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Macro-econometric model of Bangladesh economy
Dr. Muhammad Mahboob Ali

          THE economy of Bangladesh suffers from problems both in the supply and demand sides. Being least developed, the country is handicapped by poverty, imperfection in both factor and product market, continuous disequilibria in the economy, defective administrative structure, inappropriate tax structure, heavy external dependence, lack of capital stock and massive unemployment. The country is not only technologically and managerially inefficient but also underdeveloped in the transport, telecommunication, and energy sectors. A high rate of unemployment, low standard of living, low level of saving, a huge unskilled labour force, acute balance of trade deficit and low growth rate are prevailing in the economy. Both its agricultural and industrial sectors are yet to develop properly. Public and private investment cannot be optimally utilised. Default culture in the banking sector has become a prominent feature of the economy. Monetary and fiscal policies are yet to be intelligently crafted and properly coordinated for macro management to act as efficient catalysts for growth.
Although the agriculture sector dominates other sectors yet it is not properly mechanised. It largely depends on nature. Proper agricultural development policies and their implementation are still to be initiated. The industrial sector is also lagging behind. The goods, which are being produced, have no easy market and the market expansion is quite difficult. Despite financial reform measures, distortion is prevailing in the financial market. Economic growth rate is not up to the desired level. According to some estimates, the Bangladesh economy has grown by around 5 per cent per year since mid- nineties compared to 4 per cent on a long term basis over the last two decades and compared to an average GDP growth rate of 4.4 per cent per year during the first half of 1990s. One of the concerns about growth in the country is the slow growth and continued failure over the last two years of the manufacturing sector to regain its momentum. Virtually, the major draw back of the macro economic situation of the country is that fiscal policies are not properly coordinated with the monetary policies.
Real monetary and external indicators show that the rate of economic growth has been around 5.0 per cent on an average for the last thirty-four years.
After independence of the country, the then government nationalised all local commercial banks into six distinct banks by Bangladesh Bank nationalisation order 1972. As saving and investment were very low, to channelise saving and investment through the formal sector and to expand banking services in the remote areas of the country were one of the major objectives of nationalisation of the banking sector at that time. Bank branches were established particularly in the rural areas. Expansion of bank branches reduces transaction costs associated with the transfer of funds, savings, demand deposit and also time deposit. The then government adopted the supply leading strategy. But due to monopoly in the banking business, massive corruption and managerial inefficiency limited the realisation of the desired goal of this strategy. The government of early eighties decided to initiate a denationalisation and privatisation programme.
During the middle of eighties, the issues of structural adjustment and macro economic stabilisation began to be addressed in this country. Under this programme, agriculture, industry, private investment, withdrawal of some barriers in trade, tax-structure reform, change of tariff systems etc. received limited positive attention. Despite the initiatives, deficit in the revenue sector, high rate of inflation, deficit in balance of trade, lack of target investment in the private sector and external flow of capital occurred during the eighties.
The financial sector was controlled under the strict directives of government and Bangladesh Bank till December 1989. Under the controlled economy, low level of saving and investment, inadequate capital, inappropriate technology, negative real rate of return, chronic deficit in the balance of trade, smuggling etc. characterised the economy. As such a financial repression syndrome surfaced.
The financial sector reform programme was started in 1990. It included flexible interest rate, convertibility of Taka, introduction of 91 days bill, recapitalisation of banks, new procedure of loan classification and strengthening of money and capital market. Although before 1990 open market operations and bank rate policies were hardly used, currently they are getting emphasis due to the change in the policy. However, till now each year through budget speech the government declares target of annual growth rate of the GDP, estimate of price change, fiscal deficits etc.
Contradictory to the market determination policy, the total stock of money has been kept fixed and variation in money multiplier and/or monetary bases is adjusted. However, floating exchange rate mechanism was started from the year 2003. The debacle in the capital market of the country in 1996-97 was the result of wide spread manipulation and irregularities. The capital market of the country is yet to be properly developed. According to the annual report (2003-2004) of Bangladesh Bank, the very low volumes of public offerings in FY03 and FY04 are predictably oversubscribed several times over, indicating the scope and possible need of rebalancing, perhaps by regulatory prescription, of the proportions of offers through private placements and public offerings.
Formal money market and informal money market play an important role in Bangladesh, especially in the rural sector. Both the sectors play complementary roles in meeting demand without any direct or one to one relationship. The government also borrows a heavy amount from the banking channel. The change of interest rate, bank rate or open market operations have little possibility for success.
Bangladesh Bank cannot still independently determine monetary policies. And the government is still playing an important role in the financial sector. There is a very limited scope for individuals to invest in the capital market and lack of alternative opportunities for investment compelled them to invest mainly in bank deposits, post offices, saving certificates and government bonds etc.
Bangladesh is still heavily dependent on foreign aid and loan and foreign remittances. A huge deficit is prevailing in the balance of trade. It has few exportable commodities and most of them are primary products. In case of garments, Bangladesh is playing a minimal role. In the absence of adequate number of backward linkage industries, it has to import most of the materials used in the garments industry from abroad.
Taxation system has little impact on the economic development. Tax-GDP ratio is very low, which indicates that tax collection system is inefficient. In Bangladesh, indirect tax is still higher than direct tax. Value added tax was introduced to bring transparency in the tax system and augment revenue collection to promote domestic investment. Though the value added tax was introduced in July 1991, its objectives are not yet completely fulfilled and its network is relatively small. Further, VAT may lead to higher income group of people in a relatively advantageous position than those in the low income group. Taxation system of the country should be more effectively utilised for resource mobilisation of the country.
The present economic scenario of the country is still gloomy. Low standard of living, vicious circle of poverty, low growth rate, high population growth rate, low level of saving, low level of investment, inappropriate technology, huge deficit in the balance of trade etc. are prevailing.
The structural adjustment programme and macro-economic stabilisation efforts were started in the middle of the 1980s, which were followed by the liberalisation policy in the early nineties. But any significant result in the economy could not be yet attained.
The export sector of Bangladesh is now facing more competition in the international market due to the expiry of the multifibre agreement on January 01, 2005. Further, increasing globalisation of trade and investment is also creating problem for Bangladesh, which has resulted in a highly competitive global trading environment.
During the year 2002-03, the income from total export was USD 6548.88 million. Ironically, Bangladesh's earnings from the export sector mainly depend on few products (Source: Bangladesh Arthanaitic Samikhya, 2004).
The writer is Associate Professor, Department of Business Studies, State University of Bangladesh


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