Bangladesh - The Great Reset Policy Recommendations towards a USD 1 Trillion Economy

And just like that, a Peoples revolution has been won. Celebrations on the streets and smiling faces everywhere. Incredible optimism amongst an amazingly resilient people in a land I now call home.

Infact it has all been dejavu for me. It was just 2 years ago that I watched similar scenes in Sri Lanka. An elected leader thrown out through public protest.

From whither the crisis?

It would be easy to surmise that stolen money was the root cause for the economic condition we found ourselves in. Corruption is certainly a huge problem and one of the causes we find ourselves at this moment in history. Stolen money must be brought back. However, stolen money is rarely big enough to make a dent in the size of an economy as large as Bangladesh.

In my view, Bangladesh’s economic malaise arises from a combination of 2 key problems:

1. Large budget deficits coupled with a money printing central bank created substantial inflation and a falling currency - pushing middle income and social mobility away from a large segment of the population - While large budget deficits are undesirable, they are in themselves less of a problem than how they are financed. If financed through markets, high levels of borrowing will increase interest rates, pushing up overall cost and disincentivizing further spending. A money printing central bank on the other-hand which supplies the funds to continue such deficit spending removes a natural check-and-balance, creating an addictive drug with knock-on effects across the economy.
2. Progressive import controls and import substitution policies in the mistaken belief that imports are what devalue currency - Thereby reducing choice and pushing a better quality of life even further away from those aspiring to enter the middle class. A populace tends to rise up when the dream of social mobility fades away - The notion that imports are bad is a myth. In reality, money-printing central banks can explain most movements in currency - exports and imports only an outcome of monetary policy rather than the cause of it. Contrary to popular belief, it is actually exports that impoverish a country’s citizens and takes away goods that they could otherwise have consumed. Exports are however justifiable if you are able to earn money for this sacrifice and are able to import something else you like in return. These imports then improve quality of life for the citizenry in the nature of products they can consume, in lower cost and in wider choice. It fulfils the dream of owning a home, a car or simply a mobile phone.

The greatest white-collar crime is not corruption, but the grand scale impoverishing of whole populations with bad economic policy. Bill Clinton’s 1992 presidential campaign theme always rings true ‘it’s the Economy, stupid’

“The most radical revolutionary will become a conservative on the day after the revolution” – Hannah Arendt

Revolutions are like child birth. Incredibly messy, bloody but great joy at the end of it, for new life has been gifted to this earth. The first breath - a sigh of relief, the first cries - joyous. Celebrations ensue, and the customary congratulations given. Then….everyone goes home. The new parents left to fend for themselves. Endless sleepless nights of feeding, changing, worrying. Welcome to life for the next 25 years!

Enter, Bangladesh. The messy, bloody revolution has been won. Immense sacrifices were made. Enjoy the celebrations and congratulations. But tomorrow, the long road to a USD1 trillion economy starts.

Bangladesh is one of the last big opportunities that exist. A 170 million population entering middle income status, a young increasingly educated workforce, a manufacturing bastion, a 1.4bn powerhouse as its neighbor. On the cusp of a decade of transformational growth only held back by policy lethargy.

The new Bangladesh, if it intends to punch above its weight and burst through the middle-income trap, must make urgent reforms. A change in leadership is as good a time as any for a ‘Great reset’ in thinking.

“Change happens when the pain of staying the same is greater than the pain of change.” – Tony Robbins

One might be easily mistaken in thinking that if corruption is weeded out and stolen money returned, this would boost the economy. The new interim government must certainly seek to do both. If trust cannot be restored in rule of law and in our institutions, we cannot move forward sustainably.

However, in the absence of a real change in approach and policy, economic transformation cannot happen. In reality, an honest but inefficient employee is only slightly better than a corrupt, effective one.

Real change will actually be more painful in the short term. Treat the source rather than the symptoms of the sickness. Bitter medicine administered for the benefit of a patient.

With my domain expertise in mind, I will list out some economic reforms that must be done

Monetary Policy

Stability is critical in the immediate term, decisive policy and transparency can make the adjustment swift.

1. In the immediate term, allow market rates to rise and exchange rate to stabilize at their respective equilibriums. Allow markets to function and bring back confidence
2. Institutionally prevent the monetization of government debt. No more money printing
3. Move to a single anchor targeting (probably inflation targeting) and stick to it.
4. Shift away from ‘gotcha’ surprise decision making practices. Move to full transparency of timely data, more dynamic monetary policy management and open discussion

Fiscal Policy

Policy cannot be both capitalist and socialist at the same time.

1. Taxes must rise and tax net widened to bring in higher revenue. It will be difficult to reduce expenditure in the short term
2. Subsidies must be removed and energy market priced. This is a self-regulating mechanism of demand and supply.
3. Greater reliance on PPP projects to drive growth viz a viz government infrastructure spending

Banking Sector

A healthy banking sector will be the foundation of a faster economic resurgence

1. Keep banks liquid in the short term and provide assurance to the markets on support for banking suffering from a lack of confidence
2. Upsize and Recapitalize banking sector and enforce swift move towards full Basel III compliance
3. Tackle Banks with high NPL ratios through independent Asset Reconstruction companies

Capital Markets

Confidence in the integrity of the markets, deepening and widening the markets must be the sole priorities of the regulators

1. Floor prices and small downside circuit breakers must be removed and markets must be allowed to function. A falling market must not be considered a failure of the regulator
2. The regulators must move to a disclosure-based regime viz a viz a rules based regime
3. Treasury Bond markets must be made liquid via enabling repo facilities and wider participation in the market

External Trade

The greatest nations throughout history are those who were the biggest trade hubs. Creating markets for exports yields revenue, a non-protectionist import policy improves choice and quality of life.

1. Progressively remove tariff and non-tariff barriers on the import of all goods and services
2. Slow-down graduation to middle-income status if the facts allow it.
3. Focus on Free Trade Agreements to ensure continued access into new markets
4. Despite misgivings, deepen trade ties with the behemoth next door, India. We cannot afford to miss out on the excitement around India right now

Legislative

Codify structural changes enshrining governance into the framework of the country

1. Codifying central bank independence but also create clear accountability for officials missing inflation targets
2. Modernizing the Companies’ Act to make it more relevant for today’s Bangladeshi Business
3. Banking reform, creating independent and strong banks with the teeth to tackle growing NPLs
4. Introduce a Right to Information Act, that can increase transparency in government and decision making

“No pain, no gain” – Jane Fonda

Each of these reforms will be painful in the short-term

• High interest rates will make borrowings unaffordable in the short term
• Higher taxes will mean lower disposable income.
• Banking sector reform may see some investors lose their capital.
• Capital markets may fall before they rise
• Free trade may close down factories and create unemployment.

However, all of these negative effects are short term. Once stability and confidence kick in, a faster and more sustainable growth trajectory can be achieved. Here’s how:

• A stable currency and low inflation will improve business confidence and resuscitate personal consumption and quality of life
• A sustainable Government Balance sheet will allow capital to flow to the private sector, driving investment and growth
• A stronger banking sector can provide much needed capital for consumption and investment at better terms
• Confidence in the liquidity and quality of the market will attract further capital, both domestic and foreign.
• Access to imports will improve consumer choice, quality of life and create new industries using global supply chains

The Sri Lanka example

“Learn from the mistakes of others. You can't live long enough to make them all yourself.” – Eleanor Roosevelt

While outcomes were similar, Sri Lanka’s economic situation was in a far worse situation at the point of the ouster of President Gotabaya Rajapaksa. Usable reserves were near zero, there were 13-hour long power cuts, long queues for fuel and cooking gas, shortage of essential medicines and milk powder. The country was bankrupt, foreign LC lines were stopped, the LKR had depreciated c.50% against the USD, inflation was at 70%.

What changed?

With due credit to the policy makers, urgent economic reforms were done in many areas

1. Implemented decisive and dynamic Monetary Policy measures – Policy rates raised overnight by 7% and currency floated
2. Market pricing of energy and removing it from political decision making
3. Sharp increase in tax rates improving Tax-GDP ratio
4. Implementing legislation codifying reforms and governance into law

What was the outcome?

In the short-term, these reforms were painful

1. Those living below the poverty line increased from 11% to 27%
2. Bank NPL ratio increased from 7.6% to 13.3% signaling the permanent closure of many businesses, largely SMEs
3. A 300% increase in passports issued – showcasing a loss of hope for many aspiring low and middle income households
4. Restructuring of local debt, permanently impaired the retirement savings of a large portion of the population

Where are we now?

Yet, despite the short term despair, Sri Lanka is now well on the way to complete recovery

1. Sri Lanka’s currency - the LKR - is one of the best performing currencies of 2024, having appreciated c.20% over its 2022 lows
2. Inflation is now down to c.2% and expected to reduce further
3. Borrowing rates are now below 10%
4. GDP for Q1 came in at 5.3% amidst a pick up in private credit

Sri Lanka’s recovery story is yet not complete. With elections around the corner, commitment to reforms remains at risk. However, it has shown the way as to what is possible if prudent policy is followed

Bangladesh’s current position is much stronger than that of Sri Lanka’s 2 years ago. Hence reforms, when made, can result in a much more pronounced bounce-back for the country.

The Rising Tiger

We need policy makers who can be honest with the people. There is no magic wand that can make it all better tomorrow. You must not believe it if someone says so. A true re-set will take patience, it will take sacrifice.

However, as much as Japan rose from the ashes of WWII to become an Asian Powerhouse, with a commitment to lasting reform, Bangladesh too can rise from the ashes of August 5th to become South Asia’s Rising Tiger.

Views expressed herein are solely those of the author’s and may not necessarily reflect the opinions and beliefs of the organization he represents