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46

Business Administration / BB must cut merchant banks' stock risks: IMF

« on: February 25, 2015, 03:20:26 PM »

Bangladesh Bank should exercise its authority to ensure merchant banks do not pose any operational risk to their parent companies through their involvement in the stockmarket, said a top IMF official yesterday.

“Banks have exposure to the capital market. It has to be ensured that Bangladesh Bank is doing its part to properly manage the exposure,” said David Cowen, chief of the International Monetary Fund's delegation to Bangladesh.

“We will encourage Bangladesh Bank to truly develop a supervisory framework with the Securities and Exchange Commission.”

On merchant banks' roles as subsidiaries of banks, Cowen said they are perhaps falling outside the regulatory reach of either Bangladesh Bank or SEC.

“Bangladesh Bank does have the authority and it should exercise that authority to ensure these institutions do not pose any operational risk to their parent banks.”

“We do see there is a need for considerable capacity building at SEC. We are looking more closely in this area.”

The comments came at a roundtable discussion on “Medium-Term Macroeconomic Outlook and Reform Priorities” at the Policy Research Institute of Bangladesh (PRI) in the city.

On the much-talked-about public private partnership, Cowen said: “PPP is not going to be a panacea. The experience about the issue is mixed around the world.”

“I think it does have a place in Bangladesh. But PPP is going to face a number of the same challenges like those seeking to bring foreign direct investment into the country face.”

“We are encouraged by the fact that the government has set up a PPP cell. It will however take sometime before it makes any meaningful contribution to infrastructure development in the country.”

Cowen also said the government should pay attention to the quality of the spending. “Our new managing director says IMF should not only talk about growth. When you talk about inclusive growth you cannot avoid talking about quality of spending.”

Former Finance Secretary Siddiqur Rahman Chowdhury said the government should revisit quality of spending of its annual develop programme. “It is not just about spending; it is poor implementation.”

“There is a pressure on a line ministry to have the money released and spend. It is wasteful expenditure,” he said.

PRI Executive Director Ahsan H Mansur said he is really concerned about the government finance this year. “Despite the very high level of bank borrowing last year, the domestic financing was within the planned target of the budget.”

He said in the last two months last year a lot of money was injected into the economy. “We will be seeing that down the line this time around.”

“What is going to happen this year is a matter of concern because there is very serious lack of action on the subsidy front. We will see a huge government borrowing if something is not done very quickly.”

Mansur said if fiscal policies are not corrected without further delay the country will face trouble in macroeconomic front in the coming days. “There are serious challenges ahead they need to be addressed now. Or things will really go bad.”

47

Business Administration / Economy braces for rough patch

« on: February 25, 2015, 03:20:08 PM »

The economy is showing considerable signs of stress because of high inflation, abnormally high credit growth, rising need for subsidy, and depreciating value of taka, and those need to be addressed with harsh and unpopular decisions right now, top economists of the country said yesterday.

They said high oil import obligation because of the fuel requirement of rental power plants is posing a big challenge for the economy as this is drawing down the foreign exchange reserves very swiftly.

The economists also said there are distinct flaws in the application of monetary and fiscal policies, and political interventions render those even more useless.

They were speaking at a dialogue titled "Challenges facing the economy and the tasks ahead" organised by The Daily Star at its office. Former finance adviser to a caretaker government, AB Mirza Azizul Islam, moderated the discussion.

"The challenges are serious. If those are not managed, there might be a short-term crisis," said Sadiq Ahmed, vice-chairman of Policy Research Institute.

"I am not panicked but worried by the situation," said Dr Mustafizur Rahman, executive director of the Centre for Policy Dialogue.

Zaid Bakht, research director of Bangladesh Institute of Development Studies (BIDS), said, "The short-term outlook of the economy looks very bleak."

Prof Wahiduddin Mahmud, who sent a written statement to the roundtable, said Bangladesh has performed better than many countries in coping with several adversities in the global economy including recession and price hike.

"However, the macroeconomy is showing some strains that may further deepen in the coming months," said the noted economist citing examples of creeping inflation, tightening of the foreign exchange market, and rapid increase in the government's domestic borrowing.

According to the experts, rising inflation is posing a great threat to the economy at present.

Sadiq Ahmed, a former top World Bank official, said inflation is the number one problem, and it can create social and political instability. He also disagreed with those who say the inflation is imported.

"If it is imported it must be in other countries," said the economist adding, "Excess demand pressure also fuels inflation here."

Prof Wahiduddin said, "Inflation is approaching a danger zone where it becomes self-propelling and increasingly difficult to contain." He said it can no more be attributed to global inflation or to the market situation of specific items like food grains.

Dr Mohammed Farashuddin, a former central bank governor, said high inflation and future energy security are of great concern for the economy now.

"Inflation has put an unbearable burden on the middle class," he said, suggesting efforts to strengthen the Trading Corporation of Bangladesh (TCB) to intervene in the market to stabilise prices of essentials.

“But the economy is not in crisis,” Farashuddin said. “It is facing challenges. The overall outlook is not bleak at all.”

However, there are “several malaises and few of them are severe,” he said.

“The savings rate in Bangladesh is now 29 percent of GDP and investment is 25 percent. We have higher savings than investment. So there are problems in the economy,” he said. “Also, savings includes remittance and a lot of which goes to consumption.”

The economists also cautioned about the rising bank borrowing by the government and abnormally high credit growth.

48

Business Administration / freakonomic or an economic benefit

« on: February 25, 2015, 03:19:42 PM »

The specialised infrastructure and operating expenses required to host the BPL, however, is extremely costly, and it is not at all clear that either the long or short-term benefits of the games are anywhere nearly large enough to cover the economic costs. Bangladesh, a country with a staggering 160 million population strives for achieving the middle income country status by 2021. With this in mind and despite numerous economic shocks of external and domestic origin along with inflationary pressure and other monetary management problem, is the country ready to host such a major event within the country?

Academic consensus seems to be that money splashed in sports events can hardly ever be defended or justified on economic grounds, and that the evidence for their contribution to the promotional objectives of the host cities is not concrete. In specific cases if only the event can assist in poverty reduction, as well as promote community and infrastructure developments, in the urban and rural areas, then the event will be a success as in the case of South Africa when it hosted the 2010 Federation of International Football Association (FIFA) World Cup.

The BPL is a domestic cricket competition, but the major attraction is that cricketing superstars from across the globe showcase their talent alongside with the domestic stars. A bucketful of money has been splashed on cricketers through this league. The 20-20 cricket has become increasingly popular in Bangladesh since neighbouring India launched the Indian Premier League (IPL) four years back. Like the IPL, the BPL has become popular among politicians, players, actors, businessmen, cricketers and cricket lovers. Interestingly, while all of them make millions, we in the gallery end up in losing.

Among the seven divisions in Bangladesh, six were chosen (with the exception of Rangpur division) as the franchise teams to participate in the tournament. $6.49 million has been spent to buy these six franchises. It is comparatively a low price with a base price set at $1.0 million for each team. Chittagong was the most expensive franchise at $1.2 million and Barisal the least at $1.01 million.

The BCB expected a massive demand for these franchises while it was not predicted at all that the highest price to reach for a franchise would only be a $200,000 bump from the base price. Foreign buyers were welcomed to take part in the bidding war but none came forward. So that was something the country should be sad about. It could have brought some foreign direct investment (FDI) in the country. As a least developed country Bangladesh needs FDI for its enduring development process. We can only wish ourselves good luck for the near future when some more new franchises will be in the market or some of the franchisees owned by local conglomerates will be sold to foreign companies.

49

Business Administration / Interest rate and elementary economics

« on: February 25, 2015, 03:19:14 PM »

'The General Theory of Employment, Interest and Money' was published by Keynes in 1936:

the book was one of the founding stones in macroeconomic theory and his recommendations on trouble-shooting the economies in recession still enlighten the policy-makers in designing macroeconomic policies during the pitfalls of the economy. However, the current macroeconomic scene of Bangladesh is somewhat different from the global economic situation of 1930s; the title of the book reminds us of the importance of interest rate in an economy. Interest rate is the most important variable which a monetary authority controls as it has very important implication for short-run fluctuations in the economy.

In recent times interest rate has been an issue of debate among the policy makers, business community and economic observers in Bangladesh. The debate gained momentum when the Bangladesh Bank (BB) announced to take monetary tightening measures to tame inflation in its Monetary Policy Statement (MPS) for January to June of the current fiscal. Proponents of monetary tightening measures say that higher interest rate will reduce growth rate of money supply, thereby will reduce aggregate demand in the economy and, thus, will reduce inflationary pressure. While opponents say that higher interest rate will make business unprofitable and will have an adverse effect on economic growth. In recent times we have seen abolishment of interest rate cap on lending interest rate by BB, then imposition and removal of cap on deposit rate by the Bankers Association of Bangladesh (BAB) and finally reintroduction of interest rate cap on both lending and deposit rates by the Association of Bankers of Bangladesh (ABB). Such developments inspired this writer to have a look at the elementary economic theories to find a justified direction of the interest rate.

The fundamental question we face here is: what is interest rate? Why interest is paid to depositors? Interest is nothing but an incentive for postponing current consumption. As households value current consumption more than the future consumption, in the absence of interest they would not save. Here the real interest rate is what they count. Based on inflationary expectation, households calculate real interest rate and then decides what portion of money they are going to save. Higher interest rate will induce higher savings rate. And savings of households are a source of funds for firms, which they borrow through the financial intermediaries. The difference between lending rate and deposits rate is the interest-rate spread. It depends on the efficiency of the intermediaries and market structure.

If we look at the real interest rate in the recent years, we will see that both lending and deposit rates are on a declining trend and the deposit rate has been negative or close to zero since fiscal year (FY) 05, except for the year FY 09. Negative real interest rate implies that economy is penalising savers for postponing the current consumption. In this case, an informed individual will optimise its utility by consuming the entire amount of current income. S/he may even consume out of his/her savings. When interest rate is negative, one can be better off by holding consumption goods or land instead of deposit in commercial banks. In 2005, an average individual household's 82.8% of total income did go into consumption expenditure while in 2010 the portion of consumption expenditure was 95.8% (Preliminary Report on Household Income & Expenditure Survey-2010). That might be indicative of how households are responding to negative real interest rate.

We can use simple demand-supply framework to explain the impact of interest rate cap on savings, investment and interest. Let us assume interest rate spread is zero, meaning only one interest rate in the economy. We assume that the equilibrium interest rate is 17 per cent. Now if a 15 per cent interest rate cap is imposed, savings will be equal to Q1 amount which is lower than the equilibrium level (Q2). This amount of fund can be lent out at 20 per cent interest rate. Now banks will have an incentive to increase the interest rate up to 20 per cent. If there is an interest rate cap, the banks can charge higher interest rate implicitly by imposing direct or indirect charges. The result is effectively higher financial costs for the borrowers, no matter what the interest rate is.

Even if banks strictly follow the lending rate cap and do not impose additional indirect charges, then they will lend only to those borrowers who have stronger terms with the banks or who are most safe borrowers. From macroeconomic point of view, this is not desirable. This is firstly because it violates equity principle. Secondly, this may work as a barrier to entry for new businesses that are planning to set up a business by borrowing from commercial banks. This kind of barrier to entry can be a major supply-side constraint. It is notable that part of the business community is concerned about the higher interest rate, while the other is concerned about the availability of loans. Possibly, the first portion of the business community consists of those businessmen who have stronger terms with financial institutions and those belonging to the second category have lower chance of getting credit at the capped rate. Interest rate cap also restricts banks to impose a risk premium to risky borrowers. The rates used in the diagram are arbitrary but the implication is not.

The argument, 'Higher interest rate will increase cost of doing business', may not be a valid one in the current situation. Negative or very low real interest rate will encourage both depositors and borrowers to invest in assets like real estate and land. This kind of investment can push the price of those assets further. Land and real estate are important factors of production and higher price of these assets will lead to higher cost of doing business. So higher price or rent of land may exceed the savings from lower financial cost.

In our current macroeconomic situation, removal of interest rate cap and letting interest rate will make saving more attractive to both domestic households and non-resident Bangladeshis. This will help restore internal as well as external imbalances; thus, it will help increase investment required to achieve our medium term growth targets, which will benefit all the stakeholders.

50

Business Administration / A Bangladesh Bank board member yesterday said he would raise the issue of mobili

« on: February 25, 2015, 03:17:46 PM »

Economists, policymakers, academicians and microfinance experts called

upon the national planners to formulate a public policy on microfinance to dispel confusion about microcredit and to safeguard the sector from political influence.

They also observed that had there been a public policy, the sector could be kept above the influence of individuals or organizations.

They were speaking at a seminar on "Towards a Public Policy on Microfinance in Bangladesh" at the auditorium of Policy Research Institute (PRI) of Bangladesh in the city. The programme was jointly organized by PRI and the Institute of Microfinance (InM).

Bangladesh Bank (BB) governor Dr. Atiur Rahman was present at the seminar as the chief guest. It was addressed, among others, by PRI chairman Dr Zaidi Sattar, BB representative Dr Hassan Zaman, BRAC Development Institute (BDI) director Dr Syed Hashemi, Dhaka University professor Baqui Khalily, founder chairman of Palli Karma Sahayak Foundation (PKSF) M Syeduzzaman and InM managing director Dr Moslehuddin Sadeque.
 
Dr MA Khan, team leader, coordination unit of PROSPER Programme, presented the keynote paper on the topic while PRI vice-chairman Dr Sadiq Ahmed moderated the seminar.

In his paper MA Khan said microfinance started on a remarkably simple concept -- to provide working capital loans to the poor - who have little or no collateral, has expanded from group loans to individual lending; and from loans to insurance, savings and fund transfers.
 
"From the very onset, MFIs expanded in an unplanned way, without any definite policy from the government. Nevertheless, several rules, regulations and institutions have emerged that tried to guide MFIs for consolidation and sustainability of the sector," he observed.

He noted public policy on microfinance will reflect government's clear position on microfinance-related issues such as acceptance level of microfinance as a tool of poverty alleviation, modality of its operation, future strategy for its expansion or contraction, target group, regulatory framework covering issues like efficiency, interest rate, welfare, transparency, sustainability and so on.

He said there was a rise in microcredit operations in the country after passing of the Grameen Bank Ordinance, 1983 and it was at its peak in 1993, while adding that putting rules and regulations before the policy was like putting cart before the horse.

In his address as the chief guest, BB governor Dr Atiur Rahman said the most important role the central bank or the government can play is to create a conducive environment for non-government organisations (NGOs) and private sector initiatives for financial inclusion to launch. For ensuring this environment, providing macroeconomic fundamentals is the first requisite, he added.

He said economic growth is essential to generate demand for enterprises developed by micro-finance (MF) and stable inclusion is necessary to ensure that the poor people make progress about having access to savings, insurance and loans and that such progress must not erode away.

"While the macroeconomic policy may seem miles away from that of MF, they are in fact highly interlinked," he said.

The central bank chief observed that the MF industry in the country achieved its current scale of operations because of the light-touch policy of the government while a regulatory environment is needed to reflect commitment to protect people's money.

51

Business Administration / Concern over cooperative money

« on: February 25, 2015, 03:17:28 PM »

A Bangladesh Bank board member yesterday said he would raise the issue of mobilisation

of public money by companies like Destiny Multipurpose Cooperative Society in their next meeting to see whether the act abides by the law.

Shafiq Ahmed said there is a serious fiduciary problem with the multi-level marketing issue. “I did not know that they were mobilising money from their members. To me this is illegal and against the banking law.”

“I will ask the board how can an institution, which is not authorised to mobilise money, do this,” he said.

Ahmed was speaking at a seminar styled “Towards a public policy on microfinance in Bangladesh” jointly organised by Institute of Microfinance and Policy Research Institute of Bangladesh (PRI) at the latter's office in the city.

His comments came as a central bank investigation found proof of illegal banking by Destiny Multipurpose Co-operative Society Ltd, one of Destiny-2000's dozens of concerns.

Such illegal banking is creating chaos in the country's financial sector, said the probe report, which has recently been sent to the finance ministry.

The BB probe found that Destiny has been illegally running banking activities and has nearly 70 lakh members. As of December 31, 2011, it collected nearly Tk 2,000 crore as deposits and share capital from people. Of the deposits, over 94 percent are long-term, says the BB report.

"If its impact is large-scale and there is any adverse impact on the financial stability then we have a responsibility to know about them," said Ahmed.

"It will be raised in the board meeting so that it asks the management of the central bank how they look into it and how public interest is being protected," he said.

Ahmed said if any institution mobilises a huge amount of money from public and uses it, the central bank should know whether these funds are being mobilised and spent abiding by the laws, and the act is not conflicting with the banking laws.

"It is not only applicable to Destiny-2000, but also to all cooperatives that are mobilising money," he said, adding that the central bank would also have to know whether these companies have the authority to raise money in this manner.

Ahmed, also the vice chairman of PRI, said, "What will happen to the depositors if these companies flee with the money collected?"

Ahsan H Mansur, executive director of PRI, said this type of companies are completely unregulated and they have no legal authority to raise deposits.

"From this sense, perhaps the company is involved in illegal activities."

He said companies like JUBOK and Destiny have invested a lot in land properties. "As a result, prices of land have gone up by 10 times. And the whole nation is facing damages due to their speculation."

He said Destiny is a land-based cooperative. "There are many such cooperatives scattered across the country. Their activities need to be clamped down."

"If we cannot clamp down on them, the prices of land will continue to shoot up, and one day it will collapse. Although the country's banking system is not directly linked with land, 80 to 90 percent collaterals are land-based."

52

Business Administration / Analysts suggest microfinance policy

« on: February 25, 2015, 03:17:05 PM »

"We have rules, regulations and procedures on microfinance. But we do not have a policy," said M Amanullah Khan, team leader of Prosper, a DFID-funded microfinance project in Bangladesh. “We need a policy that will cover insurance, healthcare, savings and money transfers.”

"Unless we have a clearly defined national microfinance policy, our responses to delivering or scaling up low-income financial services will continue to be knee-jerk and piecemeal,” Khan said.

"It is still not late for the government to devise a national policy for microfinance for financial inclusion, a policy that is holistic, futuristic and yet practical,” he said.

Khan spoke at a seminar, “Towards a public policy on microfinance in Bangladesh” co-organised by the Institute of Microfinance (InM) and Policy Research Institute of Bangladesh (PRI) at the latter's office in Dhaka.

Microfinance must be recognised as a vital part of the financial system, dedicated to meet the financial needs of poor clients in a responsive and profitable manner, he said.

Microfinance institutions expanded in an unplanned way, without any definite policy from the government, he said. Nevertheless, several rules, regulations and institutions have tried to guide MFIs for consolidation and sustainability of the sector, he added.

Speaking as the chief guest, Atiur Rahman, governor of Bangladesh Bank, said macroeconomic policy may seem miles away from microfinance, but they are in fact interlinked.

"So irrespective of whether we have a policy on microfinance, the issue of macro-stability will have a profound impact on how the microfinance industry shapes up in future."

The governor however said he was not clear about whether Bangladesh needed a microfinance policy.

"We remain committed to maintaining a stable macro environment and a regulatory environment which safeguards people's money while ensuring that microfinance institutions have the flexibility to develop financial products to suit poor people's needs,” Rahman said. “I am not sure whether we need a microfinance policy to continue down this path.”

53

Business Administration / BB needs to take cautious steps for new banks: IMF

« on: February 25, 2015, 03:16:28 PM »

The visiting IMF (International Monetary Fund) mission chief Wednesday said the central bank is to take steps cautiously in respect of giving its final nod to the new banks.

He said: "If these banks are properly managed and operated, I think, they will be able to contribute to the Bangladesh economy."

IMF Mission Chief for Bangladesh, Asia and Pacific Department, David Cowen was speaking at a question-answer session of a formal press briefing.

Held at the Bangladesh Bank (BB) conference room in the city the press conference was organised on Bangladesh's Extended Credit Facility (ECF) arrangement.

IMF's resident representative for Bangladesh Eteri Kuintradze, its external relations officer Keiko Utsunomiya and BB general manager AFM Asaduzzaman were also present during the press briefing.

Mr Cowen said BB should ensure that the liquidity conditions are supportive in allowing new banks into the market.

The IMF mission chief in his visit in September last opposed the central bank's move to issue new licences to banks.


IMF Mission Chief David Cowen

Mr Cowen said they don't see any wrong in giving letters of intent (LoIs) to nine new banks as the central bank has maintained rules and requirements properly in this connection.

Mr Cowen said: "It (BB) has the resources it needs to properly supervise and regulate all the banks including new ones on the list."

The IMF mission chief said the country's GDP (gross domestic product) growth is expected to slow to 5.5 per cent, less than 1.5 per cent of the government target, in the current fiscal year.

He said the ECF arrangement, a concessional lending facility available to low-income member nations, is equivalent to special drawing rights (SDR) 639.96 million (around US$ 1.0 billion) - the largest ECF arrangement to date in SDRs.

He said Bangladesh's macroeconomic pressures have been intensified, necessitating policy adjustments and reforms to preserve macro-stability and bolster growth and poverty reduction efforts.

"Macroeconomic pressures in Bangladesh have been intensifying over the past 18 months," he added.

He also said fiscal pressures intensified as subsidy costs for fuel, electricity, food and fertiliser increased, expanding government's domestic borrowing and putting liquidity pressures on banks.

"Rising global prices and accommodative policies fuelled double-digit inflation, with the non-food rate hitting record highs," he added.

He said tax revenue must rise as Bangladesh has been maintaining a very low rate of tax mobilisation even in East and South Asia.

Mr Cowen said Bangladesh should create more fiscal space for public investment.

He said Bangladesh should take measures to attract foreign direct investment.

He said the country should bring down budget deficit and contain subsidy.

About the rising subsidy expenditures, he said the government should adjust oil and power prices upward to reduce subsidies.

The mission chief said adequate room should be provided for private sector credit growth to ensure GDP target.

54

Business Administration / ECF loan draws economists' ire

« on: February 25, 2015, 03:16:07 PM »

Country's leading economists Wednesday found the International Monetary Fund's (IMF) Extended Credit Facility (ECF), made available to Bangladesh recently, inadequate and untimely and felt that reform-strings attached to it would be difficult to implement by the government.

They also criticised the multilateral lending agency for ignoring many core issues, including governance, allowing of new banks and provision for whitening black money.

But the IMF mission chief and the Bangladesh Bank consultant defended the ECF saying that it would give a positive signal about the country to other development partners, investors' lending agencies and rating agencies. Apart from that the four-point reform measures will also have significant interventions to various core governance issues, they said.

They were speaking at a roundtable discussion on 'The New ECF Programme and Bangladesh Current Macroeconomic Situation and Outlook," organised by the Policy Research Institute (PRI) at its conference room.

Former finance minister M Syeduzzaman said that US$1.0 billion assistance is very negligible to enforce reform activities compared to the country's annual export earning of $ 22 billion and remittance earning of over $12 billion.

Syeduzzaman said that the four-point reform agenda brought under the EFC is nothing new.

Former adviser to the caretaker government Mirza AB Azizul Islam said the major challenge facing the reform agenda will be its implementation.

"IMF may have undertaken many legal and regulatory changes for bringing reform in tax measures but implementation of those at the field level will be an uphill task," he said.

About reform in subsidy adjustment Mirza Aziz said introduction of automatic price regime for imported fuel in line with international market rate is an overambitious scheme. "Considering the political situation now prevailing in the country it would be a quite challenging task to introduce an automatic price adjustment mechanism in case of fuel oils," he commented.

About implementation of VAT law policy he said introducing a law is very easy but implementation of that is always difficult.

He blamed donor agencies for their poor pace and small amount of funding to the country saying, "External financing kept at a low level has forced the government to borrow from banking sector thus squeezing the credit facility for private sector," he said.

Dr. Mustafa K Mujeri, Director General, BIDS said the timing of the funding is very wrong when the government has only two years left to complete its tenure and when the government has to undertake different politically populist programmes.

He said with the small amount of fund along with seven equal installments will have a minor impact on the reform activities. He expressed the fear that many of the reform activities would unfinished due to the bad timing and size of funding.

He also criticised the automatic fuel price adjustment move saying that without proper consultation with stakeholders and communication campaign, hasty implementation of any reform would face serious challenge.

55

Business Administration / IMF cautions central bank on new banks, economic stress

« on: February 25, 2015, 03:15:47 PM »

Bangladesh Bank must proceed cautiously in issuing licences for new banks, a top official of the International Monetary Fund said yesterday.

"The central bank should enforce stricter licensing criteria in considering any application for a new bank," said David Cowen, IMF mission chief for Bangladesh, Asia and Pacific Department.

“Bangladesh Bank should ensure that it has the resources it needs to properly supervise and regulate all the banks, including possible new banks on the list,” he said.

The central bank should also ensure that the liquidity conditions are supportive in allowing new entrants into the market, Cowen told reporters at the Bangladesh Bank headquarters, before wrapping up his 10-day visit to Bangladesh.

Recently, the central bank has granted permissions to set up nine banks in the country, apparently bowing down to political pressure.

At present, 47 public, private and foreign banks are already operational in the country, although only about 8 percent of the population is covered by financial institutions.

His comments came as Bangladesh Bank received $141 million from the IMF under its extended credit facility (ECF). The loan is the first instalment of $987 million that Bangladesh will receive in the next three years from the Washington-based lender to overcome macroeconomic pressures.

The five-member delegation also discussed the upcoming budget for 2012-13 fiscal year with key ministers and government officials, an IMF official told The Daily Star.

Cowen said macroeconomic pressures in Bangladesh have intensified, necessitating policy adjustments and reforms to preserve macro-stability and bolster growth and poverty reduction efforts.

He said the finance ministry and the central bank have been proactive in dealing with the macroeconomic pressures.

The ECF-supported programmes will help restore macroeconomic stability, strengthen the external position and engender higher, and allow more inclusive growth, he added.

He also said the gross domestic product of Bangladesh would grow at 5.5 percent in 2011-12.

The estimate is much lower than the government's almost 7 percent growth target for 2011-12. The country's economy expanded 6.7 percent in 2010-11 even in the face of the global recession.

He said the borrowing by the government from the banking system, including the lending from the central bank, has slowed down significantly since 2011.

“There should be adequate room for the private sector credit growth, which will be important in helping the government achieve GDP growth target,” he said.

He said raising tax revenue would be key to achieving higher economic growth. Revenue growth in Bangladesh is still low compared to East Asian low-income countries and countries that are receiving loans under the ECF.

"We look for tax revenue to gradually rise. Bangladesh needs to create more fiscal space so that it can increase public investment, which will be essential along with private investment and foreign direct investment for addressing infrastructure bottlenecks."

"Unless Bangladesh makes a serious dent at power and other infrastructure bottlenecks it may be difficult for the country to achieve 8 to 9 percent GDP growth in the medium and longer terms," he said.

The IMF official said the economic growth would depend on the implementation of reform programmes. He said Bangladesh needs to create more fiscal space for public investment and undertake necessary steps to increase both local and foreign investors' confidence in Bangladesh.

Cowen urged the government to manage its subsidy cost carefully. He, however, said the government should increase resources for various social safety nets, as some of them have been very effective.

56

Business Administration / Constraints to external trade expansion identified

« on: February 25, 2015, 03:15:17 PM »

Taking a positive note of enormous opportunities for enhancing, strengthening and deepening Bangladesh's trade with the neighbouring countries, they urged all concerned groups including policy makers, civil society and business people to look at business "from the perspectives of business rather than that of politics."

The discussants expressed such views while taking part in a roundtable on 'Enhancing Trade Facilitation in Bangladesh.'

The discussion was organised by Policy Research Institute (PRI) of Bangladesh in partnership with International Finance Corporation (IFC) in a city hotel.

Senior Trade Logistics Specialist of IFC William J Gain presented the keynote paper on the occasion.

PRI Chairman Dr. Zaidi Sattar moderated the programme and Executive Director of the think-tank, Dr Ahsan H Mansur, made the opening statement.

In his opening statement, Ahsan H Mansur urged all stakeholders to identify the bottlenecks to trade facilitation.

Addressing the discussion meeting as the chief guest, Anisul Islam Mahmud MP, a former foreign minister, said there were many Doubting Thomases at the birth of Bangladesh as an independent country in the comity of nations, about its economic survival on its own strength.

"But we have proved our economic prowess and strength before the world …. now Bangladesh is placed among 11th new emerging economies of the world," he said.

Mr Mahmud stressed the need for upgrading and modernising Bangladesh Standards and Testing Institution (BSTI) so that its standards could become acceptable all over the world.

Responding to the views expressed by a number of discussants in the round-table who identified India's refusal to accept BSTI's certification as a non-tariff barrier, he said, "while our people do not trust BSTI's standards, how Indian businesses can give credence to the same."

He commended the developments in the country's banking sector, saying, "Our banks have shown their efficiency about providing proper services to the customers, particularly in areas of letters of credit (LCs)".

He noted that 'access to land' emerged as a matter of serious concern to the investors, actual and potential ones, in Bangladesh. "It is now almost impossible to get a piece of land for setting up a new factory," he said.

Ahsan Khan Chowdhury, Deputy Managing Director of PRAN-RFL Group, presented a paper on regional trade at the meeting.

Narrating the experiences of his own farm, Ahsan Khan Chowdhury said though there is no tariff barrier for the Bangladesh exportable items in the market of the country's biggest neighbour India, but there are still a number of non-tariff barriers there.

"Exporting food or food-processing products to India take too much time due to testing requirements," he said, calling upon the government to initiate policy-level discussions so that India accepts the BSTI's certificates.

He said, "We have 126 land ports between India-Bangladesh border of which only 18 are in operation."

Mr Chowdhury also made strong pleas for easing the procedures for opening company branch offices at abroad. "It is very much needed for expansion of country's trade," he felt.

"Now the government only allows $500 for taking abroad for opening a branch office," he said, adding that not even meeting the running cost of an office is possible with such a paltry amount of money.

Dr. Mozibur Rahman, Chairman of Bangladesh Tariff Commission, said Bangladesh and India are now holding discussions for a motor vehicle agreement which will allow vehicles to enter directly into each other's territory.

57

Business Administration / Bangladesh must fix infrastructure for trade

« on: February 25, 2015, 03:14:51 PM »

Bangladesh should fix its wobbly infrastructure to reap the full benefit of the untapped regional trade, said analysts at a meeting yesterday.

They said the global attention has already shifted to Asia. And the Saarc countries are set to account for a large part of the global wealth by 2030.

So, it is right time for Bangladesh to improve its poor roads and rail networks and ports and fix energy crisis to have a larger share of the regional trade and attract investment, they added.

Their comments came at a discussion on "enhancing trade facilitation in Bangladesh" organised by the International Finance Corporation and the Policy Research Institute of Bangladesh (PRI) at Lakeshore Hotel in the city.

William Gain, senior trade logistics specialist of the Investment Climate Department at the World Bank Group, said South Asia is one of the least integrated regions in the world.

Intraregional trade among the Saarc (South Asian Association for Regional Cooperation) countries is less than 2 percent of their gross domestic product compared to more than 20 percent in East Asia.

Lawmaker Anisul Islam Mahmud said there are non-tariff barriers in both India and Bangladesh. "Our own people do not trust BSTI (Bangladesh Standards and Testing Institution). How can then we convince India to trust it? We have to bring in standardisation at the government agency."

"The BSTI has to be upgraded with equipment, skilled human resources and money."

The former foreign minister said trade facilitation would only improve if Bangladesh can perk up its supply side situation.

He said Bangladesh's real bottlenecks lie in the supply side. "Our roads, ports and railway have to be improved. Our gas crisis has to be sorted out. Our land ports should be developed."

Md Mozibur Rahman, chairman of Bangladesh Tariff Commission, said strong infrastructure facilities are needed for trade facilitation. "We also need to build institutions as they are not updated with modern knowledge and know-how."

Ahsan Khan Chowdhury, deputy managing director of Pran-RFL Group, said regional trade is important for Bangladesh and the country cannot afford to look up to the US and the European Union for trade forever.

He said India has opened its border for Bangladesh in a major way. "But if we cannot develop our infrastructure, we will not be able to reap the benefit of regional trade."

"The members of the European Union do a lot of trade within the region. We can do the same in South Asia," he said.

Chowdhury said Bangladesh must prepare all its land ports for trade with India, as businesspeople are not being able to utilise all of them. "We need to open more border ports."

He said the road connectivity is too poor to help trade facilitation.

The official urged the government to keep the existing border ports open for longer hours everyday. "The BSTI should be developed so that importing countries accept certification of the agency."

PRI Chairman Zaidi Sattar said it is the responsibility of both the public and private sectors to improve trade facilitation.

Gain of the Investment Climate Department also said trade facilitation is not easy, and having "one-off' solution to trade facilitation will not help. However, there is potential for high level of trade facilitation with a low level of investment, said Gain.

58

Business Administration / IMF's reform recipe to impact new budget

« on: February 25, 2015, 03:14:21 PM »

IMF conditions will have a sizable impact on the budget for the next fiscal year,

which economists say will boost economic reforms, but will require the government to take a few unpopular decisions just before the polls' year.

The government is going to present its third budget this year after assuming power, accepting some stringent conditions of the International Monetary Fund (IMF).
The economists say if the government can fulfil the conditions, it would create more space for development spending.

In line with the IMF conditions for getting an Extended Credit Facility (ECF) of around $1billion from the lender, the government's subsidy spending in the next budget will have to be contained within 2 percent of GDP. This year the amount of subsidy is more than 4 percent of gross domestic product (GDP) in the revised budget.

To fulfill the IMF conditions, the government will also have to hike the prices of fuel, fertiliser and electricity in the next fiscal year which is very risky for the government just before the national election year.

The IMF conditions also include reducing the government's borrowing from banks; especially borrowing from the central bank has to be kept within 1 percent of GDP; tax-revenue target has to be raised by 0.5 percentage point to 11 percent of GDP in the next fiscal year.

For achieving the targets, two new laws on value added tax and income tax, including various reform programmes, have to be incorporated in the revenue administration.

The government will also have to initiate various fiscal and monetary reform programmes.

Sadiq Ahmed, vice chairman of Policy Research Institute (PRI), said these targets are all feasible and in the right direction.

The targets are consistent with the sixth five-year plan of the government and the directions set in the past two budgets.

"So, it is hard to find fault with these targets. If properly implemented, the overall effect of these policies would be positive for economic growth and poverty reduction.”

World Bank's Senior Economist Zahid Hussain said, “This [ECF reform programme] will create space to boost ADP spending which will benefit further if aid utilisation is improved.”

Ahmed of the PRI said the investment rate in the past few years has been stagnant at 24-25 percent of GDP. To achieve the sixth five-year plan's growth and employment targets, the investment rate has to be raised to around 28 percent of GDP.

He said, though two years of the sixth five-year plan have already gone, the investment rate did not improve.

Ahmed said, “It is looking increasingly difficult that the sixth plan's growth and employment targets will be met unless massive efforts are made in the next three budgets to raise public investment and avoid a crowding out effect on private investment.”

This calls for a much more aggressive drive to raise tax revenues, reduce energy subsidies and mobilise foreign funding for investment, he added.

On whether reducing subsidy and implementing the IMF's reform programmes would put pressure on common people, Ahmed said, “I am not suggesting that all energy subsidies should be abolished. Neither should the subsidy be open-ended as presently.”

He said the government should do a proper analysis of how to limit the subsidy to a manageable amount and target it to the needy. The government should also think of alternative ways to reduce the adverse effects of higher energy prices on the poor.

Giving an example Ahmed said, instead of subsidising diesel across the board, the government could subsidise public transport, including mass transit. Countries globally have found innovative solutions to limit the fiscal cost of energy subsidies while also protecting the needs of the poor. Bangladesh can learn and adopt appropriate energy pricing policy that balances fiscal pressures with the needs of the poor, he added.

Hussain of the WB said, under the IMF's ECF programme the government has committed to moderate fiscal consolidation by narrowing fiscal deficit by one percentage point over the next three years.

59

Business Administration / Keep bank borrowing within projected limit

« on: February 25, 2015, 03:13:59 PM »

Metropolitan Chamber of Commerce and Industry (MCCI) Wednesday urged the government to keep its borrowing from the banking system limited to the amount of Tk 230 billion proposed in new budget to avoid any crowding out effect on the private sector.

The chamber body also called upon the government not to raise the rate of advance income tax to 1.20 per cent on all exports and keep it at the present level of 0.6-0.7 per cent in order to provide relief, as export earnings are falling in the backdrop of the global financial crisis.

"In the name of containing inflation, investment should not be ignored as longer version of contractionary monetary policy will affect the industrial sector adversely for a period of 5-6 years," Barrister Nihad Kabir, MCCI vice president said at a seminar on budget 2012-13 jointly organised by the MCCI and the Policy Research Institute of Bangladesh (PRI).

The seminar titled views on budget 2012-13 was held at the MCCI conference room in the city.

On the other hand, analysts and economists at the seminar said the government's projected growth of gross domestic product (GDP) at 7.2 per cent, keeping inflation at 7.5 per cent, will be difficult to achieve during the next fiscal year.

They felt there were enormous challenges in implementing the proposed budget and expressed their doubt about the government's ability to deal with such challenges.

Former caretaker government adviser Dr Mirza AB Md Azizul Islam, PRI chairman Dr Zaidi Sattar, PRI executive director Dr Ahsan H Mansur, MCCI vice president Barrister Nihad Kabir, MCCI standing committee chairman on tax and tariff Anis A Khan, professor MA Taslim and former national board of revenue chairman Muhammad Abdul Mazid spoke at the seminar.

Speaking at the seminar, Mirza AB Md Azizul Islam said 7.2 per cent GDP growth proposed in the budget is based on the hope of increased confidence of development partners and foreign investors following extended credit facility by the International Monetary Fund (IMF), improved annual development programme (ADP) implementation and high interest rates on savings tools.

He said funds from development partners will be difficult to attract as they have their own terms on project implementation.

He said foreign investors do not care about the ECF agreement adding: "They want macro economic stability, stable political situation, availability of cheap labour force and sound infrastructure."

He said greater pace in ADP implementation is not possible.

Mr Islam said increase in interest rate on savings tools could help reduce bank borrowing and ensure private sector's better access to fund.

"I believe people's capacity to purchase savings certificates has been largely eroded following high rate of inflation," Mr Islam added.

He said the government should either cut its expenditure drastically or depend on bank borrowing.

He said: "I've reviewed 19 macro economic indicators of the outgoing fiscal and got only one which gives a glimmer of hope. That is remittance."

"The other indicator, tax mobilisation up to 19 per cent, is reasonably good. But it is weaker than last year's over 27 per cent," Mr Islam added.

60

Business Administration / Govt imposing non-tariff barriers to protect local industries

« on: February 25, 2015, 03:13:01 PM »

A number of speakers at a programme Saturday said the trade policy plays an important role in accelerating economic growth while others considered the country's inadequate infrastructure and lack of political stability are major constraints to attaining that goal (economic growth).

Opinions of the participants were divided over the importance and pace of trade policy reforms for providing a boost to the country's economy.

Some participants favoured gradual openness in tariff structures but some others argued that the trade policy should protect local industries.

The participants ranging from economists to business leaders were speaking at the launching of quarterly policy briefs by Policy Research Institute (PRI) of Bangladesh on the country's economy held at its office in the city.

Chairman of PRI Dr Zaidi Sattar was the moderator in the programme. He also presented a paper styled 'Is the trade policy losing direction?'

PRI Executive Director Ahsan H Mansur presented two papers -- one on the fiscal policy and budget and related challenges and the other on the monetary policy titled 'Is Bangladesh Bank's Monetary Policy Stance Working?'

Commerce Minister Ghulam Muhammed Quader attended the programme as the chief guest while former education minister and Bangladesh Nationalist Party (BNP) leader Dr Osman Farruk joined it as the special guest.

Former caretaker government adviser Dr Mirza Azizul Islam, former finance secretary Mr Zakir Ahmed, President of International Chamber of Commerce, Bangladesh (ICC,B) Mr Mahbubur Rahman, Executive Director of Centre for Policy Dialogue (CPD) Dr Mustafizur Rahman and senior economic adviser to the Bangladesh Bank governor Dr Hassan Zaman, among others, took part in the discussions on the occasion.

Commerce Minister G M Quader said the government is imposing non-tariff barriers mainly to protect 'local infant industries.'

He said: "There is no pressure from the WTO (World Trade Organisation) and other regional economic organisations."

Mr Quader said many nations are now imposing non-tariff and para-tariff restrictions as the customs duty rate has now been brought down to an almost zero level, following trade liberalisations.

Participating in the discussion, Dr Osman Farruk said the trade policy should not be designed only for export earnings. "Poverty alleviation and employment issues should also be taken into consideration," he observed.

Mr Farruk was critical of the government's subsidy for the power sector. He said: "In generating power, I don't find that the government is following the least cost option."

Mr Farruk was also critical of government's heavy borrowings from the banking system. The government is not only squeezing investment but also shifting a heavy burden on the next generation, which is totally unacceptable and unethical, he observed.

He said the trade policy should not aim at increasing the volume of revenues rather it should focus on investment promotion and employment generation in order to help alleviate poverty.

Participating in the discussion, Dr Mirza Azizul Islam, a former finance adviser to the immediate past caretaker government, said while formulating the trade policy, some kinds of protection for local industries are needed so that they can produce high value-added products later on a competitive basis.

He said some South Asian nations which are now producing high-value added products had witnessed public policy intervention to protect their local industries.