Oil price for policy implication: What are the Challenges for Bangladesh at Present Moment?


January 04, 2016

Dr.Sikder Md. Anowarul Islam

There is an acute debate in local and international policy implication when international oil price is started to decline and the trend boost in bottom line. The international oil price reduced 30 to 35 dollar per barrel at present moment. Like others countries, reducing oil price increased the productivity and income redistribution as well as the revenue of the government especially where oil market is regulated by the central government.

Theoretically, it is true that reduction in oil price will increase economic growth and productivity. But it may differ from country to country. If the market governess is poor, and revenue is the prime objective of private market-then reducing oil price will increase business revenue as well as profit. Market failure will increase income inequality up to the level where economic growth will reduce in long run.

What is the present economic situation in Bangladesh?

Gini coefficient raged by 0.28 -0.32 which is presumed growth augmented. Tax GDP ratio is less than 17-20% so far which is still presumed growth augmented. Private market is venerable and market failure is acute. Capital market is stagnated and trend of secondary market is venerable and out of the trust of general investors. Asymmetric information leads general investors to invest here. Mutual fund, corporate financing and financial institutions are leading the capital market. We can’t still depend on capital market to get large scale investment by primary shareholders. Banks and financial institutions are not capable to invest a mega projects like Padama Bridge and other infrastructures, where we have millions of dollars reserve at present moment.

There are lots of destructions prevailing in the economy but we are still growing due to acute expansion and innovation of agricultural sectors, women empowerments, micro credit and SME finance, labour income from abroad and export revenue of garments sectors. But there are different scenarios if we analysis garments sector development in Bangladesh. Always getting competitive advantages by reducing oil price, energy and labour income may not bring sustainability except implicit transfer in long run especially in garments sectors if our GDP growth sustained 6.5 percent up to 2021, as if, we are thinking our per capita income will cross USD 1500 by 2021.

What are the recent predictions for reducing oil price and productivity?

“If we decrease 10% oil price- we will gain 3% GDP growth: Say, Exports by garments sectors 0.4%,increase of consumer demand 0.6%, reduction of inflation 0.2% and reduction of Government revenue/savings 0.4%, Source: Bangladesh Economic Analysis-2015, World Bank, CPD” -well, it sounds great!

It is predicted that our average growth is 6.5 percent + 3% bonus by reducing oil price = 9.5% GDP growth, by next fiscal year- which will cross the highest global trend of economic growth in 2016-17.

Economic Challenges for Bangladesh:

  1. Why do we always adjust international price for garments sectors by reducing our endogenous resource and labour income? How long we will sustain by this process in international market without diversification since garments production is depending on the competitive advantages for ordinary goods.
  1. Reduction in oil price will reduce inflation, import price of raw-materials and improve competitiveness of world market in garments sector: but why buyer will pay more if they know we may import garments raw-materials by 2% less than before. Any way cumulative impact is more than that…
  1. Why Government will reduce 4% savings by reducing oil price as if government can take mega protects like Padma Bridge, Production of Public Goods, Infrastructure Development, Power Generation etc.,— yes, there are so many…!, Is this government public investment will not increase marginal consumption and economic growth…? If, public investment is positive to economic growth and productivity, then why implicit private transfer-where it cost 2-3% market distortion in general.
  1. Private market is not competitive- especially in transport sectors. There are overfull demand prevailing in this sector due to government rationing. Why reducing oil price will reduce transport cost in local market?
  1. Agriculture sectors are playing vital roles in economic growth and productivity in Bangladesh. If the inflation reduce by 2% both in urban and rural sectors, the cost of production of agricultural sector will reduce accordingly, but the price of agricultural sectors reduced by 10% in last year in terms of production cost. What revenue benefit will get agriculture sectors by reducing oil price by 10% under the present market situation?

Public Policy:

As we know public policy is not like as general economics. It will fix value judgment of a society and also increase of economic welfare. The economic scenarios of developing countries are not same as industrial countries. Here sometimes government intervention improves economic welfare- especially when government intervention increases public capital to invest for economic growth and productivity.

If we want to reduce poverty and increase employment generation-we need increasing government spending for urbanization even in remote administrative level. Where from the revenue will come even we don’t know the optimal percentage of growth maximized government revenue? Should we be optimistic without analyzing the environment of Bangladesh economy- theoretically and empirically? Even we have so many international friends and donor agencies to invest, but the reality is more crucial than we expect generally-Greece is the best lessons for us!

Data Source: Bangladesh Economic Analysis-2015, World Bank, CPD, The Daily Prothom-Alo, Bangladesh, January 04, 2016. LinkedIn-January 04,2016

 

 

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