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COLUMN

Offsetting recession fallout
The global financial crisis has generated a lively debate in Bangladesh. At the initial stage the debate centred on whether Bangladesh was insulated from the crisis. Many argued that Bangladesh was safe, as it did not have any connection with the toxic assets that caused the turmoil. This was rather naive because in the modern inter-connected world economies are inter-dependent in a variety of ways including through trade, capital flows, tourism, and remittances. Thankfully this debate is now over as evidence of slowdown in growth of export earnings and remittances along with further evidence that these trends will likely become worse in 2009 have convinced all that the adverse effects are real and may last for sometime. At the least 2009 will be a very difficult year for all countries including Bangladesh and this may even spill over into much of 2010. So, the debate has now shifted to what needs to be done to address the difficulties caused by the global crisis.
Part of the debate in Bangladesh is now emphasising the need for "bailout" packages for enterprises facing the demand crunch, including budget subsidies, loan forgiveness, and subsidised loans. The emphasis is on relief, instead of thinking about a more comprehensive approach that asks what could be done to protect and enhance economic growth, exports and employment.
There are a number of problems with this relief approach.
1) The government does not have adequate fiscal space to finance large bailout packages and new subsidies. Currently government revenues are only 11 percent of GDP, of which existing food, fertiliser, fuel and public enterprise subsidies and other transfers already use up almost 4 percent of GDP. Development spending is falling as a share of GDP (only around 4 percent of GDP pres ently) and this pattern has to be reversed, particularly to ensure the financing of power sector, other infrastructure and basic health and education in order to support growth and human development. Additionally, there is a risk that revenues might decline due to slowdown of the economy and trade. Clearly the government is already in a fiscal bind.
2) Some have argued for higher fiscal deficits There is scope for this because of lower oil prices that will likely save the government about 1.3 percent of GDP this year. This is an important gain that needs to be used wisely rather than giving it away as relief with no long-lasting impact. Even with the gain from lower oil prices, overall fiscal deficit (budget plus off-budget) may exceed 4 percent of GDP. Using this fiscal space will take the deficit beyond 5 percent of GDP. Stretching the deficit further may compromise prudent fiscal management. Interest payments absorb over 2 percent of GDP, which is 18 percent of the revenue resources. Additional deficits will further increase the interest burden of public debt and reduce future budget flexibility.
3) The relief approach misses out on the need for structural reforms to improve the investment climate, lower the cost of doing business, and enhance competitiveness.
4) This approach may not benefit the poor. It is the poor who need assistance and protection more than anybody else. Subsidies for large enterprises will not create jobs for the poor.
So what is the way out?
Bangladesh has done well since independence in increasing growth, reducing poverty and improving human development. Yet its 2008 estimated per capita income of around $530 is low by even South Asian standards (estimated 2008 average per capita income is $920). Its poverty rate of 40 percent is the second highest in South Asia, below only to Afghanistan (42 percent). Despite past progress, the human development agenda remains substantial. Importantly, it remains highly vulnerable to natural disasters and climate change.
Against the backdrop of this huge development challenge, the global financial crisis poses both a threat and an opportunity. The threat is the downside risk of a sharp fall in earnings from exports and remittances that could seriously disrupt growth and create unemployment and social pressures. The opportunity is that this presents the country an environment to get together and find ways to raise the development effort.
Bangladesh faces many institutional and policy reform chai lenges. 1 would like to highlight five major reforms:
First and by far the most pressing need is to create fiscal space by looking at revenue mobilisation options. There are two major reforms in this area that can be done fairly quickly.
(i) The income tax administration needs to be modernised by simplifying the tax forms (e.g. by dropping the wealth statement forms), delinking tax collection from tax officials by allowing payments through banks rather than through tax offices, relying on hundred percent self-assessments, undertaking selected but rigorous audits of large tax payers, and instituting heavy penalty for non-compliance. This reform is guaranteed to raise compliance and tax revenues.
(ii) A huge amount of wealth is vested in urban land and land-based property Yet the government gets a very little revenue from this. The property tax system needs to be overhauled to tap the revenue potential of this asset, with the initial effort focused on the capital city-
Second, a thorough review of all public spending programmes with a view to reassessing priorities is necessary. This will yield immediate benefits. In a constrained fiscal
environment ensuring that every taka is spent well and in areas that create jobs for the poor, support private investment, and contribute to growth and human development are important.
Third, banking reforms are impor -tant to ensure the financial health of die banking sector and improve its efficiency. Bangladesh has made some good progress in recent years in die banking sector, as reflected in the growth of credit and deposits and the reduction in non-performing loans. This progress should be consolidated. While the first round contagion effects of the global financial crisis have not affected the financial sector, there are downside risks from the second round effects that need to be watched
Precautionary measures including stress tests for individual banks and review of capital adequacy might be important. Providing support to enterprises facing liquidity constraints through measures such as loan rescheduling, export financing, and working capital needs are possible ways to mitigate the effects of financial crisis rather than using subsidised credits, loan forgiveness and further monetary .expansion. Fourth, in an environment of constrained global demand, competitiveness is key to protecting market share. International comparisons of cost of doing business and efficiency of trade logistics < show that Bangladesh lies at the bottom third of the comparator countries. This illustrates the large scope for reducing cost and enhancing competitiveness through further business deregulation and improvement in the supply of electricity, transport and ports services.
Finally. Bangladesh can raise its exports, investment and growth through better connectivity’ and trade with regional countries. The priorities are in the areas of trade logistics, regional transport, power, and water. All these are critical for development of Bangladesh.
The global crisis provides a major opportunity for Bangladesh and its neighbours to set aside their prejudices, suspicions and grievances and rethink the economic cooperation agenda.
The author is with the World Bank in Washington DC The views expressed here do not necessarily reflect those of the World Bank Group