Shifting the Gear on the Economy

Every budget season brings the same ritual. Numbers are unveiled, pundits declare them too optimistic or too austere, and commentary fixates on a set of numbers -- GDP growth or revenue targets are too optimistic -- or cliches bordering on pablum -- the government is out to stifle the economy through debt or tax or both.

These are, almost without exception, the wrong conversations to be having.

Economic policies should not be judged on a single number. They should be grounded within a framework -- a set of interlocking institutions, instruments, and commitments that, when they work together, translate a government's ambitions into actual outcomes for real people.

Understanding that framework is what separates serious economic analysis from noise. And right now, Bangladesh needs more of the former.

Bangladesh economy is currently stuck in a rut. Three major economic policy statements are expected in the coming weeks. These statements will tell us how the government expects to shift the country out of current economic malaise.

From Stagflation to Sustainable Acceleration

The economy has been hit by a series of supply side shocks since the beginning of this decade, which were mostly mishandled by the Hasina regime. Political uncertainty and transitional difficulties -- to put things charitably -- have compounded the problem since the Long July.

The result is that the economy is growing at an anaemic pace of sub-4%, while inflation remains sticky at nearly 9%. These stagflationary conditions are expected to persist into the next fiscal year, as shown in Charts 1 and 2.

More importantly, according to the IMF analysis, the past several years have scarred the economy so much that only a slow and gruelling recovery is likely. Consequently, they forecast economic growth to recover to barely a 6% pace in 2031 (Chart 3).

Even that, of course, will require a strong recovery in private investment. If this investment recovery is not matched by a similarly strong recovery in household savings, then the current account will swing into deficit, which is exactly what the IMF forecasts (Chart 4).

That is, the macroeconomic tasks are two-fold: In the near-term, come out of stagflation; and in the medium-term, accelerate the recovery without blowing out the current account deficit.

It is against that background the government is going to be announcing a set of economic statements in the coming days and weeks.

Tomorrow (June 11), the Finance Minister will be presenting the Budget in the Parliament. The Bangladesh Bank will be releasing the Monetary Policy Statement by the end of the month. And the Five-Year Strategic Framework for Reform and Development will be released in early July.

A Strategic Framework

International best practice would suggest that macroeconomic policies in the next few years be grounded in the Five-Year Strategic Framework. The Framework should provide a clear outline of the government’s aspirations for the economy.

Unlike traditional five-year plans, however, the Framework should have a strong focus on how to realise these aspirations, and link them to macroeconomic (and indeed, microeconomic and sectoral) policies.

Further, the Strategic Framework should also have a strong emphasis on monitoring, evaluation, learning and risk management.

For example, if the Framework aspires to achieve faster economic growth by the end of the decade than the IMF’s forecasts, then presumably it would involve either more investment or stronger productivity boost from the same investment. If the former, then what will happen to the current account?

If the latter, then what will drive it? Not only should the Framework have a coherent narrative around these, but the specific policy implications should also be spelt out.

The Strategy should have built in scenario contingencies for an evolving economy.

Specifically, the Strategic Framework should give the Bangladesh Bank a clear task for monetary policy, while grounding the medium-term fiscal and budgetary framework that will (have) be(en) announced on June 11.

The Monetary Trilemma

The Monetary Policy Statement is expected later this month, and will tell us how the central bank is reading the economy. Conceptually, central banking operates under a fundamental constraint known as the impossible trinity: A country cannot simultaneously maintain free capital mobility, a fixed exchange rate, and independent monetary policy.

It can only pick two of the three. Bangladesh Bank, like any central bank, must operate within this reality.

In practice, Bangladesh Bank right now faces a conundrum. Interest rate has been high, aggregate demand is weak, and yet inflation (particularly non-food inflation) persists.

Meanwhile, the currency is facing appreciation pressures which the central bank is managing by mopping up US dollars from the market and building a reserve a buffer. Is this the right policy mix?

A war chest of reserves will be important to manage a future current account deficit (such as what the IMF forecasts, for example). But an appreciating taka right now might help with inflation. Is that not a more important priority?

A significantly appreciating taka against dollar is not something we have a living memory of --what might the confidence effect of that be on the economy? We simply don’t know. But we do know that many exporters will not like it. The Monetary Policy Statement should give us an idea about how the central bank is weighing up these issues.

The Fiscal Trilemma

On the fiscal side, governments often face their own three-way bind. Bangladesh, like many developing economies, simultaneously faces higher spending requirements, pressure to contain public debt at sustainable levels, and a genuine difficulty in raising tax revenues. The Finance Minister cannot fully satisfy all three at once.

This is not a counsel of despair. It is an argument for honesty. A government that acknowledges its fiscal trilemma can make deliberate choices and explain them. A government that pretends the constraint doesn't exist will eventually be confronted by it anyway -- usually not at a moment of its own choosing.

Perhaps the most important feature of economic governance is whether the government's stated vision actually connects to how it raises and spends money.

The logic is straightforward. The Strategic Framework should set the political vision -- a trillion-dollar economy by 2035, investment-led growth, human welfare, regional development. From that vision should flow a medium-term fiscal and budget framework: multi-year macroeconomic forecasts, fiscal targets, expenditure ceilings, and spending allocations. From that framework should flow the annual development program and departmental budget allocations. And undergirding all of it should be robust monitoring and implementation mechanisms.

This is a cascade from political decisions to professional implementation. When it works, budget line items reflect genuine national priorities. When it doesn't -- when the annual budget bears little relationship to the medium-term framework, or when the medium-term framework bears little relationship to the strategic plan -- the numbers become, at best, aspirational fiction.

How to Judge the Plans?

So, how should we judge the coming economic statements?

Here is a short guide.

Don't obsess over forecasts. Macroeconomic forecasts are educated guesses. Treating them as the main event is a distraction. Instead, look at the narrative and the details. Is the story coherent?

If the assumptions underlying a projection come true, will the promised results actually follow? Are the elasticities and ratios used to produce these results transparent and evidence-based, or are they black boxes?

Ask whether the plans are consistent with each other. If the strategic framework promises investment-led growth, is that reflected in the medium-term budget framework? Is the Annual Development Program actually funded to deliver the priorities the framework names? Is monetary policy consistent with the government's fiscal stance, or are the two working at cross-purposes?

Ask what the monitoring and evaluation mechanisms are. What happens when targets are missed? Is there a risk management framework? Who is accountable, and to whom?

And note the big factor that should be present (and could well be missing) in all these statements --the crisis engulfing the banking sector.

The quality of Bangladesh's economic future will be determined not by any single budget figure, but by whether the institutions connecting vision to implementation are built and maintained with the seriousness they deserve. That is the conversation worth having.

Hold the government to account for the answers to these questions. But hold the pundits to account too. Commentary that ignores institutional coherence in favour of number-chasing is not analysis -- it is theatre.

Speaking of theatre, as a suave Anglophile patron of the creative economy, surely the Finance Minister is familiar with many adventures where the hero has to shift the gear and manage the brake-clutch-accelerator footwork while the Aston Martin swerves in a foggy, narrow mountainside road while dangers lurk at every corner. Those stories always end happily for the hero.

May that be the case for the Finance Minister as well.

Jyoti Rahman is the Exectuve Editor of the weekly Counterpoint.