Towards a strong economic recovery in 2022
The Covid-19 situation is now surrounded by uncertainties. Just when we were about to relax in the face of the decline in pandemic cases, it is time to worry again. With the increase in Omicron cases, the economy is at risk of being affected as countries around the world take precautionary measures to contain the spread of the new variant. Therefore, the performance of Bangladesh’s economy in 2022 will be determined by how the novel variant of the coronavirus is handled. Despite a relatively better performance in terms of economic growth, Bangladesh’s economy faced a number of challenges in the first months of the current fiscal year (FY2021-22). Over the next few months, policymakers will need to remain vigilant in the face of some tough signs for the economy.
First, during the July-October period of FY22, revenue mobilization by the National Board of Revenue (NBR) increased by 16.6% compared to the same period of FY21. The main impetus came from the collection of indirect taxes through imports and exports. However, revenue growth is well below the NBR target which is set at 27% for fiscal year 2022. Achieving this target will require the revenue mobilization effort to increase by 30.7% over the course of the year. the next eight months of fiscal 2022.
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Second, the trend of government spending in the July-November period of FY2022 is also below the target level of 18.6% and requires faster speed. Of course, the share of expenditure under the Annual Development Program (ADP) during these five months is better than that of 2021. This is however lower than the same period of the pre-pandemic period. A visible feature of ADP spending is that the Health Services Division, of its total allocation – which is only 5.8% of the ADP total – could only spend 6.4% of the fund up to now. This is unfortunate, because spending on health services has to be increased during the pandemic.
Third, inflationary pressures have become a major concern, especially for low-income consumers. Several people lost their jobs during the pandemic. With the opening of economic activities, many have found their jobs, but at lower wages. The higher prices in the international market due to the recovery in demand, high transport prices and supply constraints have resulted in an increase in commodity prices at the national level. According to the Bangladesh Bureau of Statistics (BBS), point-to-point inflation reached 5.98% in November 2021 from 5.7% in October 2021.
While creeping inflationary pressure is worrisome for the recovery from the pandemic, official inflation figures do not reflect reality, as the real price pressure felt by the people is much stronger than existing inflation rates. It is necessary to modify the basket of commodities to estimate inflation. These should be based on the actual consumption pattern of the majority of the population. Higher inflationary pressure has also been a concern for small savers, as the real interest rate on savings with commercial banks has fallen at a time when the pandemic has hit people’s incomes.
Fourth, one of the main drivers of growth and employment, the private sector, may also struggle to fully recover in FY22, although credit to the private sector has grown at a rate higher in October 2021 (9.8%) compared to June 2021 (8.3%), but well below the target of 14.8% for this fiscal year. The increase in credit growth to the private sector may be due to the resumption of economic activities and increased demand for imports and exports. To stimulate private investment, we need a competitive and level playing field for all investors, a reduction in the cost of doing business, better infrastructure and qualified human resources.
Fifth, the external sector has seen positive signs driven by higher export earnings, import payments and remittances. Between July and November of FY22, export earnings increased 24.3 percent. Import payments also increased by 51.4 percent during the July-October period. Although remittances declined by (-) 21% between July and November of FY 22, compared to the unprecedented increase in FY 21, this figure remains higher than in the same period during the pre-pandemic period. Another good sign is the increase in overseas migration after a high number of returnees following the outbreak of the pandemic.
But the increasing trade deficit is a cause for concern, which led to a negative current account balance during the July-October period of this fiscal year. The other concern is that higher ready-made clothing exports (RMGs) are driven by volume rather than value. Despite the rise in commodity prices, RMG’s unit prices have not increased, which may put entrepreneurs at a disadvantage to remain competitive.
Finally, the government will need to define an exit strategy from financial policies linked to Covid during the second half of fiscal 22 and the first part of fiscal 23. High nonperforming loans have long been a major concern of the sector. banking. The moratorium on the collection of bank loans and the classification by the central bank on stimulus packages should be suspended, and the collection of bank loans should be followed seriously. It is also time to time limit some of the fiscal incentives provided by the government to certain sectors, especially when there is a need for fiscal space. The government will need to pursue expansionary fiscal and accommodative monetary policies for some time to support the poor and small businesses in a more targeted manner, and make the necessary public investments over the next six months of fiscal year 22.
Dr Fahmida Khatun is Executive Director of the Center for Policy Dialogue (CPD).