results on the ground, rather than the ex-ante benevolent wishes, is the hallmark of evidence-based policymaking. Any nimble policy making process prominently features reality checks which in turn need immunity from policy principals to mitigate the risk of policy-based evidence production.

The writer is a former lead economist of the World Bank's Dhaka office.