The textile and jute ministry seeks to put the default loans of private sector jute mills owed to four state-run commercial banks in "block accounts" to stop interests from piling up in a bid to rescue the mill owners from a heavy financial burden to some extent.

Banking Division sources said the total of default loans of private jute mills have not been calculated yet, but it is roughly Tk 12 billion.

The ministry will send a letter to the Finance Division in this regard to arrange a meeting with the stakeholders to discuss the ways to ease the huge burden of loans of the private jute mills in state-owned Sonali Bank, Janata Bank, Agrani Bank and Rupali Bank.

The decision came at a meeting of the Consultative Committee on Jute at the jute ministry earlier this month.

Jute and Textile Minister Abdul Latif Siddique presided over the meeting where the managing directors of the four state-run banks were also present. The meeting also decided to declare jute goods as an agriculture product within this year.

During the meeting, the jute minister requested the managing directors of four state-owned commercial banks to give low-interest loans to the real jute farmers.

The meeting also co-opted Jahangirnagar University Professor Khurshid Begum in the consultative committee lead various researches on jute politics and to explore new markets at home and abroad.

Default loans of private jute mills in four state-run banks till June 30, 2009 will be ‘blocked’ for 30 months with previous five years’ interest. The amount will be repaid in installments with an interest rate of 8 percent for 10 years, the meeting decided.

According to the decision, the private jute mills would also be provided with 7 percent interest rate facility on working capital loan, which would be ensured by the Finance Division, the Finance Ministry Monitoring Cell and Bangladesh Bank (BB).

The local jute exporters purchase jute at Tk 2200-2400 per tonne, but have to export jute items at Tk 1200-1400 per tonne, meeting sources said.

Due to loan burden, the number of private jute mills is decreasing in the country despite a high demand of jute goods in the global market, Professor Khurshid Begum told daily sun on Monday.

A research on the country’s jute sector is examining the ways to revive the country’s one of the oldest export sectors as we have comparative advantage in this particular sector, she added.

The Daily Sun/Bangladesh/ 19th June 2012

A budget is supposed to be a comprehensive economic policy statement of the government for one year. This is particularly so in the penultimate year of the present government. Keeping in view the next general election, the government is hoping to have another term in office after the election. A closer examination of the budget document reveals that a number of important issues have either been ignored or these have been discussed in a cursory manner.

The outlay of the next fiscal year has been increased by 19 per cent from the 2011-2012 revised budget to fix it at Tk 1.9 trillion (Tk 1,91,738 crores). The annual development programme (ADP) has been set at Tk 550 billion (Tk 55,000 crores). But nothing has been said about the implementation of the budget. The government will face formidable challenges in implementing the big budget. It would be extremely difficult to implement the budget if seen from the point of view of financing. If the government borrowed more from the banking system, it would have adverse impact on private sector borrowing, investment, growth and inflation.

There is uncertainty about the financing of Padma bridge project. The World Bankhich has suspended funding of the project due to corruption charges. The government is now looking for alternative sources of financing. It will take long time to firm up new funding proposals. That is why the Finance Minister made very low-key observations about this project in his budget speech.

The World Bank has finally broken the ice over the dispute regarding its financing of the Padma bridge project and proposed five new conditions for the government to ensure corruption-free implementation of the project. The conditions are:

l A high-powered investigation team has to be formed to probe the allegation of corruption.

l An independent firm has to be appointed to monitor implementation of the project.

l The persons against whom there are allegations of corruption would not be involved in the implementation of the project.

l Another condition is that the co-financiers will have to be actively involved in the procurement process.

l Besides, as a long-term step the government will have to take initiatives to increase the capacity of the Anti-Corruption Commission.

Two sides will soon discuss the conditions in detail.

The Finance Minister did not provide any statistical basis for his projection of employment creation and merely made some general remarks. We cannot measure poverty alleviation without figures on the employment situation. He spoke about overseas employment and job creation by the private sector. But the government has very little contribution in these areas. A vigorous employment policy was expected from the government.

The Finance Minister projected that within the next fiscal year, there will be a huge surplus power as a result of the implementation of dozens of power projects. Presently, the load shedding level swings between 400mw and 1200mw. We shall consider ourselves lucky if we can get rid of load shedding by the next year. It is said that the country will be able to import 250MW power from India by the next year. But this is hardly likely to happen. Discussion on this project is going on for two and half years. One year will not be enough for the implementation of this bilateral project. Similarly, the proposed import of electricity from Nepal, Bhutan and Myanmar at this stage seems to be more a pipe dream than a practical proposition.

No rationale was given in the budget document for whitening black money. In the post-budget press conference, the Finance Minister defended the provision for legalising undisclosed money saying it would bring investment and prevent cash going out of the country. In 2009, the Finance minister had admitted that whitening of black money was unethical. This time he supported it as a step that is going to inject investment.

Meanwhile, the World Bank in its appraisal report has mentioned about declining investment and shrinking savings in Bangladesh. If whitening of black money has not helped for last three years, how is it going to help now?

Spiralling prices of essentials is a big headache for the common people. Innumerable articles have been published in the daily newspapers on this subject. Debates took place on monitoring and syndicates. Even ruling party Members of Parliament are critical of price spiral of essential commodities. It is surprising that the national budget did not even touch this issue. It is very much an issue of public interest and the government did not care to address it.

The Centre for Policy Dialogue (CPD) has mentioned that the government has done injustice to tax-payers by increasing the minimum individual tax without raising the tax-free income threshold. They have also identified a shift in subsidies from agriculture and food security to power and energy, which may increase disparity between the rich and the poor. The government, CPD said, has failed to find out innovative ways to increase tax collection.

In the budget, there is no mention about attracting investment. No attention was given to falling investment. In the post-budget press conference, the Finance Minister said that Bangladesh was having growth with stagnant investment situation. But how far this will be sustainable is questionable. Growth is bound to decline without investment. The Finance Minister admitted that special reform interventions are needed to address instability in the capital market and to prevent unwarranted volatility. The capital market continues to be unstable and government action needs to be expedited.

Though the Finance Minister is hopeful about reducing inflation rate to 7.5 per cent, the mechanism for attaining this has not been spelled out. Contractionary monetary policy alone may not be sufficient in tackling inflation.

Bangladesh is a divided house. Political instability is responsible for this. The Finance minister has not addressed this issue. The government appears not to be in a hurry to deal with unstable political scenario.

The writer is an economist and columnist.

The Financial Express/Bangladesh/ 17th June 2012

The national budget arguably is the most important instrument for the implementation of the sixth five-year plan. Two budgets (FY11 and FY12) have gone by and the third one (FY13) has just been presented to parliament and will likely be approved with minimal changes. These three budgets send important signal about the government's thinking and economic policy management. The consistency between the annual budgets and the sixth plan also provides valuable insights regarding the gaps between intentions/plans and realism/implementation.

The sixth plan set ambitious targets for the five-year period starting in F11 and ending in FY15 (Table 1). The sixth plan is the first of the two medium-term plans aimed at implementing 'Vision 2021'. At the macroeconomic level, the main targets are: (i) increasing GDP growth rate from 6.1 percent in FY10 to 8 percent by FY15; (ii) reducing poverty rate from 31.5 percent in FY10 to 22.5 percent by FY15; (iii) lowering yearly average inflation rate from 7.3 percent in FY10 to 7 percent in FY13 and 6 percent in FY15; (iv) increasing the share of manufacturing employment from 11.2 percent in FY10 to 15.2 percent by FY15; and (v) reducing income inequality.

To achieve these targets, the plan makes a number of assumptions about the macroeconomic policy framework. The key policy targets are: the investment rate is to increase from 24.4 percent of GDP in FY10 to 32.5 percent by FY15; exports are to increase by 15 percent annually during FY12-FY15 ; tax to GDP ratio is to increase from 9 percent of GDP in FY10 to 12.4 percent by FY15; prudent macroeconomic policies would be maintained to keep inflation low and preserve the stability of the exchange rate; role of the private sector would be bolstered to play a bigger role in infrastructure financing; public investment will emphasise infrastructure, human development, agriculture and social protection; and income inequality will be reduced by improving the equity of the budget.

The actual results of the first two years under the sixth plan are summarised in Table 1. The data on outcomes of the first two years of the sixth plan suggest serious shortfall in GDP growth, investment, export and inflation targets of the sixth plan. If corrective actions are not taken quickly, it will be near impossible to achieve the sixth plan's GDP and exports growth targets, which in turn will jeopardise the employment and poverty targets. There are also serious issues regarding the equity aspects of the budget, including pressure on inflation, which raises concerns about the plan's realism in achieving an improvement in income distribution.

Against the backdrop of the above, the targets and policies underlying the FY13 budget gain added significance. This mid-term budget of the sixth plan needs to tackle forcefully the gaps in economic performance in order to put the economy on the path of the sixth plan and Vision 2021.

Table 2 summarises the FY11 and FY12 budget outcomes and the FY13 budget target. There are a number of positive aspects of budgetary management of the past two years. The fiscal deficit has been contained at around 5 percent of GDP; the tax to GDP ratio has been growing as planned; public investment spending has been rising; and budget spending has been focused in priority areas of infrastructure, education, agriculture and health. These have had a positive effect on economic growth and human development. But the efforts, although in the right direction, fall short of what is needed to achieve the sixth plan targets.

While the tax to GDP ratio has been increasing, the overall tax performance remains weak by international standards and available resources fall far short of what are needed to achieve the targets of the sixth plan. The budget continues to rely heavily on trade taxes including supplementary duties. This has contributed to unintended trade protection that has hurt exports. High trade protection is a major reason for the inability of Bangladesh to diversify the export base.

On the spending front, a major budgetary problem is the inability to curb large subsidies in energy that has caused the current spending to swell. The fiscal deficit targets have been achieved by curbing public investment spending in both FY11 and FY12. As a result, the public investment rate is significantly below the rate needed to achieve the growth targets of the sixth plan. In particular, the FY11 and FY12 budgets have both failed to implement the planned investments in infrastructure. The much heralded public-private partnership (PPP) initiative for infrastructure did not take off in a significant way. Shortage of foreign financing has caused excessive reliance on borrowings from the Bangladesh Bank that has contributed to inflationary pressures. Budget borrowing has also constrained the availability of credit for the private sector.

Improvement in income equality requires policies to improve the equity of both taxes and public spending. Heavy reliance on inflationary financing has had adverse consequences for poverty and income distribution. There is plenty of empirical evidence that inflation hurts the poor and low income groups more than the better off. On top, there are considerable loopholes in the tax net that allow the rich to escape a substantial amount of their income and wealth from the tax net. These include capital gains on real estate transactions and from stockmarkets and property taxes. Personal income tax collection remains woefully low at around 1 percent of GDP even though the top 10 percent of the population accounts for a whopping 35 percent of the national income. This indicates that the effective income tax rate, which is supposed to be the most progressive tax instrument, is a mere 3 percent as opposed to an inflation tax rate of 10 percent which is highly regressive in nature.

On the spending side, although the government has put priority on health, education, agriculture and social protection, weak implementation and inadequate availability of funding limits the positive effects of this policy. For example, Bangladesh spends only 2.4 percent of GDP on education and 1 percent of GDP on health as compared with 4.8 percent and 3.5 percent respectively in Korea. The 2 percent of GDP spending on social protection is similarly inadequate compared to the needs of the population. There are also substantial issues regarding the quality of these spending.

The policy gaps in the last two budgets suggest the need for an aggressive and tough budget stance in FY13 in order to recover the lost ground from the last two budgets. How adequately does the draft FY13 budget presently debated in parliament meet this challenge?

On the growth front, the main budget instruments are public investment, exports and deficit financing. The FY13 budget continues to keep the fiscal deficit under control at below 5 percent of GDP, which is a positive development. It also targets a 0.8 percent of GDP increase in public investment. A key question is how will the increase in investment be financed? Taxes are projected to grow by 0.2 percent of GDP, which still leaves a financing gap of 0.6 percent of GDP. Unless corrective actions are taken to reduce subsidies, it is very unlikely that the investment target will be met. The cumulative shortfall in public investment over the three-year period of FY11-13 would be in the range of 2 percent of GDP, which is a serious shortfall.

Regarding exports, the FY13 budget continues to rely heavily on trade taxes and has introduced some further anti-export measures. So, the ability to achieve a 15 percent growth in exports in FY13 in an environment of European debt crisis looks very difficult. Similarly, the continued strong reliance on bank borrowing for budget financing will imply a likely adverse effect on credit availability for private finance that could hurt private activities. In this environment of both investment rate and exports growth being substantially off-track, the sixth plan GDP growth target will not be met.

The projected reduction in poverty incidence and the increase in employment share in manufacturing in Table 2 are both predicated on achieving the GDP and export growth targets of the sixth plan. A shortfall in the GDP growth target or the export growth target will naturally imply an inability to achieve these outcomes.

Regarding inflation, the result will depend upon the budget's ability to keep the lid on subsidies. The level of deficit financing through the banking system, which is already on the high side, especially in the context of the restrained monetary policy required for inflation control, is predicated on that. The targets for subsidies and bank borrowings were both bust successively in the last two budgets, which leaves an uneasy feeling that the FY13 budget continues to walk on a tight rope.

Concerning income distribution, the budget does not come close to taking any significant measure to improve this. The loopholes in the income tax net remain, largely owing to the absence of effective capital gains and property taxes. On the expenditure side, the tight resource situation and continued strong pressure from subsidy limit the ability of the government to expand the required programmes in the areas of safety net, rural infrastructure, health and education.

These aspects of the FY13 budget lead to the natural conclusion that it does not make any significant effort to catch up with the lost momentum on investment, exports and income distribution from the first two budgets of the sixth plan. This is a missed opportunity. With elections still some 18 months away, the government could take tougher actions on the income tax and subsidy front to release resources for funding higher public investment and social programmes. Trade protection should be reduced to boost exports. The government could also mobilise higher levels of foreign funding to finance much needed investments in infrastructure. These policies would also allow the government to reduce reliance on bank borrowing, thereby freeing up more credit for the private sector while also lowering the pressure on the creation of high-powered money.

The author is vice chairman of Policy Research Institute of Bangladesh. He can be reached at sahmed1952@live.com.

The Daily Star/Bangladesh/ 17th June 2012

Traders work on the floor of the New York Stock Exchange.

Many more years of money printing from the world's big four central banks now looks destined to add to the $6 trillion already created since 2008 and may transform the relationship between the once fiercely-independent banks and governments.

As rich economies sink deeper into a slough of debt after yet another wave of euro financial and banking stress and US hiring hesitancy, everyone is looking back to the US Federal Reserve, European Central Bank, Bank of England and Bank of Japan to stabilise the situation once more.

What's for sure is that quantitative easing, whereby the "Big Four" central banks have for four years effectively created new money by expanding their balance sheets and buying mostly government bonds from their banks, is back on the agenda for all their upcoming policy meetings.

Government credit cards are all but maxed out and commercial banks' persistent instability, existential fears and reluctance to lend means the explosion of newly minted cash has yet to spark the broad money supply growth needed to generate more goods and services.

In other words, electronic money creation to date -- whether directly through bond buying in the United States or Britain or in a more oblique form of cheap long-term lending by the ECB -- is not even replacing what commercial banks are removing by shoring up their own balance sheets and winding down loan books.

Global investors appear convinced more QE is in the pipe.

"It is almost as if investors are saying QE will happen no matter what," said Bank of America Merrill Lynch's Gary Baker.

BoA Merrill's latest monthly survey of 260 fund managers showed nearly three in four expect the ECB to proceed with another liquidity operation by October. Almost half expected the Fed to return to the pumps over the same period.

The BoJ has already upped asset purchases yet again this year and Bank of England policy dove Adam Posen said on Monday the BoE should not only buy more government bonds but target small business loans too.

But aside from investor hopes of a market-based call and response, is there any evidence that QE actually helps the underlying problem and what are the risks from all this?

The "counterfactual", to use an economics wonk's term, is the most powerful argument in QE's favour -- what would have happened if they didn't print at all and broad money supply collapsed?

But after four years in which, according to HSBC, the balance sheets of the Big Four have collectively more than tripled to $9 trillion and still not generated self-sustaining recoveries, the question is how long this can keep going on without creating bigger problems for the future.

For a start, there is no quick solution to the problem of mountainous indebtedness.

Recapitalizing banks; stabilising housing and mortgage markets responsible for deteriorating loan quality; further deep integration of euro fiscal links to support the shared currency; and capping government debt piles in the United States, Japan and Britain will -- even for optimists -- take many years.

On top of that the rich economies face gale force headwinds over the next decade from ageing and retiring populations.

In the interim, the job of central banks looks increasingly like a blended mix of monetary policy and sovereign debt management. And that's on top of recently acquired roles as guardians of financial and banking system stability.

The concern is that monetary authorities are increasingly acting as government agents responsible as much for stabilising bond markets and keeping banks clean as for fighting inflation.

The question is not whether central banks can withdraw this money again once broad money growth gains traction -- most think that's mechanically easy -- it's whether they will be able to resist pressure to carry on underwriting government deficits.

A series of papers prepared for a Bank for International Settlements workshop in May certainly saw the problem.

"Whatever view is taken of this, the boundary between monetary policy and government debt management has become increasingly blurred. Policy interactions have changed in ways that are difficult to understand," the BIS overview concluded.

The papers also made clear that this form of monetary policy has plenty of precedents throughout the earlier part of the 20th century during the gold standard. It's only since the 1980s and 1990s that consensus shifted squarely behind the idea of highly independent central banks pursuing narrow price stability and even strict inflation targets.

And given the level of credit chaos that ultimately emanated from the so-called Great Moderation, it's possible that history will see that system as the aberration rather than norm.

HSBC economists Karen Ward and Simon Wells reckon central bank independence is the biggest impact from ever-more QE and fear that, as in Japan, the price will be paid by persistently high if sustainable government deficits that stifle growth.

"The heyday of independent central banking could be drawing to a close," they wrote in a wide-ranging report on QE.

Hedge fund manager Stephen Jen said he thinks the temporary benefits of QE are outweighed by long-term costs such as removing pressure for fiscal reform and market volatility.

"At some point, the benefit-cost balance flips."

Then again, not everyone bemoans the greater responsiveness of central banks to the will of elected governments.

“The source of central bank independence is public support from elected officials that the central bank is pursuing desirable social goals,” BoE's Posen said Monday.

The Daily Star/Bangladesh/ 14th June 2012

From left, Muhammad Abdul Mazid, former chairman of NBR; MA Taslim, a professor of economics at Dhaka University; AB Mirza Azizul Islam, former caretaker government adviser; Zaidi Sattar, chairman of Policy Research Institute (PRI); Nihad Kabir, vice-president of Metropolitan Chamber of Commerce and Industry (MCCI); Anis A Khan, chairman of the tariff & taxation sub-committee of MCCI, and Ahsan H Mansur, executive director of PRI, attend a press meet on the 2012-13 budget, co-organised by the MCCI and PRI at the MCCI office in Dhaka yesterday.

A panel of economists yesterday doubted the chances of the government of achieving 7.2 percent economic growth in the next fiscal year.

The government may fail to reach the goal due to weak export growth amid a sluggish global demand and the presence of energy and infrastructure constraints to boost investment, they said.

They also expressed concern over proper implementation of the next fiscal year's budget due to weak capacity of government agencies.

They spoke at a press meet on the proposed budget for 2012-13, co-organised by Metropolitan Chamber of Commerce and Industry (MCCI) and Policy Research Institute (PRI) at the chamber's office in the capital.

Only two out of the 19 indicators of the economy -- remittance inflows and revenue collection -- raise hopes, said Mirza Azizul Islam, former finance adviser to a caretaker government.

The remaining 17 indicators are clearly moving towards undesirable direction at varying degrees, said Islam.

His remarks came at a time when exports growth is slowing down, while pressure on the balance of payments is rising due to dwindling foreign exchange reserves coupled with soaring subsidy pressure.

At the same time, the government's dependence on bank borrowing has created concerns among the private sector on availability of credit.

Ahsan H Mansur, executive director of the PRI, said the global economy is experiencing a 'second round of shocks' and Bangladesh has begun to face the impact of it like other countries.

"Slowdown is very much real. It is on our doorstep," he said, adding that the global recession has certainly affected Bangladesh through the export sector and general investors' sentiment, which translated into slower manufacturing and services activities and lower investment.

But a relatively strong domestic demand due to increased remittance inflows helped sustain domestic economic activities and revenue performances, he said.

He said a strong growth in the industrial sector, generally supported by garments, is needed to achieve the government's target of 7.2 percent economic growth.

"This will be extremely challenging in FY2013 due to the weak export demand in the EU and the US," he said.

Mansur hoped the government may achieve the target for 7.5 percent inflation mainly because of the falling commodity prices on the international market and a tight monetary policy of the Bangladesh Bank.

On the budget, Mansur said implementation challenges are enormous for the government due to its capacity dearth.

The 7.2 percent growth target has been set in line with the sixth five-year plan where it was assumed that energy shortage would ease and investment would rise while global economy would remain stable, said Zaidi Sattar, chairman of the PRI.

But gas and power shortages still remain as significant impediments to rapid growth, he said. Poor investment climate stymied new investments, he added.

"If the investment rate is not rising, because domestic and foreign investments are both constrained, it is time to accept reality and reconcile with a lower GDP growth until the logjam of 24-25 percent investment rate is broken," he said.

Prof MA Taslim of the economics department at Dhaka University said the proposed budget is basically a budget driven by the conditionality of the International Monetary Fund.

Nihad Kabir, vice president of the MCCI, said the proposed budget is challenging and ambitious not in terms of allocation but in terms of the government's implementation capacity.

Noting the tight monetary policy, she urged the government not to control inflation in such a way that brings down investment and affects economic growth in future.

Anis A Khan, chairman of the Tariff & Taxation Sub-committee of the MCCI, said the economy is facing a number of challenges, which are likely to stunt growth and bring disorder in the macroeconomic management, if not addressed.

He urged the government to limit bank borrowing within the projected amount of Tk 23,000 crore to avoid crowding out effects on the private sector.

"We suggest boosting revenue collection and using foreign resources more efficiently to finance the budget deficit," he said.

The chamber also recommended proper staffing and training for capacity building of ministries and agencies for effective and transparent implementation of the projects under the annual development programme, said Khan.

He urged the government to waive interest on the incomes of life insurance policyholders, reduce advance income tax on exports and corporate income tax.

The MCCI is 'disappointed' over the government's plan to legalise undisclosed income in the next fiscal year budget, he said.

"The chamber feels that the concession, if allowed, must be limited to the incomes from legal sources and their investment should be restricted to productive sectors only," said Khan, who is also the managing director of Mutual Trust Bank.

Muhammad Abdul Mazid, former chairman of the National Board of Revenue, also spoke.

The Daily Star/Bangladesh/ 14th June 2012