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Thursday, December 8, 2022

‘I DON’T THINK SOME AD-HOC MEASURES TO SOLVE THE CURRENT LIQUIDITY CRISIS IN THE BANKING SECTOR WILL HELP’

Dr. Selim Raihan is a Professor at the Department of Economics, University of Dhaka, Bangladesh and the Executive Director of the South Asian Network on Economic Modeling (SANEM). He holds a Ph.D. from the University of Manchester, UK. He is the Honorary Senior Research Fellow at the University of Manchester, UK. He is also an alumni of the Harvard University’s program on “Cutting Edge of Development Thinking”.

Dr. Raihan possesses vast expertise in empirical research on international trade, economic growth, poverty, labor market, macroeconomic policies, political economy, and climate change issues. He has worked quite extensively on applied economics, especially assessing impacts of trade and economic policies, using country-specific and global Computable General Equilibrium (CGE) models, and micro and macro-econometric modeling and estimation techniques.

He has a long experience in teaching international trade, economic modeling, quantitative economics, econometrics, development economics, and poverty dynamics. He has more than 12 years of experience in conducting international and national training programmes on economic modeling in various countries, including Bangladesh, India, Nepal, Mongolia, Senegal, Sri Lanka, and Thailand. Dr. Raihan has published 17 journal articles, 23 books, 35 book chapters and 45 working papers. He has also worked for several national and international organizations including the Asian Development Bank, the World Bank, UNDP, UNESCAP, UNCTAD, IFPRI, the Commonwealth Secretariat, FAO, European Commission, ILO, IDRC, DFID, etc.

Dr Selim Raihan cuts a figure of an old school economist—serious looking and ready to see the world in terms of sine curves. He however masters the skill of translating numbers into meaningful insights which can provide armchair policymakers much food for thoughts.

Dr Raihan currently works as a Professor of Economics at Dhaka University. He also holds the position of Executive Director of South Asian Network on Economic Modeling (SANEM). The Fintech team recently went to his office of SANEM at the capital’s Gulshan area and talked with him on a number of burning issues. Here is an excerpt of that interview for our Fintech readers.

FINTECH: Can you tell us a bit about your background?

S. Raihan: I passed my S.S.C exam from BAF Shaheen School and my H.S.C exam from Notre Dame College. After that, I enrolled at the Economics Department of Dhaka University.

I went to the United Kingdom to pursue my Masters and Phd in Economics at the University of Manchester after graduation. I focused my thesis on international trade. Upon completion of my doctorate degree there, I returned to Dhaka University and joined the Economics department. I have been there since the last 19 years.

FINTECH: When was SANEM formed? What are its activities?

S. Raihan: SANEM was launched in January 2007 in Dhaka as a non-profit research organization registered with the Registrar of Joint Stock Companies and Firms in Bangladesh. The basic idea behind the formation of SANEM was to create a network of economists and policy makers in South Asia with a special emphasis on economic modeling.

As a research organization, SANEM aims to promote the production, exchange and dissemination of basic research knowledge in the areas of international trade, macro economy, poverty, labor market, environment, political economy and economic modeling. It seeks to produce objective, high quality, country- and South Asian region-specific policy and thematic research.

SANEM contributes in governments’ policy-making by providing research supports both at individual and organizational capacities. SANEM has maintained strong research collaboration with global, regional and local think-tanks, research and development organizations, universities and individual researchers.

SANEM also promotes young researchers from Economics, Business and Social Sciences to undertake independent research works on contemporary issues. We bring out a monthly publication named “Thinking Aloud” and we hold an annual conference in each year since 2016.

We also have an internship program in place for fresh university graduates and arrange regular training programs on economic modeling and contemporary economic issues for both Bangladeshi and other South Asian participants. Over the last 11 years SANEM has become one of the leading think tanks in South Asia.

FINTECH: The banking sector in Bangladesh is presumably going through a sort of crisis now? Do you think the government is taking appropriate measures to get the banks out of the crisis now?

S. Raihan: The banking sector is one of the most important components of any country’s economy and it is no different here in Bangladesh—the world’s 44th largest economy. The sector accounts for around 2.9% share in the gross domestic product (GDP) and its backward and forward linkages with the rest of the economy are also very strong. So, any turmoil in this sector automatically has profound implications for other sectors in the economy.

I believe the prevailing crisis in the banking sector is a culmination of the pro-longed structural problems in the banking sector. There are exceedingly high non-performing loans, which is now more than Tk 80,000. The NPLs have stacked up on frequent scams which seemed to happen one after another. This has obviously created a lack of confidence in the mind of the depositors and investors.

Also, in recent time, excessive lending by some private banks has shot up the Advance-Deposit Ratio (ADR) above 90% for some of the banks. Interestingly, such excessive lending happened in the context of a sluggish private sector investment growth. There is a widespread concern as well as belief that a large part of this lending is misused.

The banking sector is also now characterized by weak regulation and monitoring. And there has not been any visible punishment of irregularities seemingly because of political patronage. The lack of independence of Bangladesh Bank has only intensified the problem.

Using economic models, we have estimated of the annual loss in GDP due to the inefficiencies in the banking sector, and it appears that the current inefficient banking sector in Bangladesh leads to an annual loss in real GDP by around 1%, which is equivalent to around Tk 10,000 crore.

Against that backdrop, I don’t think some ad-hoc measures to solve the current liquidity crisis in the banking sector will help. Recent decisions on allowing state agencies to deposit 50% of their funds to deposit in private banks and slashing CRR by 1.0 percentage point to 5.5% are examples of such ad hoc measures and thus may lead to a bigger crisis. In order to solve the problems in the banking sector it is important that the Bangladesh Bank is given full independence and it is free from any political or vested influence. There is an immediate need for a strong and independent ‘banking commission’ to address the problems and irregularities.

FINTECH: Bangladesh has recently entered into the lane of becoming a developing country? What are the areas it should work on now to have a sustainable development irrespective of political turmoil?

S. Raihan: Bangladesh has successfully met all three criteria for LDC graduation in the first review in March 2018. It is expected that Bangladesh will be able to meet the graduation criteria in the second review in 2021 and will finally graduate from the LDC status in 2024. Benefits of graduation from the LDC status are cited to include an improved country-image and higher rating for investment by international rating agencies which may attract larger foreign direct investment.

However, there are a number of risk factors for Bangladesh associated with its graduation from the LDC status. Simulation results from economic models suggest that the loss of preferences in the markets of European Union, Canada, Australia, Japan, India and China in 2027 (the year which will mark the end of preferences for Bangladesh if the country can officially graduate from the LDC status in 2024) might lead to an annual reduction in total exports of Bangladesh by 11% which would be equivalent to around US$ 6 billion given the current projection of growth in exports.

Also, many of the exemptions of WTO provisions, including the cut in tariff and subsidies and adherence to intellectual property rights (especially for pharmaceuticals sector), which are currently enjoyed by Bangladesh as an LDC, will no longer be available after 2027. Furthermore, as Bangladesh has already graduated from the World Bank’s ‘low-income’ category to ‘lower-middle income’ category, the scope for loans at lower interest rates would be limited.

It is important to mention here that much of the aforementioned prospective benefits are not ‘automatic’ as the country has to work quite a lot to materialize those benefits. In contrast, almost all of the possible losses would be ‘automatic’ as soon as the country graduates from the LDC status.

Therefore, the country has to prepare itself over the next nine years to counter these losses. Bangladesh has a poor record of attracting foreign direct investment, high concentration of exports, weak competitiveness, and poor physical and social infrastructures. The country needs to attract large volume of foreign direct investment, noticeably diversify its export baskets, enhance competitiveness, and significantly improve physical and social infrastructures. Improvement in the quality of economic and political institutions and quality service delivery by the public institutions are very crucial in sustaining the development process.

LDC graduation is, therefore, not a panacea. There are genuine concerns that though the business-as-usual process of economic and social development might lead Bangladesh to graduate from the LDC status by 2024, such business-as-usual process will certainly not lead to achieving the much larger and important development goals. Becoming a non-LDC and graduating from the current status of ‘lower-middle income’ country to an ‘upper-middle income’ country are not the same, and therefore, avoiding the ‘middle-income trap’ would be a forthcoming challenge.

On top of all these, attaining the stiff targets of SDGs by 2030 would be a gigantic task for Bangladesh. The changing global and regional scenarios also appear to be much more challenging. All these suggest that Bangladesh has to make some extraordinary efforts in its economic and social development process in the days to come.

One of the important aspects of Bangladesh’s development over the past three decades or so is that the change in the government has not impacted much in its development trajectory. However, in the coming years, to achieve SDGs and to graduate to the upper-middle income country status, maintaining a reasonable level of political stability will be important as the targets under SDGs and upper-middle income country status are much steeper than those for the LDC graduation. This also calls for a strong commitment from the political elites of both the ruling party and the parties in the opposition.

FINTECH: What will be the important areas that the government should concentrate on in this year’s upcoming budget?

S. Raihan: The key challenges of this year’s national budget are managing the low revenue mobilization which basically happens because of the poor performance in income tax generation and collection. It results in a low tax-GDP ratio as well as low and inefficient implementation of the Annual Development Programs (ADP). Low public spending on human development also happens because of this.

Now if we shed light on the trend of the past few years, we will see that although the ADP implementation rates of some ministries have improved (e.g power division), those of some other crucial ministries in fact deteriorated significantly (e.g. health, education, social welfare etc). In the case of tax composition, there has not been any improvement in the share of income tax in total tax collection. The proportionate contribution of income tax in Bangladesh has been much lower than that of other south Asian countries.

The country needs to improve the tax-GDP ratio substantially. Bangladesh has one of the lowest tax-GDP ratios in the world. In Bangladesh, large sections of the population (who are well capable of paying taxes) as well as a large section of economic activities are outside of the tax coverage. Also, structural factors such as large informal economy and low literacy have hindered tax collection. Though, the country has undertaken some reforms, they have remained to be less successful due to various institutional weaknesses and vested political patronage. The fiscal policy process, therefore, needs a ‘breakthrough’ where there should be a strong political commitment on simplifying tax systems, strengthening tax administration, and broadening the tax base under a wider reform agenda aiming at improvement in governance and business environment as well as formalization of the economy.

In order to meet the development challenges of the country, particularly those of SDGs, the country needs to radically improve its performance in terms of revenue mobilization through increased tax generation effort. In the context of expenditure, both implementation rate and quality of spending have to be increased substantially. Expenditure target should not only be aimed towards spending, but be aligned with development goals of the country. In particular, allocation in social sectors, e.g. health and education, has to be increased by a significant margin.

FINTECH: The private sector investment has been sluggish over the past few years. What needs to be done to promote private sector investment and what are the roles of SEZs and FDI?

S. Raihan: It has been a matter of big concern that the private sector investment in Bangladesh over the past few years has been stagnant in proportion to the gross domestic product (GDP). Though in the policy making process, improvement in infrastructure and business environment, importance of the special economic zones (SEZ) and setting up of institutions like Bangladesh Economic Zones Authority (BEZA) and Bangladesh Investment Development Authority (BIDA) are rightly emphasized, there have not been any clear roadmaps or directions on how these will facilitate an accelerated private sector investment. For example, still, there is no clear roadmap on the establishment of the SEZs which has put the private investors into an uncertain scenario. Also, the plan of actions for the improvement of cost of doing business is unclear and the progress is not visible.

Therefore, a visible ‘breakthrough’ is indispensable in attracting both domestic and foreign investments. Weak infrastructure, poor business environment and risk of political conflicts are critical problems for Bangladesh to attract both domestic and foreign investments. Few Special Economic Zones (SEZs) need to be geared up very soon for regaining investors’ confidence.

In this context, a major departure is needed in terms of enhancing government’s institutional efficiency to ensure timely delivery of such projects. Furthermore, there is a need for strong commitments from the political elites in Bangladesh for necessary economic and institutional reforms towards realizing the bright prospects of SEZs. Undoubtedly, political stability and avoidance of economic policy reversal can ensure the success of the SEZs.

FINTECH: Is ‘Jobless growth’ an increasing phenomenon?

S. Raihan: Gloomy job creation in the economy over the past few years is linked to the sluggish private sector investment as well as increased automation in some sectors, especially in the readymade garment sector. The major concern is that economic growth in recent years has not been able to generate a large number of jobs in the economy, which has prompted an alarm whether Bangladesh has entered a phase of ‘jobless growth’. Policies and actions which can promote private sector investment in diversified labor-intensive manufacturing and services sectors will likely to result in generating large scale employment. There is a need for a serious thinking process in the policy-making arena to avoid the ‘jobless growth’ phenomenon.

FINTECH: What are the challenges in attaining SDGs by 2030?

S. Raihan: A critical issue with respect to the implementation of SDGs is the substantial volume of resources required to finance such development goals. Our estimation shows that additional resources required for the implementation of the SDGs in Bangladesh would be 10% of GDP now, which can increase to 24% of GDP by 2030. Given the changing global scenario, for financing SDGs, Bangladesh will have to rely more on domestic sources, and this is no doubt a big challenge.

It is also important to note that mere generation of resources would not ensure implementation of the SDGs if institutional and governance related aspects are not properly addressed. Efforts need to be something extraordinary and a strong political commitment is needed for implementing the SDGs.

Therefore, extra-ordinary efforts are needed with respect to achieving social and environmental targets under the SDGs by 2030, as the business as usual process would no way help us getting there. We should also understand that mere economic growth is not the sufficient condition for ensuring meaningful social and environmental developments as envisaged in the SDGs.

The needs for effective economic and social policies and programs as well as improvement in economic and political institutions are now more than ever. ■

 

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