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2014: a mixed bag for the economy

Political stability and economic reforms crucial for 2015: economists

Md Fazlur Rahman
The country will say goodbye to 2014 with mixed achievements as there are encouraging improvements in some sectors of the economy and disappointing developments in others.
The overall political scene was largely calm, punctuated by small-scale strikes and demonstrations.
This helped the economy operate almost smoothly, and macroeconomic stability was by and large maintained.
Inflation was under control, driven in part by favourable international price trends and a conducive monetary policy framework.
Agricultural growth followed its normal path, aided by benign weather, reasonably smooth functioning of agricultural input markets and improved farm gate prices.
A significant increase in the overall balance of payments surplus boosted official foreign exchange reserves as the Bangladesh Bank intervened to prevent a large appreciation of the nominal exchange rate. The current account surplus turned into a deficit later in the year, as imports surged and exports stuttered as its main purveyor, the garment industry, went through a transitional phase.
The exchange rate depreciated only slightly as the central bank began to sell dollars for the first time in last three years.
The monetary policy continued to be a source of strength for the economy, notwithstanding shortfalls in financial regulation.
"In 2014, we did not get what we wanted,” Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
He said the government could not capitalise fully on the relative peace the country has had on the political front and make some headway on the economic front Rather, it was focused on shortterm political issues.
As a result, the social and economic issues did not get as much attention as they warranted. The government missed a trick to send the economy on the 7 percent GDP growth trajectory, he added.
The government's biggest failure lies in infrastructure. Despite remaining in power for six years, no major project was implemented, Mansur said.
Zahid Hussain, lead economist of the World Bank's Dhaka office, said the fiscal policy in 2014 was consis-tent with macroeconomic stability.
Politics-related disruptions and weak imports brought about a shortfall in tax revenue collections in fiscal 2013-14. This was offset by better control of recurrent expendi-
tures, particularly subsidies.
Revenue growth remained weak later in the year. Yet the overall budget deficit was contained below the original target. Implementation of development projects continued to be lacklustre, he said.
Mansur said no tangible work was done in case of tax reforms, which would have raised the tax-GDP ratio to 14 percent from the existing 11 percent.
Mustafizur Rahman, executive director of the Centre for Policy Dialogue, a local think-tank, said the investment momentum, which the country needs for higher economic growth, was missing this year, despite the presence of a relatively stable macroeconomy.
"We have not seen much improvement in areas of revenue generation, implementation of annual development programme and public-private partnership, all of which could have paved the way for higher growth. ”
Attempts to inject momentum in the economy by way of economic reforms in the first year of the government were also missing, he said.
Hussain said the economy continues to face several key challenges: political uncertainty, growing infrastructure deficit and a de-facto onerous regulatory regime.
As a result, private investment did not show any convincing sign of recovery.
"As a citizen of the country, we expea a congenial political environment, where investors will feel confident and Bangladesh can consolidate in areas where it has achieved successes and pay attention to the qualitative aspea of
successes," Rahman said.
He said uncertainty, which started to peter out, seems to be coming back because of expectations of political agitation in the coming days or weeks. "The government needs to contain that. "
"Already, there is apprehension that a huge amount of money is going out of the country partly due to the uncertainty. It will further aggravate if the uncertainty deepens. We must provide a medium-term outlook of stability to investors."
About the banking sector, Hussain said it remained stressed throughout the year, which refleas the lingering impact of a series of financial scams and resultant loan defaults in state-owned commercial banks. Rahman said nonperforming loans as percentage of total aedit have gone up.
Overall, the financial sector remained shaky because of limited aaions to improve corporate governance and accountability. The seaor remains vulnerable to shocks and economic slowdown, Hussain said.
Looking forward, he said macroeconomic stability is likely to continue into 2015 and the robust 6 percent GDP growth may prolong if export growth recovers and private investment regains some momentum.
The recent collapse in international oil prices, which is expected to be sustained at least through the first half of 2015, will ease pressure on the balance of payments and fiscal balances, while also contributing to containing inflation, the WB economist added.
Mansur said if world oil prices remain where they are now, the gov-
ernment will not need to raise power tariffs and oil prices any longer.
Given the absence of tangible private sector aedit growth and the subdued domestic demand, it will not be tough to achieve inflationary target, he said, adding that the government can go ahead and set aggressive inflation targa.
Mansur, Hussain and Rahman all agreed that the potential downside risk is concentrated on the political side.
Ensuring political stability and embracing deeper economic reforms are challenging tasks. Success in these spheres would allow Bangladesh catch up with East Asia and the Pacific, said Hussain.
Mansur added: "The political uncertainty still remains a major threat. We don't know what will happen. We have to remove this apprehension as early as possible."
Rahman said implementing reforms in economic governance should be a major priority in 2015.
Mansur hopes exports would rebound in the second half of the current fiscal year. "Otherwise, we will face major problems."
He went on to urge the government to build the Padma bridge as soon as possible. If complaed, it will help domestic activity. The four-laning of the Dhaka-Chittagong Highway has to be complaed by 2015. Otherwise, it will be very frustrating, added the PRI economist.
The government has to at least sa the ball rolling on the highway pro-jea linking Dhaka with Mymensingh and Sylha, the elevated expressway and the Metro Rail projea
"The government can do a lot if itwantsto," Mansur added.