Aiming for a strong economic recovery in 2022
The Covid-19 situation is now shrouded in uncertainty. Just when we were about to relax over the receding pandemic cases, it is once again time to worry. With Omicron cases surging, the economy is likely to suffer a hit, since countries across the world are taking precautionary measures to contain the new variant's spread. Hence, the performance of Bangladesh's economy in 2022 will be determined by how well the new coronavirus variant is managed. Despite a relatively better performance in terms of economic growth, Bangladesh economy has faced a number of challenges in the first few months of the ongoing fiscal year (FY2021-22). In the coming months, policymakers will have to stay vigilant in view of a few challenging signs for the economy.
First, during the July-October period of FY22, revenue mobilisation by the National Board of Revenue (NBR) grew by 16.6 percent when compared to the same period of FY21. The major impetus came from indirect tax collection through imports and exports. However, revenue growth is far below the target of the NBR which is set at 27 percent for FY2022. Fulfilment of this target will require the revenue mobilisation effort to grow by 30.7 percent during the next eight months of FY2022.
Second, the public expenditure trend during July-November of FY2022 is also below the target level of 18.6 percent and needs faster speed. Of course, the share of expenditure under the Annual Development Programme (ADP) during these five months is better than that of FY2021. This is, however, lower than the same time span of the pre-pandemic period. One visible feature of the ADP expenditure is that the Health Services Division, of its total allocation—which is only 5.8 percent of the total ADP—could spend only 6.4 percent of the fund so far. This is unfortunate, since there is a need for higher spending on health services during the pandemic.
Third, inflationary pressure has become a major concern—particularly for the low-income consumers. Several people have lost employment during the pandemic. With economic activities opening up, many have regained their jobs, but at a lower salary. Higher prices at the international market due to recovery of demand, high shipping prices, and supply constraints have caused commodity prices to rise domestically. According to the Bangladesh Bureau of Statistics (BBS), point-to-point inflation rose to 5.98 percent in November 2021 from 5.7 percent in October 2021.
While creeping inflationary pressure is worrisome for the recovery from the pandemic, the official inflation numbers do not reflect the reality, since the actual pressure of prices felt by the common people is much stronger than the existing inflation rates. There is a need for changing the commodity basket for estimating inflation. These should be based on actual consumption pattern of the majority of the people. Higher inflationary pressure has also been a concern for the small savers, as the real interest rate from savings with the commercial banks, has declined at a time when the pandemic has hit people's income.
Fourth, one of the key drivers of growth and employment, the private sector, may also find it difficult to recover fully in FY22, though credit to the private sector grew at a higher rate in October 2021 (9.8 percent) compared to June 2021 (8.3 percent), but much lower than the target of 14.8 percent 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. For boosting private investment, there is a need for a competitive and level playing field for all investors, reduction of cost of doing business, better infrastructure, and skilled human resources.
Fifth, the external sector has seen some positive signs driven by higher export incomes, import payments and remittances. During July-November of FY22, export income grew by 24.3 percent. Import payments also increased by 51.4 percent during the July-October period. Though remittance inflow declined by (-) 21 percent during July-November of FY22, compared to the unprecedented increase in FY21, this is still higher than the same period during the pre-pandemic period. Another good sign is the rise 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 has led to a negative current account balance during the July-October period of this fiscal year. The other worry is that higher exports of ready-made garments (RMG) is volume driven rather than value driven. Despite price hikes of raw materials, the unit prices of RMG have not increased, which may put the entrepreneurs in a disadvantageous situation to remain competitive.
Finally, the government will have to map out an exit strategy for Covid-related financial policies in the second half of FY22 and the first part of FY23. High non-performing loans have been a major worry in the banking sector for long. The moratorium on bank loan recovery and classification by the central bank on stimulus packages should be discontinued, and the recovery of the bank loans will have to be followed up seriously. It is also time to make some of the tax incentives provided by the government to certain sectors time-bound—particularly when there is a need for fiscal space. The government will have to pursue expansionary fiscal and accommodative monetary policies for some time to support the poor and small enterprises in a more focused manner, and make required public investment in the next six months of FY22.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD).