Time to shift focus to generating jobs from new megastructures: ex-governor Salehuddin

Inflation control, increasing reserves, and strengthening good governance in the banking sector are some of the most important issues, believes the former governor

The government should prioritise foreign currency management and expanding the social safety

net sector to curb the escalating inflation in the country, suggests former Bangladesh Bank governor Salehuddin Ahmed.

He believes the government faces five challenges - curbing inflation, increasing foreign currency reserves, improving good governance in the banking sector, boosting revenue generation, and enhancing budget implementation capacity .

And to confront these challenges, the former top central banker recommends focusing on small and medium industries that unleash employment. He emphasises avoiding large-scale infrastructure projects to prevent financial mismanagement and increasing workers' wages.

On Jun 6, the Awami League government, coming into power for the fourth time, will present a Tk 8 trillion budget for the upcoming 2024-25 fiscal year.

This first budget by the new government, formed in January, comes at a time when the national economy faces significant global and local challenges. These include depleted foreign reserves, a depreciating Taka, rising import costs, and runaway inflation.

The former head of the country's financial sector regulator, Salehuddin Ahmed spoke to bdnews24.com about the government’s fiscal strategies and the measures necessary to ensure a stable macroeconomic environment.

HOW TO INCREASE RESERVES?

Foreign reserves in the country have been gradually depleting for the last two years. Besides losing the capacity to repay foreign loans, Bangladesh was becoming weak in bargaining for international trade, the former governor said.

Financial account, one of the significant indexes of the foreign transaction, still stands negative. However, the current account returned to positive after a year.

As foreign currency income is lower than the expenditure, the dollar reserves dipped from $31.20 billion in the beginning of the current fiscal year to $24.21 billion by May. This is equivalent to $19.72 billion in line with the BPM6 method by the International Monetary Fund.

‘‘Bangladesh is getting weaker in reserve management. These days, even a rickshaw-puller knows that we don’t have enough reserves, while earlier they didn’t even know what reserves were. We heard of so many policies taken in the past few years. If those weren’t weak, why didn’t the reserve increase? It never increased at all.“

The government can opt for some short-term and long-term measures to increase the reserves, he said. “Money laundering should be brought down to zero.”

“We’re supposed to get more remittances. The government must monitor where the remittances are going. Migrant workers pay the remittances while abroad, and then money launderers bring that money to the workers’ families. This should be stopped at any cost.

“Money laundering should be stopped as well. This can be controlled at any time if political decisions are made.”

Salehuddin believes that inward remittances would be $4 billion to $5 billion more per year than the current level if all migrant workers used legal channels to remit.

Increasing foreign investment was another way to increase the foreign reserves, he said.

“Bangladesh is not showing enough skill to attract [foreign investment] as there’s no forecast of energy cost and the unsatisfactory credit ratings,” he said.

Salehuddin sought a permanent solution to the electricity and gas crisis. Why did Bangladesh not get foreign investment while Vietnam, a competitor, got $ 7-8 billion, he asked.

He said that only telling the foreigners that Bangladesh had an investment-friendly environment was not enough. The foreigners would look for assurances for a stable energy supply and investment-friendly environment.

‘‘They will check if they can get the investment return on time. They won’t trust us if the reserve is low. Anyone will love to invest in Bangladesh if the foreigners are given special discounts, long-term policy changes introduced, and corruption stopped,” he said.

Frequent policy changes in the energy sector prevent foreigners from making long-term investments in Bangladesh, said Salehuddin.

‘‘Even the local businessmen face the same problems. They are also worried about when the prices of oil or gas will rise. These prices change now and then.”

He suggested the authorities could introduce some bonds to attract foreign currency deposits and strengthen the process to bring export income home through mid-term and long-term measures.

CURBING INFLATION

Double-digit inflation looms for Bangladesh as the country grapples with rising transportation costs and food prices. This comes after the government agreed to reduce fuel subsidies as part of a $4.7 billion loan deal with the International Monetary Fund last year.

Food inflation has already reached a staggering 12.5 percent, and the situation is expected to worsen with further subsidy cuts.

The recent decision to adjust fuel prices every three months to match international market rates will also contribute to the price hikes.

Additionally, the weakening taka is driving up import costs, putting further pressure on essential goods.

Market manipulation by internal syndicates further exacerbates the problem.

The former governor warned that increasing the supply of goods is crucial to curb inflation.

Without addressing this core issue, simply talking about controlling inflation will be ineffective, he said.

"Store shelves are stocked, so supply can't be the main culprit behind price hikes. Just monitoring the market through the Directorate of National Consumer Rights Protection won't work. Food and commerce ministries need to take stronger action. We need to break the stranglehold of wholesalers and middlemen who form these price-fixing syndicates. The government has to get tough on them."

The former Bangladesh Bank governor voiced his dissent against the IMF's push to cut fertiliser and electricity subsidies for agriculture.

He said, "We can't simply reduce subsidies for fertiliser and agriculture. There might be room for adjustments in a few areas, but the main focus should be ensuring that these subsidies reach the small, individual farmers (who need them the most)."

PRIORITISING BANKS

The government has consistently fallen short of its borrowing targets from the banking sector to cover the budget deficit.

As of May 12 of this year, the government has only borrowed Tk 500 billion, significantly lower than the targeted Tk 1.32 trillion.

This follows a similar trend from the previous fiscal year, where they borrowed nearly Tk 786 billion against a target of Tk 1.06 trillion.

Despite these shortfalls, the government plans to increase borrowing targets in the upcoming budget.

Economist Salehuddin raises concerns about the government's reliance on borrowing.

He said, "Running a deficit budget is unsustainable. Spending more than we earn will only widen the gap. A bigger budget means squeezing businesses for more money, but that burden ultimately falls on consumers through higher prices. We need to control spending and focus on raising income. Printing more money won't solve inflation; it will just make things worse."

"Loss of public trust in banks due to the liquidity crisis creates a double whammy. We can't fix the economic mess if people don't believe in the banks. Good governance in the banking sector is crucial. The government relies on banks for loans, but how can they borrow without liquidity?

“We need to prioritise strengthening the banks. Stopping loan defaulters from getting away with it will bring money back into the banks, improving liquidity and overall stability."

‘NO’ TO BIG INFRASTRUCTURE PROJECTS

Advising austerity at all levels, the former governor said, "We cannot continue to implement projects by borrowing. We are squandering our budget. In addition to halting unnecessary expenditures, large infrastructure projects should be put on hold for now."

Questioning the provision of infrastructure, he said, "We have manpower and services, but hospitals are idle, and machinery remains unused. This is a direct waste that needs to be addressed."

Salehuddin also highlighted the need to enhance budget implementation capacity, saying, "It's clear that our budget implementation is weak. There's a lack of expertise, as well as issues with ethics and transparency."

Regarding the purchasing practices for projects, he added, "It's unclear whether action is being taken against those who are overpaying, buying items worth Tk 5 for Tk 10."

BOOSTING EMPLOYMENT THROUGH SME

Salehuddin stressed the importance of focusing on small and medium industries to boost employment opportunities.

He said, "The employment aspect is crucial in the budget. Due to import controls, some who had income sources at the end of last year are now unemployed at the beginning of this year."

"The economy cannot be sustainable without small and medium enterprises. Employment comes from these sectors, and they need support," he added.

The former governor expressed concern that the economy cannot thrive solely on the service sector, saying, "Rather than increasing the budget, priority should be given to spending on essential projects that promote employment-friendly investments."

MORE FUNDING FOR HEALTH AND EDUCATION

Salehuddin said, "There is a growing reliance on the private sector for medical care, requiring special attention."

He continued, "There should be more spending on social safety nets. The current amount of the old age allowance is insufficient.

"There are also problems with the distribution of allowances, with some not reaching the right people. Although the government has started to fix this issue, more work is needed to ensure that allowances go to the right recipients and are properly monitored."

[Writing in English by Sabrina Karim Murshed and Arshi Fatiha Quazi; editing by Osham-Ul-Sufian Talukder]