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How To Get More Of It
Powering national development
Qazi Kholiquzzaman Ahmad
Finances for national development can be mobilised from various sources. These include domestic sources, viz. revenue collection, borrowing from the domestic banking system and the members of the public and contribution of state-owned enterprises in the public sector and private sector investments including portfolio investments; international trade; and foreign sources, viz. remittances, official development assistance, foreign direct investment, and commercial borrowing from international sources.
Before considering the sources of financing, let us remind ourselves of the following pertinent statistics. Bangladesh has, in recent years, been investing 23-24 per cent of its GDP, achieving an average annual GDP growth rate of just over five per cent. From this level of investment, a significantly higher economic growth rate could be achieved if corruption and wastages were minimised.
Revenue
Revenue-GDP ratio remains low in Bangladesh, having been an annual average of only 10.6 per cent during 2001-2005. It was between about 9 and 10 per cent during the 1990s. Every year, the actual collection of revenue falls significantly short of the projected amount. The reasons include evasion of tax (taxes account for about 80 per cent of the total revenue collection) and other revenue payments by the people concerned on one hand and inefficiency and corruption in the revenue collection machinery on the other. Corrupt practices on both sides are widespread, often working in collusion. Obviously, if transparent efforts can be mounted, it will be possible to expand tax-base and improve revenue collection. But, for that to happen, it is necessary to control corruption and improve efficiency in the revenue collection machinery through administrative and legal action and use of appropriate legal means against the evaders.Most of the revenue collected goes to revenue expenditures and only a small proportion is available for development purposes. For example, just 6.6 per cent of the revised revenue collection in 2004-05 was allocated to Annual Development Programme (ADP), down from 12.4 per cent in the original 2004-05 budget. In the original 2005-06 budget, the proportion is 9.4 per cent.
Domestic borrowing
The government's dependence on borrowing from the domestic banking system and members of the public is very significant. For example, it accounts for 37 per cent of the revised Annual Development Programme (ADP) for 2004-05 and is proposed at 34 per cent in the original ADP for 2005-06. The 2005-06 budget indicates that the projected interest payment on accumulated domestic loans in 2005-06 is as high as 18 per cent of the total revenue expenditure of the government.Contribution of state-owned enterprises (SOEs). The 44 (non-financial) SOEs contributed Tk. 2,023 million in profits and dividends to the public exchequer in 2003-04, while the estimated amount for 2004-05 is Tk. 2,815 million. On the other hand, subsi-aes/grants paid to 14 SOEs is Tk. 3,895 million in 2003-04, and the estimated amount is Tk. 5,023 million for 2004-05. The SOEs were able to pay up 87 per cent of their debt service liabilities in 2003-04. But, the total net losses incurred by all 44 SOEs in 2003-04 was Tk. 5,492 million, and it is estimated to be as large as Tk. 29,893 million in 2004-05 mainly due to oil price increase in the international market and devaluation of taka against dollar. As of now, these enterprises are a drain on the national exchequer on a net basis. The non-financial SOEs should be privatised as quickly as possible, but to genuine private investors and at fair prices.
Private sector investment
The private sector investment has been increasing but very slowly over the past decade or so and stands at an estimated Tk. 682.9 billion or 18.5 per cent of the estimated GDP in 2004-05. In Bangladesh, the dynamism that was expected of the private sector in the wake of free market and globalisation has not happened, partly because of the failure on the part of the government to create a conducive environment in terms of policies, facilities, and regulatory systems and partly because the private sector remains finance capitalism-oriented. Moreover, the private sector is also often involved in corrupt practices such as loan default, taking of loans for investment but not undertaking the projects, and over-invoicing (in the case of imports) under-invoicing (in the case of exports) depriving the country of huge amounts of foreign exchange.It has emerged from many studies that small and medium enterprises hold a large potential in Bangladesh for contributing to economic growth and dispersal of economic activities to different parts of the country, thereby promoting employment and income earning opportunities for poorer segments of the population. Local business associations may be an effective means of mobilising local resources towards promoting a locality-based vibrant business sector. But, this potential remains mostly unrealised.
Share market still remains undeveloped and not much portfolio investments are being generated by its intermediation.
International trade
The export sector is an important source of securing resources for development, particularly so in the present globalized world. But, the sector is extremely narrowly-based in Bangladesh. Only a few exportables, namely, readymade garments including knitwear and hosiery (RMG), fish and shrimp, raw jute and jute goods, and leather together account for about 80 per cent of the total foreign exchange earnings of the country; and only the RMG exports are responsible for over two-thirds of the total. In the wake of the expiry of multi-fibre agreement (MFA), Bangladesh's RMG sector faces uncertainties, although it has so far been able to hold its own and has even improved its performance in the knitwear segment. Bangladesh, being a least developed country, is entitled to special market access facilities. Currently, efforts are afoot to secure such facilities in the USA. Up to the early 1980s jute and jute goods accounted for a proportion of the country's total export earnings similar to the present share of the RMG, but have now dwindled to about four per cent or so.
Manpower export policy update overdue
It is important that, even if RMG continues to perform as well or better, efforts are made to develop other major exportables. There are two possibilities which may be pursued with determination. One of them is the information and communication technology (ICT) sector, which needs to be facilitated and encouraged through policy adjustments and infrastructural facilities as necessary. The other is the export of human-power. There are gaps arising for skilled workers in many developed countries due to declining populations. The Government of Bangladesh can mount market research to identify which skills are required by which countries and then train people in those skills and facilitate their employment-migration to the respective countries.
In the wake of liberalis-ation, imports into Bangladesh have been increasing faster so that the trade gap has increased and is now very large. It was Tk. 237 billion in 2003-04 (58 per cent of the total export earnings in that year), further rising to 311 billion (73 per cent of the total export earnings) in 2004-05. It is, therefore, important that unproductive and luxury imports are discouraged through appropriate monetary and fiscal measures so as to make more foreign exchange available for importing machinery, spare parts, intermediate goods, and raw materials to support expansion of domestic production.
Remittances
The remittances by Bangladeshis working abroad have been increasing significantly over the past several years. By 2004-05, remittances reached US$3.85 billion, accounting for 6.4 per cent of GDP at current market prices and for 32 per cent of the total national savings in that year. Also, remittances were about three times the foreign assistance received during the year. Clearly, therefore, remittances are a welcome silver lining in the context of mobilisation of financial resources.There is scope for further significant increases in the remittances as substantial amounts of funds are channelled by these people through hundi (i.e. illegal foreign exchange deals through which the intermediaries use the foreign exchange given to them for their own purposes and provide the taka equivalent in Bangladesh to the designated recipients). Despite several steps taken by the government over the years to encourage remittances through official channels and discourage the practice of hundi, hundi remains a major operation in practice. It should be possible to persuade more people to use the official channels in sending more money to Bangladesh if quick and assured delivery, appropriate exchange value, and profitable and secure investment opportunities in Bangladesh can be guaranteed.
Maltreatment of Bangladeshi migrant workers by their host employers in certain countries is reported, but our missions in those countries often remain unconcerned and unhelpful. They are also not always treated well and even maltreated, at times, at airports and by custom officials when they travel back to Bangladesh. They deserve to be treated properly; it is their legitimate right.
Foreign assistance
Foreign aid, both grants and low interest loans, has been a useful source of finance for development in Bangladesh. However, the aid climate has been becoming increasingly difficult. Thus, Bangladesh received only US$1.03 billion in 2003-04, compared to an all time high of US$1.74 billion in 1994-95. The average annual receipt during 2001-02 to 2003-04 has been US$1.35 billion. In 2004-05, having risen somewhat compared to the previous year, it has been about US$1.3 billion. Moreover, in real terms, the aid received has declined significantly over time. Also, despite the fact that about half the foreign aid received is in grants, the outstanding debt, as of 30 June 2004, is US$18.5 billion or about US$134 per citizen. It is suggested that, in the wake of the Poverty Reduction Strategy Paper (PRSP) having been finalised, more foreign aid will be available to Bangladesh in order to achieve the PRSP goals and, indeed, the MDG goals on the basis of which the PRSP goals have been formulated.However, the fact remains that the PRSP document itself will not guarantee availability of increased foreign aid. Much will depend on how far the anticipated reforms work out to the satisfaction of the donors. Governance reforms including the establishment of rule of law and control of corruption and violence and reforms promoting privatization and deregulation are among the reforms that are required to be implemented.
Availability of foreign aid will depend on the progress made regarding these and other reforms that the donors think fit to ask for. However, the just mentioned governance reforms and reforms to improve the management of the economy should be implemented by the Government of Bangladesh regardless of whether the donors want them or not.
All reforms must be formulated in response to the prevailing realities in the country considered in conjunction with the national goals, and not as dictated to by the donors.
Foreign Direct Investment
In the process of globalisation, foreign direct investment (FDI) is a major activity worldwide. Given good economic prospects and socio-political stability, a country may attract foreign investment more than another which is less equipped in these regards. Bangladesh has not so far been able to attract much FDI. The highest annual FDI has been US$460 million in 2004-05, which is only about three-quarters of one per cent of GDP, however, very recently, large foreign companies such as Tata Group of India, Dhabi Group of United Arab Emirates, and Global Vulcan Energy International (GVEI) of USA have shown interest to invest large sums of money in Bangladesh. While Tata's proposed investments are largely in productive activities, the rest of these intended investments are mostly for service sectors such as telecommunication and hotels.The FDI so far received has mostly gone to such sectors as gas and oil exploration, productive activities in the Export Processing Zones, and readymade garments.
Indeed, FDI has to be encouraged but the national interests such as employment generation, poverty reduction, and the best possible utilisation of the available natural resources in the interest of the nation should be ensured in the process of negotiations with foreign investors. However, the purpose of private investment is to make profit. Hence, the interest of both Bangladesh and the investors should be thoroughly evaluated to reach win-win agreements in respect of the issues involved.
The stumbling blocks impeding FDI in Bangladesh include confrontational politics, violence of different types, bureaucratic hindrances, and infrastructural inadequacy. If these obstacles can be removed, FDI may flourish in Bangladesh in a mutually beneficial manner for the investors and the people of Bangladesh.
International commercial borrowing
The capacity of the Government of Bangladesh to borrow internationally at market rates of interest is limited. Also, it would be an highly risky step to undertake any significant commercial borrowing internationally.In summation
In order to improve the prospects of mobilisation of finances and to ensure efficient utilisation of the available resources for faster economic growth and poverty and disparity reduction, certain key steps should be taken. These include: improve governance by establishing transparency, removing corruption and inefficiencies, controlling violence, and establishing rule of law, as this is the right thing to do towards constructing a healthy nation-building process, but, at the same time, this will help attract more foreign aid and FDI; specifically, control corruption and raise efficiency in revenue collection machinery and development administration, which will, for example, lead to increased revenue collection by the government and increased actual utilization of the available public resources; focus on human capability development at all levels of society through education, training, and health interventions, as appropriate, and introduce a pattern of investment to relate equitably to all segments of society, which will increase employment and productivity all round leading to increased GDP, increased savings and investments, and accelerated poverty reduction; encourage further remittances by taking necessary steps such as sending appropriately skilled workers to countries where particular skills are required; disinvest to genuine private investors at appropriate prices all non-financial SOEs as soon as possible to eliminate the drain on public exchequer resulting from the subsidies paid to them; formulate and put in place as quickly as possible appropriate regulatory system/systems to guide government action and private sector behaviour towards flourishing of a healthy private sector, which should generate more private sector investments; diversify exports through concerted public and private efforts to increase and consolidate exports earnings and discourage luxury and less important imports to reduce the trade gap; and facilitate through policy, infrastructural, and institutional (such as establishment of effective local government) support, mobilization of local people and local resources for promoting employment and income earning opportunities (through, for example, setting up of small and medium enterprises) at the local spaces.Sources of data used in this article are Ministry of Finance, Bangladesh Economic Review 2005 and Bangladesh Bank Economic Trends, September 2005.
Illustration : Sabyasachi Mistry
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The author is President, Bangladesh Economic Association (BEA), and Chairman, Bangladesh Unnayan Parishad (BUP).