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2020 | OriginalPaper | Chapter

4. Macroeconomic Policy, Price Stability and Inclusive Growth

Author : Muhammed Muqtada

Published in: Quest for Inclusive Growth in Bangladesh

Publisher: Springer Singapore

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Abstract

During the past two decades, the economy of Bangladesh experienced a fairly sustained macroeconomic stability, and was able to achieve substantial growth in gross domestic product (GDP). However, there is evidence that suggests this growth has neither been inclusive, nor has it been able to bring about structural changes needed to sustain higher growth. The chapter contends that the macroeconomic policy-making would require a rethink in order to meet the above challenges. It notes that the current COVID-19 pandemic and the sharp economic downturn, requiring extraordinary stimulus measures to protect lives and livelihoods, are likely to bring the above challenges into sharper focus. The chapter reviews the current macroeconomic policy framework of Bangladesh, and underscores the need for balancing its usual emphasis on stability, with the need for structural change and social inclusion. This, in turn, would require an expansionary macroeconomic policy, albeit prudent, that focuses robustly on stepped-up investment, job growth, and reduction of inequality and vulnerability. To this end, the chapter explores the critical role of monetary, fiscal, external and financial inclusion policies, and how far these could be reoriented to address said challenges.

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previous chapter Inclusive Growth in Bangladesh: Evidence and Issues

next chapter Growth of Manufacturing Employment in the Changing Context of Trade and Trade-Related Policies

See Stiglitz (2010) and Krugman (1999) on one hand, and Mauro (2011) on the other, for a discussion from different standpoints, on themes that have gained increasing prominence in recent times.

See for example, Bhaduri (2019), Epstein (2007), Nayyar (2015) and Pollin (2008) for a vigorous emphasis on the employment objective of macroeconomic policy.

See Khan (2015), CPD (2017a).

See IMF (2017) for a brief assessment of these challenges.

See MoF (2020). Also see CPD (2020) on factors that may affect GDP growth in the current year.

For an account of the state of the Bangladesh economy during this early period, see Khan (1995) and Bhattacharya and Titumir (2001).

See Easterly (2001) and Muqtada (2014) on how conditional borrowing was linked to undertaking of strict macroeconomic reforms during the 1980s. In many African countries such reforms led to a compression syndrome, and a reduction in aggregate demand.

The plan adopted for the period FY2015-16 to FY2019-20.

For various growth projections for Bangladesh, see IMF (2017), ADB (2017) and World Bank (2017a).

CPD (2020).

For example, the under-construction flagship project, the Padma Multipurpose Bridge, which is expected to expand connectivity and economic activities in a major way.

In FY2017-18, GDP expenditure shares were: private consumption (70.8%), private investment (23.3%), government consumption and investment (14.3%) and net exports (−8.7%).

For alternative growth–investment scenarios for Bangladesh, see Mujeri (2014).

See for example, WEF (2017).

This signifies a characterisation of an economy moving towards the Lewisian turning point. For further reflections on this, see Islam (2014b); also see Chap. 6 in this volume.

See Chaps. 3 and 6 of this volume.

In point of fact, a clearly articulated and comprehensive employment strategy does not exist in Bangladesh planning.

For further details on the issues of price stability, growth and inclusion in Bangladesh, see Muqtada (2015).

Conservative proponents of inflation targetting propose an inflation rate of 3% or less.

The crisis effects and the stimulus measures are still in a fluid state; for an interim evaluation see CPD (2020).

See Farashuddin (2008), Younus (2012), Anwar and Islam (2013). These tend to suggest trade-offs at around 7–8% inflation rates, except Biswas et al. (2016), where the threshold is estimated at 6.25%. Sample size, the period concerned and methodological differences account for these variations.

This implies a careful calibration of inflation rate tracking and potential output growth, weighted by a money demand multiplier; this is often a sum up of projected inflation, GDP growth, plus a multiplier factor.

See details in Muqtada (2015).

Muqtada (2015).

Bangladesh, despite the ongoing pandemic, projects a growth rate of 8.2% during FY2020-21.

In the recent past, Bangladesh has been meeting its borrowing needs increasingly through National Savings Certificates (NSCs). See Sect. 6.2 on the relative importance of the sources of public borrowing in Bangladesh.

CPD (2020) mentions a 61% decline in month-on-month export earnings during May 2020.

See Farashuddin (2008).

Bangladesh Bank has recently issued instructions to commercial banks to place a cap on deposit (6%) and lending rates (9%). It is still unclear how this decree will work, while at the same time ensuring market competitiveness.

Since the introduction of the Basel II framework in 2009, there has been greater accountability and risk-resilience capacity in the sector; but there is still need for closer enforcement to curb loan defaults and government interferences that impairs the risk management culture. Capital adequacy is still below BASEL III requirements for some banks, and the prospects of full BASEL III implementation by 2019 seem bleak.

See Islam (2012).

See Habib et al. (2017); in the recent past, the financial and banking sector has been jolted by a series of scams and fraudulent practices.

Grameen Bank, BRAC and Proshika in Bangladesh, have been globally recognised as prominent and effective initiatives of financial inclusion, that support poorer people, through access to resources/opportunities and financial choices, to strengthen their efforts for a better livelihood, and enhance individual capabilities. These models have been replicated in several other developing countries of the world.

For example, banks and financial institutions are supervised by the Bangladesh Bank; MFIs are supervised by the Microcredit Regulatory Authority (MRA); so on and so forth.

Akter (2016) on the need to extend coverage of the microcredit finance market.

The critical role of financial inclusion in poverty alleviation and inclusive growth is now widely recognised (UN 2006).

See for example, Beck and Demirgüç-Kunt (2008).

The debate on fiscal consolidation has ruled over much of the past two decades, especially in the European Union (EU), and intensified, as debt–GDP ratio continued to increase in a milieu of slow growth and rising unemployment.

In this regard, one may note that, a large number of countries, both in developed and developing countries, have adopted fiscal rules with specified numerical thresholds related to revenues, expenditures, budget balance and debts. The rules are often statutory, and some countries have established Fiscal Responsibility Councils to monitor compliance with statutes. It is interesting to review the Consultation IV Reports of the IMF for these countries. See IMF (2017).

Varied fiscal rules exist in India, Pakistan and Sri Lanka, see IMF (2017).

See World Bank (2015).

See for instance, Rahman et al. (2010) for a brief account of the impact of the GFC in Bangladesh, and some of the stimulus measures undertaken by the government. Also see CPD (2020) for an early account of the likely adverse impact of ongoing economic downturn and stimulus measures on budget deficit and public finances.

See World Bank (2017b).

See CPD (2020), which projects a major shortfall in revenue earnings during FY2019-20.

See for example, Mansur (2014).

See Krugman (2005), Chowdhury and Islam (2012); on Bangladesh, see CPD (2017a, b).

See IMF (2017) on the exhortations for improving budget practices in Bangladesh.

Over the past several years, there has been a consistent shortfall of revenue earnings from the government’s projected targets (CPD 2017b).

Also see for example, CPD (2017b) and Ahmed (2015).

There is reportedly a recent rise in the number of taxpayers, from about 1.5 million to 3.3 million.

See Chap. 7 of this volume.

See Harasty et al. (forthcoming).

For example, the IMF (2017) estimates that the cost of budget borrowing has increased by between a quarter to half per cent of GDP.

At the time of writing, several stimulus packages have been announced, the amount equal to 3.7% of the national budget (CPD 2020).

Krugman (2005).

See previous discussion; also Ahmed (2015) and IMF (2017).

It may be pertinent to recall the Keynesian contention that if financed by borrowing, an increase in autonomous government expenditure—whether investment or consumption—would cause output to expand through a multiplier process, particularly when there are unemployed resources.

See Bhaduri (2005) for a persuasive case of integrating employment-based programmes in budget planning.

The current sectoral allocations show that defence and public order and safety together capture more budget resources (11.4%) than either physical or social infrastructure expenditures.

See CPD (2017a).

Compare this to allocation to defence, which has been more than 1% of GDP throughout the past decade.

For instance, with respect to budgets in Bangladesh, it appears that allocations for six ministries concerning social welfare and security have gone through a generally declining trend, both as percentage of GDP and total budget (CPD 2017b).

See for example, Mahmud et al. (2008) and IMF (2017).

Hoy and Sumner (2016), for example, carry out a detailed simulation exercise to show how large reductions in poverty (at different threshold levels) can be realised simply through reducing allocations on defence spending and subsidies to fossil fuels. The authors refer to these as public bads. They also advocate a prudent taxing of the rich, to generate additional fiscal space.

The sudden surge in growth of imports may have been due to import requirements of an array of mega projects in infrastructure and energy sectors that have been launched in the recent period.

See European Commission (2017).

There still remains anti-export biases and protection, which are restraining export potential of several industries. See Khan (2015), Ahmed (2015). Also see Chap. 5.

See WEF (2017).

The government has stalled its decision to give effect to the proposal to create a sovereign wealth fund, which would have had part of its foreign reserves directed to infrastructure development. While infrastructure development is critical to creating a basis for structural transformation, the use of the limited reserves would be risky unless the export-capacity-to-import is greatly stepped up.

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Title: Macroeconomic Policy, Price Stability and Inclusive Growth
Author: Muhammed Muqtada
Publisher: Springer Singapore
Book: Quest for Inclusive Growth in Bangladesh
Print ISBN: 978-981-15-7613-3

Electronic ISBN: 978-981-15-7614-0

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-981-15-7614-0_4