Farzana Munshi, PhD, Professor, Department of Economics and Social Sciences at BRAC University, elaborates on the mounting external challenges to Bangladesh’s economy, global inflation, and existing issues in the labour market.
The fallout from the pandemic and the recent global crisis stemming from the Russia-Ukraine war have made the economic targets set in the 8th Five-Year Plan (2021-2025) a lot harder to achieve. Do we need to revise our targets due to the emerging global situations?
I would say yes. The 8th Five Year Plan, prepared before and during the early phase of the pandemic, targeted to achieve 8.51% GDP growth and 5% inflation during the Plan period (2021-2025). Bangladesh was one of the fastest-growing economies before the pandemic. The 2010 decade witnessed, on average, 7% plus GDP growth and an inflation rate below 5.5%. This sound economic performance helped the country cope better with the pandemic situation than many countries; the inflation and GDP growth rate were at around 5% during the pandemic years. Just when the economy started recovering from the pandemic, the Russia-Ukraine war and the sanctions and the consequent disruption in the supply chain of fuel, food and fertiliser created a bit of uncertainty and stress in the economy. In addition, the post-pandemic rises in internal demand and some of the inherent structural weaknesses of the economy led to high inflation and slowed economic growth. So yes, the Plan targets need to be revised, and the economic conditions need continuous assessment. Nowcasting is becoming increasingly important in advanced countries for short-term analysis and predicting the present and very near future of GDP, its components and other macroeconomic and financial variables.
Speaking of economic indicators, how will the rising inflation and wage stagnation affect Bangladesh’s aggregate poverty rate? How can the government use its monetary/fiscal instruments to alleviate the pressure on the impoverished population?
Rising inflation decreases purchasing power for all but disproportionately impacts different income groups. Most higher-income jobs are inflation-adjusted, whereas lower-income jobs are not. Hence the lower-income group bears the hardest hit of rising inflation; many slip below the poverty line when inflation rises. Inflation also leads to wage-price spirals; higher inflation leads to higher demand for wages, which may increase the production cost leading to
further inflation and a further reduction in average wages, higher unemployment and higher poverty. Central banks worldwide are responding by raising the policy rates to control inflation. It could be an option for Bangladesh Bank as well. Although there may be questions about the effectiveness of policy rates, still, raising them will signal the
Bank’s strong stance regarding inflation control. Increased domestic demand is a key reason for the recent rising inflation; raising the lending rate should help control it. Controlling inflation is primarily a monetary policy’s task, but low monetisation rates and low market sensitivity of the interest rates affect the functioning of monetary policy in Bangladesh. The Bank’s autonomy is also a crucial factor in this context. Coordination between fiscal, monetary
and exchange rate policies is vital to controlling inflation. The government of Bangladesh has taken some measures in response to rising inflation: several austerity measures have been introduced to restrain the growth in aggregate
demand, in addition to financial assistance to the poor. Currency is depreciated, and import restrictions have been imposed on several luxury and non-essential items. Rice is the major consumption item in the majority’s consumption basket. Therefore, there must be initiatives in place to save rice production from natural calamities to ensure food security.
According to the latest reports by the International Labour Organization (ILO), the youth unemployment rate in Bangladesh currently stands at 10.6%, which is more than twice the overall national unemployment rate of 4.2%. Are we letting our democratic dividend pass by? How can we turn this around?
I hope not! We can turn this around by addressing the demand and supply side constraints. High rate of youth unemployment and NEET (not in employment, education or training) especially for female youth, underutilisation, informal employment, low-quality jobs, slow job creation rate, skill shortage and skill gap are some of the major constraints to exploit the full potential of the demographic dividend Bangladesh is currently experiencing. The dividend will continue for some years and it is extremely important to create more jobs that are better and inclusive, as soon as possible, remembering the new challenges of the post-pandemic recovery phase and the skill demand for the fourth industrial revolution. Simultaneously, we need to assess the sectoral skill gap and prepare the workforce accordingly with quality education and technical, vocational education and training (TVET). Policies to promote self-employment, particularly youth entrepreneurship by providing access to capital and training, can have a substantial
positive effect on youth employment. ICT-based self-employment is flourishing and has huge potential, particularly for women. International migration is another area having huge potential for youth employment. To realise the potential, periodic assessment of the type of skill demand in the international market and dissemination of that information is essential. Other policy interventions may include relevant training, access to financing migration costs, migration cost reduction, and investment opportunities for remittances.
What do you see as the most prominent labour market challenges in our country? What kind of policy reforms do you suggest to overcome them?
They are the same challenges that I just mentioned – high youth unemployment and informal employment, slower job creation, skill gap and shortage, and gender gaps reflected in lower female labour force participation rate. In addition, I would like to stress on the overall lower productivity of workers in Bangladesh. Lower productivity leads to lower real wages and lower production. This may slow down the growth of an economy, eventually leading to
Low Level Equilibrium Trap. Skill gaps and shortages created a dependency on foreign skilled workers, creating additional pressure on external payments. Increasing productivity should be the priority. Policy intervention may
include improving workers’ and managers’ skills through quality education, on-the-job training and the use of ICT and improving the working conditions which should lead to a reduction in informal employment. The high rate of child marriage and child labour is a major concern, which demands urgent policy attention. There is no recent data on child labour, but a 2013 survey by BBS suggested 3.62 million child labour, the majority of whom work long hours in hazardous working conditions. Anecdotal evidence suggests that the number has increased significantly during the pandemic. Implementation of the government’s national plan of eliminating child labour will hopefully improve the situation.
POLICIES TO PROMOTE SELF-EMPLOYMENT, PARTICULARLY YOUTH ENTREPRENEURSHIP, BY PROVIDING ACCESS TO CAPITAL AND TRAINING CAN HAVE A SUBSTANTIAL POSITIVE EFFECT ON YOUTH EMPLOYMENT
How would you assess the Bangladesh government’s decision to acquire a loan of USD 4.5 billion from the International Monetary Fund (IMF) for a loan package? Did we really need a bailout?
I wouldn’t call this a bailout. The government sought USD 4.5 billion loan from the IMF Resilience and Sustainability Trust for budgetary and balance of payment support and to address the climate change issues. This is a precautionary measure. We are not in a crisis situation like some other South Asian countries. Rising inflation and external imbalance have created a bit of stress in the economy. Our Debt-to-GDP ratio is low and our foreign exchange reserve is still sufficient to cover four to five months’ import payments. The prediction of recession and rising inflation in Europe and in the US may affect our future export demand. International migration remittances, the other major foreign exchange earning source, may also be affected by external demands. The IMF loan will serve as a buffer for the foreign exchange reserve in the event of further deterioration of external conditions and will help to reassure confidence in the financial and foreign exchange market. The loan will hopefully help the government to address the long-pending structural weaknesses to make the economy more competitive.