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Sickness being transferred to private sector in Bangladesh

M. Morshed Khan
Lack of adequate capital, weak institutional and physical infrastructures and design faults In the Implementation of otherwise sound national industrial and Investment policies stand as stumbling blocks on the way of the development of a free market economy and a heathy, strong and socially responsive private sector in Bangladesh. The private sector is as underdeveloped as the entire economy. Capital is scarce. The stock exchange is weak and undeveloped.
Fiscal policy including taxation policies and practice of the government stunt the growth of the stock exchange. Banks could supplement the stock exchange if these were independent. Denationalization of the major banks yet in the public sector could help; sick banks, even If nationalized, cannot however deliver the goods.
Then again, the present policy of trangfering sick public sector Industrial units to private sector only transfers sickness. It does not assist the growth and development either of market economy or private sector.
Economic growth in Bangladesh in 1990-91 suffered a setback due to a series of natural calamities such as cyclone and floods. The Gulf crisis also affected the economy more adversely than one would have expected it to. As many as 63.000 workers, who had been a major source of the country's foreign exchange earnings, had to return from the war-ton Middle- East. The government had to incur a large expenditure for their repatriation. The country's Balance of Payments position got tilted for the worse following the increase in petroleum prices and shortfall tn export earnings. All these were involuntary. but inexorable. The government, notwithstanding the political unrest leading lo the epochmaking transition to participative democracy, responded to the situation by strengthening adjustment measure. GDP growth was earlier projected at 4.2 per cent. The revised estimate of GDP growth Is 3.6 per cent GDP growth in 1989-90 was 5.84 per cent. Per capita GDP In 1990-91 increased by 1.5 per cent.
In 1990-91, the economic growth rates of different sectors were as follows: agriculture: 2.43 per cent, industry: 7.86 per cent, electricity, gas and natural resources: 5.32 per cent, construction : 5.10 percent, transport and communi-
cations : 5.32 per cent and other services 3.64 per cent.
Foreign Exchange Reserve at the end of 1990-91 was es tintated at USS 825 million compared to US S 520 million last year. In 1990-91, foreign aid disbursement stood al 1832 million US Dollar compared to 1810 million Dollar 1989-90.
Inflation during 1990-91 has been estimated at less than 9 per cent compared to 9.3 per cent last year. The general price index remained low as the price index for food was slightly lower. Both general price Index and food price index. however, showed a persistent upward trend in the year.
The government Budget for 1991-92 envisages a current receipt of 2362 million US Dollar and a current expenditure of 2245 million Dollar. It is amid at generating an additional revenue of 194 million Dollar as a result of tax reforms and newly imposed taxes. The Annual Development Programme for 1991-92 has been projected at 2083 million Dollar indicating an increase of 21.4 per cent compared to 1716 million Dollar in 1990-91. External assistance will, therefore, finance 86 per cent of the development budget, compared to last year's 87.4 Ccent-Thc budgeted growth been projected at 5.7 per cent compared to 3.6 per cent of 1990-91.
The budget has put the usual emphasis on industrial development for employment generation, increasing national Income and reducing dependence on external assistance.
A free market economy, In the proper sense of the term, cannot be conceived of without a sufficiently large, robust and growing manufacturing sector.
Increasing income, savings and Investment can only be ensured if a buoyant private sector, featured by broad- based industrialisation and commercialisation of agriculture, can be set up. Experts have continually been emphasising the need for a strong private sector and large scale industrialisation for the type of free market operation that has made South Korea, Thailand, Singapore and Hongkong what they are today, dynamic, vibrant and prosperous economies. Do we have the stage set for their kind of break-
through?
Records show that by the end of the seventies and early eighties, the private sector in the country grew considerably. From 11 per cent of total financial allocation made in the private sector in the First Five Year Plan (1973-78); it grew to 16 per cent in the Two Year Perspective Plan (1978-80) and to 33 per cent over the Second Five Year Plan (1980-85) and to 35.2 per cent of total financial plan allocation in the Third Five Year Plan (1985-90).
The New Industrial Policy (NIP), announced in 1982 by the government was featured by (a) continuation of disinvestment of abandoned industrial enterprises under public corporations, (b) restoration of nationalised jute and textile mills to their former Bangladeshi owners, (c) entrusting special agencies with the management of sick and big industrial units (d) simplification of the industrial Investment schedule (c) expanding the area of private sector to all industries except six, reserved list' ones, namely, arms and ammunition and allied defence equipment, atomic energy, air transports, telecommunication, generation and distribution of electricity and mechanised forest extraction and the like. Foreign investment in joint ventures was encouraged.
The 1986 Industrial policy was also In line with its predecessor. further opening up the scope for the private sector operation. Save and except the reserved list' all other industries were made open for the private sector. Public sector was also allowed to sei up industries In these sectors all by themselves or in joint venture with private sector.
One new, if somewhat discouraging and contradictory, feature of this policy happened to be the formulalion of a priority list' and a discouraged list' of industries.
The recently announced Industrial policy is yet another step forward to give the private sector the much needed shot in the arm by way of further relaxation of terms and conditions for it.
Speedier and more extensive Industrialisation, however, continues to be as elusive as ever, and so docs privatization tn its desired measure. And
notwithstanding the very good investment and industrial policies, the government will have to do a lot more to realize Its dream of a free market economy and a healthy, growing private sector- whose mainstay happens to be the manufacturing sector.
The 'Bangladesh Manufacturing Industries Survey 1990' published by the Metropolitan Chamber of Commerce and Industry, found 'remarkable silver linings in the hitherto depressing scenarios painted in respect of the industrial sector. Fore example, the share of the manufacturing sector In the GDP has been found to be 16 per cent, Ihc private sector accounts for more than 85 per cent of manufacturing value added, growth in private manufacturing value added, growth in private manufacturing sector averaged 7.75 per cent annum; the employment estimate is about 55 per cent higher, and of the total manufacturing employment, about 94 per cent is in the private sector.'
Consider against situation in the country's power sector, as an example. 'Bangladesh can build a Jamuna bridge every four years If the system loss of Power Development Board is reduced. Such a statement by no less a person than the Vice President of the World Bank is most disconcerting for a massively aid- dependent country . Il shows the counter productiveness of foreign assistance which have financed the overwhelming share of the investment of the power sector. In 1990-91, PDB Incurred a net loss of Tk. 227.62 crores as against a huge investment of Tk. 10,945 crores. The return on such huge Investment being negative (2.07 per cent), one can clearly show it as a glaring case of wastage of public resources, and so on. Launching of the DESA will unless it is deliberately sabotaged, ptart yielding results that every one likes to see.
The point Is there are anomalies here and these, hindering the proper growth of the market economy and the private sector. These need to becarefully studied and eventually removed. Consider, for example, the absence of a vibrant Stock Exchange. One certainly cannot conceive of a viable free market economy with such a morbid stock ex-
change. Than again, everybody knows how dividends of enterprises are taxed, while Defence Certificates have been made tax-free. Under such circumstances. a small entrepreneur would prefer to keep his money in Defence Savings Certificates, FDR to earn virtually untaxed interest rather pay 64 to 66 per cent tax.
The weakness of the stock exchange could be made up by denationalised banks coming into the picture. However, banks in the nationalized sector suffer from Immense problems. Transferring these problems alongwlth the banks to the private sector would not help strengthen tfye economy.
The mass scale nationalisation and Privatisation Scheme of the Government may be wildly successful, but they will definitely not create genuine market economy in the country on their own. Because the missing elements will be an efficient financial sector which is considered to be heart of modern capitalism. This is not a mere technicality or a traditional expertise keeping the financial Institutions of the country in its present state of affairs without going for radical reforms. New industries or business may turn- out to be still born. Even existing companies capable of thriving after privatisation will be capital hungry. Whereas, failing companies may be propped up by bankers with a very little incentives to cut off credit facilities to their traditional borrowers. In Bangladesh Slock Exchange are still insignificant and likely to remain so for next few years. So the task of mobilising domestic savings and allocating capital to the right business will rest largely with the bankers. Making reforms In the financial sectors, in other words clearing the banking mess left over by the nationalization is one of the most Intractable problems facing the economic reforms. Perhaps that may have forced the decision makers to go for an adhoc approach.
Setting up of financial infrastructure through a proper banking network and accepted accounting rules will no doubt be a greater challenge where skills are tn short supply. Despite this, the only way to introduce commercial incentives into banking is to priva-
tise the bank just as it is for other industries. Although, Bangladesh is planning step by step bank privatisation so far the plan do not address the unique problem facing the banks i. e. what to do with the huge number and volume of bad loans with our state owned enterprises on their books. Privatising he banks or the industrial enterprises when cleaning up their portfolios is destined to be a failure. In the past, loans were made at the directions of the Government to various state owned enterprises and without having any commercial basis.
The loans and viability of fund always followed the plan. The nationalised banks were not required or allowed to decide which enterprises could pay back the loan and in many cases such loans were not properly secured. Many will never be paid or many will not be able to repay the loans. Denationalising industries with their existing tasks/ borrowings may aggravate the situation further. Because of the arbitrary nature of the past borrowing there is little correlation between Insolvency and inefficiency. Many of the industries with heavy debts could also be among those which will be able to survive in a free economy. The ideal solution will be lo wipe out these bad debts to make the slate clean.
To do this the Government would have to write of all the existing loans made by the nationalised banks to the nationalised enterprises and then privatise bolh nationalised banks as well as national enterprises. What would happen to the nationalised banks themselves? Wiping out their own portfolios clean, would leave them with no income to pay interest on deposits and no assets to repay depositors who arc likely to withdraw their money.
The transfer of the mess created by nationalization to the private sector docs not help improve the economy.
This has been amply proved tn Bangladesh by Ihc faulty policy and practice of transferring sick industries to the private sector. The government as recently formed a committee to identify the various sick units in the textile industries sector with the atm of transferring them to the private sector. The committee has already
identified 188 such units. This is nothing new in view of the fact that it had been the government's undeclared policy long since to get rid of the sick industries by way of disinvestment.
Transferring of sick industrial units from the public to the private - ctor is in fact transferring ol sickness from one part of the economy to the other. This really does not help. Unsuspecting private individuals and entrepreneurs have time and again been lured into buying sick projects from the government. The result is all too predictable. Soon after going into production the new owners start feeling the weight of the cumulative effects of liabilities, labour problems and other problems. In no time they find out that the vitality of the industrial unit has already been eaten into, as a result of which they cannot produce or sell enough to pay their instalments to the government or maintain regular debt- servicing.
The wave of privatization in East Europe and the Soviet Union has fashioned new concepts and terms. In this unfolding set of Jargons "Peo-pllzation" of industrial and commercial units is a favourite. The idea is to transfer ownership of hitherto publicly held units to the ownership of individuals clustered as sherehold-ers in others words fast development of massive joint stock companies.
But the question remains here whether such a thing is possible in a situation like Bangladesh were even the traditional patterns of private ownership of enterprises are far from being developed and strong? Without going through the process of partnerships and private limited companies which when they grow strong can spawn and nourish an environment rich with generous flow of capital, investment, and entrepreneurial and managerial skill "peoplization" can not be successful.
The most important factor is creating an environment of hope, confidence and security tn the economy. The much-trumpeted concept of 'Commercially Important Person (C1P)' remains a concept only and publication of the names of Banks and DFIs' defaulters In the press does not really Improve the recovery position. The various mass commu-
nication media can perhaps play the most vital role tn furthering the cause of the nascent private sector tn Bangladesh by, giving its achievements and successes the favourable projection these rightfully deserve.
The various Chambers of Commerce and Industries throughout the country must also be made stronger — much stronger and bigger. The Chambers of Commerce and Industry could really' do a great deal in finding out ways and means for eliminating the various anomalies that handicap the growth of the economy along the desired lines. But then, the powers that be must be ready lo listen to the Chambers of Commerce and Industry and other platforms of organized business and In-dustry.
The private sector itself is making sincere efforts to come forth with realistic suggestions for improving the environment. For instance, the Federation of Bangladesh Chambers of Commerce and Industry (FBCC1) has already signed an agreement with the Centre for Development Research, Bangladesh (CDRB) to identify some of the regulatory functions in respect of small scale industries that could be handed over to the Chambers and Associations to help accelerate the growth and development of SMEs, unhindered by traditionally slow-moving government bureaucracy.
A very strong political will and clear political commitment, accompanied by concrete steps on the part of the government, can alone usher in healthy market economy. And last but not the least a real one-stop service for potential investors should be set up on war footing If there has to be speedy industrialization in Bangladesh.
This is an edited version of the key note paper,'Market Economy and The Private Sector in Bangladesh,' presented by M Morshed Khan. Chairman, Arab Bangladesh Bank Limited and former president, Metropolitan Chamber of Commerce and Industry, and also, Bangladesh Chamber of Industries to an audience at Jatiya Press Club on October 11 on the occasion of lecture series organised by the club. The paper highlights the issues which on qf special Interest In the context of the government's announce policies for a market — oriented competitive economy.
— Economic Editor