As the challenges are intertwined, accomplishing one will make others more complicated.
If there is no price adjustment for fuel, power and fertiliser, the subsidy in the next budget will be almost double -- whopping Tk84,000 crore -- than that is for the current fiscal year.
In a Tk6.80 lakh crore budget, a Tk84,000 crore subsidy means Tk1 of every Tk8 will go for subsidy spending. Then how the social safety net would be widened as the rising inflation warrants a bigger allocation for the vulnerable families and individuals.
The government wants to keep inflation under control, and interest rates on bank loans unchanged. How is it possible at the same time?
Interest rate is a policy instrument. To determine whether interest rate readjustment is good or bad, we have to look at the real time outputs the interest rate changes deliver.
Inflation and the dollar crisis are two of the top priorities right now. If these two issues are not addressed properly, then neither growth, nor investment, nor job creation will be possible.
To keep the dollar stock and inflation under control, it is necessary to increase the demand and supply of the greenback. The policy rate hike by the Bangladesh Bank while keeping the interest rate fixed at 9% will have no effect eventually.
If there were a scope for raising the interest rates, the demand for US Dollar would also increase, and there would be some impact in terms of dollar supply. Because, expatriates are sending a part of their income to their families at home, while parking the savings abroad for better premiums. If the interest rate on deposits in the country were raised a little, a part of that savings would also come to the country.
Therefore, I do not understand why the topic of maintaining the current interest rate was included in the list. Because, it is not a development objective. Development objectives are employment, investment, reducing inflation, increasing subsidies, alleviating poverty and increasing social assistance.
The unchanged interest rate will cause several harms, especially investment. Many banks are reluctant to lend at the current rate, which deters many potential investments. If interest rates had risen a little, banks might have been willing to lend to the investors.
Not all of the challenges mentioned are the same. The basic challenges need to be separated and then the outcomes need to be identified. Whether we will increase the interest rate or not, whether we will increase the subsidy or not -- these will be the strategy of the government.
I think the strategies and goals got mixed up. There must be a clear line between the strategy and objective. No strategy will match with any objective.
Interest rate adjustment, raising or lowering the exchange rate and changing revenue rates will be the strategies of the government. These are any objectives on their own.
The objectives are to ramp up development, increase growth, reduce poverty and inflation, while the instruments are expenditure, borrowing and exchange rates.
Zahid Hussain, former lead economist of the World Bank, Dhaka office
[The Business Standard Special Correspondent Abul Kashem took the interview over phone Saturday.]