The highs and lows of Bangladesh's macroeconomic framework

If you are looking for an assembly of coherent thoughts on the state of macroeconomics in Bangladesh in the post Covid era, I recommend reading Sadiq Ahmed's 'Bangladesh Stabilizing the Macro Economy' published by Nymphea Publications in December 2023. 

Those familiar with introductory macroeconomics can enrich their skills by experiencing throughout the book the application of foundational macroeconomic tools in organising data to inform our understanding of the dynamics of Bangladesh's salient macroeconomic variables: growth, inflation, foreign exchange reserves, money, credit, interest rate, exchange rate, fiscal deficit, public debt, and macroeconomic policies.   

Sadiq, currently a Vice Chairman of the Policy Research Institute, spent all his professional life working on country and corporate levels for the World Bank in Washington. He still lives there, but his heart never left Bangladesh. I had the pleasure of working with him for several years when he was the boss of my boss before he retired in 2009. 

The book, a compilation of Sadiq's years of research, elaborates on the sources of the lingering macroeconomic stress Bangladesh is currently enduring and the policy tradeoffs, based on data put together in a consistent macroeconomic framework. His hard-nosed dissection of data may not entertain readers looking for painless solutions but will certainly enlighten those looking for doses of reality to understand the policy predicaments.

Macroeconomic stability

Sadiq treats this comprehensively in the first four chapters. He provides a detailed account of rising inflation, slower growth, and large external imbalance since the pandemic and the way the policy makers dealt with them which he generously describes as 'Out-of-Box Thinking'.  

That such creative thinking can sometimes be counterproductive is made abundantly clear in his discussion of the results in chapter-3. Inflation has remained high, reserves have continued to deplete, and fiscal outcomes moved in directions not exactly in line with macroeconomic stabilisation.

He debunks a few defences of 'Out of Box Thinking' in ways that reflect his polite and gentle personality and his penchant to stick to the facts. But he does not let these get in the way of calling a spade a spade.  One such is the following: "…all this hype about inflation created by the Ukraine War and rising global commodity prices is not based on facts but misperception" (p.40).  

A key takeaway, on which there now probably is a Dhaka Consensus, is that restoring macroeconomic stability is 'the topmost priority' because 'the inadequacy of policy reforms has already hurt the economy substantially. The required policy measures are tough and there will be political resistance…' 

Export diversification

Sadiq lauds the role of exports in Bangladesh's development achievements while at the same time highlighting the failure to grow exports beyond garments. Bangladesh exported 1,393 non-RMG products in FY21, he notes. "Among these, Bangladesh has strong comparative advantage in 39% of the products and moderate comparative advantage in another 27% of the products.  So, potential competitiveness of a large, diversified export basket is not an issue" (p.47).

If you are wondering what the issue is, his answer is trade and exchange rate policies: "…there is huge protection accorded to import substitutes through a range of tariffs and para tariffs that make production for the domestic market much more attractive than exports." 

The anti-export bias resulting from these policies were reinforced by 43% appreciation of the real effective exchange rate between 2011 and 2023. There is no asymmetry in the access of RMG and non-RMG exports to concessional finance, special subsidies and duty exemptions through Special Bonded Warehouses.

LDC graduation, trade diversion due to competing countries forming trading alliances, geo-economic fragmentation, and the challenges to employment posed by the advent of disruptive technologies have elevated the criticality of export diversification. If you are thinking of writing a policy brief for the FY25 Budget, you will benefit from reading The Way Forward sections on p.48 and p.56 which make the case for exchange rate flexibility, trade policy reforms, and other complementary policies to discover and incubate new exports.    

Fiscal policy

The book's 5 out of 12 chapters deal with the direct role of the government, covering fiscal outcomes, tax reforms, state-owned enterprises, fiscal redistribution, and the social protection system. This is one area where even an optimist in characterising Bangladesh's development, such as Sadiq, is compelled to describe progress since independence as 'modest'.  

The tax effort has been 'weak and stagnant', fiscal deficit as a percent of GDP 'traditionally low but rising in recent years', and 'very little is left for funding core programmes in health, education, infrastructure, and social protection' on the expenditure front (p.59).  'Mixed signal' followed a helpful fiscal response to the pandemic as macroeconomic stability came under pressure.

Noting that several long-standing fiscal challenges have worsened in the post-global economic shock environment, Sadiq makes a cogent case for reforms "on both the resource mobilisation front and on the public expenditure front." Tax reforms need to be "complemented by efforts to improve the financial performance of the state-owned enterprises to improve their financial contribution to the Treasury and eliminate the fiscal drain from loss making enterprises" (p.67).  

Earlier in p.26 he asserted that "the government can mobilise an additional 1.2-1.6% of GDP from the profit of these enterprises" through corporate governance and pricing policy reforms. This is well substantiated in chapter-9 where he lays out the SOE reform agenda going forward.

Banking reforms

The story of Bangladesh's banking sector is a story of how reforms transformed "a public-led activity to a private-led activity" with far reaching effects on financial deepening, inclusion, and customer service. This is a takeaway worth reckoning from the last two chapters on "The Imperative for Banking Reforms" and an update on the challenges facing the banking sector currently. 

What contributed to such a transformation? Sadiq's take is short and simple: deregulation. "The most fundamental reform that happened is the progressive deregulation of the banking sector that allowed a large number of private banks and nonbank financial institutions (NBFI) to grow" (p.118). 

Alas, these could not be sustained as old ailments have staged a comeback due to 'policy drift' since 2012 (p. 123) exacerbated by "the adoption of several controversial monetary and credit policies'' (p. 136) since 2020.

The update in chapter 13 lists deteriorating portfolio quality, deposit growth slowdown, variable financial health in different banks, and poor loan recovery as key contemporary challenges. It spells out the reform options to reduce NPLs, resolve weak banks, and enhance deposit mobilisation; another set of useful policy inputs in the run up to the FY25 Budget. 

Present yet absent

While reading through his discussion of exchange rate management in chapter 2, 3 and 5, one can't help but feel the absence of a chapter explaining the historic and current state of play in the exchange rate regime under the IMF programme. 

The IMF changed Bangladesh's exchange rate regime from 'crawl like' to 'other managed' in their December 2023 Article IV report. 'Other managed' is a term used when the exchange rate regime does not meet the criteria of any of the other categories. 

Although scattered over several chapters, Sadiq is unambiguous on the counterproductive results of the BAFEDA-ABB model of setting exchange rates, a model the IMF is in no hurry to roll out. A chapter on the exchange rate regime could have discussed the disconnects observed between the current reality of the foreign exchange market in Bangladesh and the IMF's take on the pace and sequence of exchange rate reforms. The IMF programme appears to be on the wrong track on this front.  

There is inadequate recognition of fogs in macroeconomic data. The fogs have spread from data on GDP growth to inflation, exports, NPLs, revenue collections, public expenditure, and counting.  

Macroeconomic analysis is a prisoner of data. Those unfamiliar with the data distortion are likely to take away a misleadingly rosier narrative on Bangladesh's macroeconomic management than Sadiq intends to paint. He knows the data issues as well as any others.