Sluggish export-import growth, struggling private sector, foreign debt, and lack of data credibility—the newly formed interim government is looking at numerous problems to address. With a fresh hike in policy rate, the government’s priority seems clear: checking money flow in the market to ease inflation quickly.

Dr. Khondaker Golam Moazzem, prominent industrial economist and Research Director at the Centre for Policy Dialogue (CPD), discusses these pressing issues in detail in an interview with Mohammad Saiful Islam of Industry Insider.

Dr Moazzem has vast experience in research on workers’ rights, social safety nets, income tax, power and energy, gender equality, social justice, and environmental sustainability. He is also a versed policymaker who actively participated in formulating various government policies, including the Industrial Policy of Bangladesh (2010 and 2016).

Find the recorded interview on Industry Insider’s YouTube channel: @industryinsider

The policy rate has once again been hiked. For the second consecutive fiscal year, imports of capital machinery and industrial raw materials have gone down, and exports have declined as well. How will this hiked policy rate impact our imports and exports?

The primary aim of increasing the repo rate is to check inflation. Well, the policy rate was increased before, but inflation didn’t decline; rather, it increased. Because a policy rate hike not only aims to slow down private-sector investments but also to check government investments. However, we saw reduced investment or money flow in the private sector, but borrowing for the public sector didn’t decline. The government violated the monetary policy often. As a result, the expected impact of a policy rate hike on inflation didn’t come.

The current Finance Advisor and the Bangladesh Bank Governor, both experts in economics, have surely realized that public sector investment must be checked to curb inflation through policy rate hikes. Their understanding of the economic situation gives hope that the government will reduce its inclination to take loans from the central bank, which will reduce currency overflow and eventually positively impact inflation. 

On the other hand, such an initiative brings some consequences as well. Investments in the private sector include imports of raw materials, capital equipment, and essential goods. These are also impacted by the contractual policy. Considering Bangladesh’s overall macroeconomic situation, the private sector is not that investment-minded now. The changed political scenario added more uncertainty. I believe nobody is considering any big investment right now. Simply put, policy rate hikes are not that responsible for sluggish private sector investments as much as the macroeconomic instability of the country is.

Inflation was 11.66% last month, the highest level in a decade. While checking inflation is necessary, how long can Bangladesh’s economy afford to take a contractionary path? More specifically, how long can we afford to overlook industrial growth to combat inflation?

The credit squeeze in the market is not the only reason the private sector is under strain or the import of raw materials is low. The foreign currency reserve is currently in a crisis; it is intertwined with many other problems. As long as our reserve is unstable, expansionary monetary policy will hardly impact investments. Rather, more money flow in the market could negatively impact the economy by fueling inflation. Also, there is a chance of money being drained outside. So, in my opinion, contractionary monetary policy should continue as long as the reserve is not stable and the taka steadies against the dollar. Most importantly, the country might not have macroeconomic stability until the global energy market stabilizes. Till then, it’s hard to expect investments.

Global credit rating agencies like Fitch and S&P have downgraded Bangladesh’s banking sector, and BBX has downgraded the business environment index. Given the recent mass uprising, investors’ confidence seems low. What strategies should the interim government take to turn it around?

It is logical that international credit rating agencies have downgraded Bangladesh’s rating; I believe the ratings will fall further. Even this might differ when the actual economic picture comes out. Especially after the new government took over, we are seeing real data regarding the banking sector, information dissimilarities among institutions, information of irregularities regarding the stock market, energy sector, etc.; when we get all these credible data, we’ll know what the actual situation is and whether the credit rating agencies’ indicators could show us that. 

Most importantly, we need to see the real economic and financial situation. It’s a no-brainer that making positive projections year after year, standing on a false foundation, will bring no good. Therefore, it is more important to focus on finding out how bad our economy is than to be worried about negative reporting by credit rating agencies. If we know where the problem is, reformation will be possible. I believe that local and foreign investors will take this positively.

We often say that negative information regarding our economy and work environment might tarnish our reputation. But we forget that global knowledge comprises so much data that it hardly changes its position for whether small information is revealed or not. Hence, the government should find out the actual situation, no matter how bad, and develop strategies to transition from there. I think investors do not want to see sugarcoating on the situation. They want to know the actual situation where the economy now stands due to mistakes made in the past and see what reformation steps are being taken to uplift the economy. This will, in fact, be crucial for investors to gain confidence in Bangladesh in the long run. 

Our Micro, Small, and Medium Enterprises (MSME) are awaiting new struggles as the policy rate is hiked again. They have been struggling all along. So, what can the banking sector do for them? Especially what reforms and policies should the government undertake to make the banks help our MSMEs survive along with the large industries?

Fixed interest rates of 9% and 6% caused more damage to small and medium entrepreneurs than this policy rate hike. A fixed 9% interest rate often makes banks reluctant to lend money to MSMEs. Because their operating cost is high and to keep a profit margin, they expect double-digit interest rates from MSMEs. Since it (double-digit interest rate) was not possible, banks lent more money to big enterprises rather than MSMEs. So, keeping the interest rate fixed wasn’t right. The bottom line is that a competitive market needs to have truly competitive interest rates. 

The important thing here is that small and medium entrepreneurs object to high interest rates. They want the availability and accessibility of credit and the simplification of the complications involved in getting credit. However, as much as the banking sector is structured to lend money to large entrepreneurs, it is not for small and medium entrepreneurs. There are even instances of loans taken for small ventures of big entrepreneurs in the name of small and medium entrepreneurs. Real small and medium entrepreneurs who require money to start their ventures are still largely deprived. This can be attributed to banks’ financial instruments, which are not at all MSME-friendly. Regardless, small and medium entrepreneurs are blamed for this for not having organized financial reports, security, and skills to analyze cash flow data. I want to differ. This is the characteristic of our small and medium entrepreneurs, not weakness. We need to keep in mind that our small and medium entrepreneurs operate with very small capital and little profit margin. It’s impractical for them to have an accountant and online-based setup. Therefore, the financial instruments need to be developed by adopting their characteristics, which most banks do not have.

Brac Bank can be mentioned in this regard as it was established targeting SMEs. A few other banks have SME-focused loan schemes, too. As the central bank sets SME loan targets, other banks disburse SME loans to meet the requirements. But this is not enough for the sheer number of new entrepreneurs nationwide. For women entrepreneurs, securing a loan is even more difficult because they cannot show security against the loan; in other words, they are discouraged. If we really want to do something for them, it’s not about policy rates or 9-6% fixed interest rates; it’s about bringing a change in the whole supply chain and the financial system, which is absent at the moment. 

Previous government has left us with huge debts. Loans were taken for mega projects like EPZ, power plants, etc., which now seem hard to repay. How will this suddenly formed government deal with this situation?

The first lesson this government needs to take is to ensure proper procedural works before taking up big projects, which the previous government avoided during many mega projects. Usually, a DPP (Development Project Proposal) for mega projects is made after pre-feasibility and feasibility studies, and then the project director is chosen. Then, there is a bidding before the beginning of a project. Monitoring is required even during the project initiation stage. Unfortunately, this whole process has been trapped in a vicious cycle of weak frameworks for big or small projects. Pre-feasibility and feasibility studies have not been conducted for many projects. As a result, those projects inevitably carry some issues that impact the estimated return (Internal Rate of Return or IRR, Economic Rate of Return or ERR) from the project later. 

We can name a few, like Payra Port and Bangabandhu Tunnel...

Yes, you’ll find these issues in many projects. I don’t think any project adds a post-feasibility study or post-implementation review. But this should be done for big projects to check whether the estimated return is coming from them. Then the government can take lesson from that. 

Many alarming things are now unfolding. It is even heard that the contractors themselves prepare the quotations and submit them to the ministry, whereas the contractor is supposed to be selected from the bidding, which is supposed to take place after the DPP. It seems the cart has gone ahead, leaving behind the horse, and the driver is deciding what happens to the horse, the cart, and the mast. This vicious cycle has set in, creating a group of (beneficiaries) in every ministry and department. Health, education, local government, road, energy – these groups are present everywhere. They claim to have followed the rules, as well as the public procurement and e-procurement guidelines. But these are done in a way that you’ll find none other than one person controlling them all. Procurement clauses are also prepared in a way that everyone else would disqualify except for the person they intend to qualify. And those who qualify have some sort of understanding among them about who would do which part. Taking lessons from these, the current government needs to be careful about these vicious cycles at different project stages. The second lesson is that government officials get involved in many dishonest means during project implementation. Project directors tend to prolong implementation time and create unique demands so that they cannot even be questioned. 

Again, project components are sometimes divided into small pieces to appear as parts of another project so that a large expenditure on a big project doesn’t raise questions. 

Further quality compromises can be seen in project implementation. Major projects financed by international donor agencies often have third-party monitoring or evaluation. However, locally financed projects are not evaluated properly. Even the participation of the local people is not ensured. As a result, the people for whom the project is being implemented do not know whether it will benefit them. All these things have some lessons for the government. 

However, the government cannot help but take responsibility for the projects already undertaken and repay their debts. Commercial loans were taken for some of these projects. These are sometimes called blended finance, where concessional and commercial joint ventures do the project. Some projects were taken with concessional loans. Now, the government must take responsibility for these high-interest loan projects. 

What the government can do is negotiate. The forex reserve situation is volatile, and many payments are due. If we consider them a part of the reserve, the total reserve will go down further. So we can negotiate with the international donor organizations and development banks in two ways: first, we can try to make the terms flexible, for example, by extending the tenure, making the interest rate flexible, and converting part of the commercial portion into a grant; second, we can seek for easy loans or grants from the international organizations to repay the hard commercial loan installments which are non-negotiable. The government is already negotiating with the IMF, the World Bank, ADB, JICA, and even China. 

If the government can secure some budget support from these entities, repaying immediate loans will be easy. However, we cannot prevent more pressing issues from appearing in the future only by repaying loans. We must think about our inefficiencies in using loans, check irregularities and wastage, and find alternative financing. One alternative is increasing internal revenue to self-finance local investments and other demands. There is a huge potential in this regard. In 2021, we conducted research from the Center for Policy Dialogue (CPD), which found that the amount of tax not collected that year was equal to the amount collected. Clearly, there is huge revenue potential within the country, which is not being realized due to the weakness of NBR or lack of technical, other data, and integrated financial systems of various parties. We cannot only depend on foreign loans but also try to increase internal revenue collection.

A question in line with your discussion: You gave examples about lack of proper feasibility studies or contractors being taken before DPP, or a huge amount of revenue is being evaded; another recent data fiasco of 10 billion USD by Export Promotion Burea (EPB) – all these proves there is a crisis of data transparency in Bangladesh. So, how can we ensure transparent data reporting? 

Data is politics in developing countries. So, politics is involved while this data is being reported. A political government will claim credit from high growth data. A lower inflation data also involves one kind of political economy. Data is manipulated in many ways in Bangladesh by different organizations, not only for them but also to benefit a certain group. So, we should not indiscriminately jump to conclusions about data being underreported or hiked. We must find real data or information. Hence, I must say that the possibility of overstatement of export data is less likely. Bangladesh exported enough, but the money didn’t come to the country. So, if we accept the fact that a USD 10 billion overstatement was made regarding exports, it will benefit a certain group of people. Therefore, we must have this understanding of the political economy of data. 

We must logically judge data validation by checking which organization gives it and rationally decide how and where to use it. It’s not hard, especially since the new government must be enthusiastic about data transparency. We must ensure transparency and accountability for data and make it open to all; the government has to do it. When there is a parliament (elected government), data will be presented regularly. The good thing is that the government is working with the IMF to make quarterly GDP reports. Although there are some anomalies, it’s a positive start. Likewise, we want all other data to be transparent and timely because timing is important. Earlier, the central bank used to release data with a lag of about a month or more. 

If you visit the Bangladesh Bank or NBR website now, you’ll see two or three months old data. These are not usable. So, more transparency and punctuality in terms of data is required. Another important thing is the disaggregation of data. Only some basic macro indicator-based data is not enough for Bangladesh’s growing economy. The first obstacle foreign investors stumble upon in our country is the lack of proper market data. The concerned associations or authorities can’t provide them with the data they need. Sometimes, they don’t even want to give what they have. That’s why investors have to invest in consultancy farms to collect credible data regarding a particular supply chain. So, we need more disaggregated data and more sectoral and micro-level data. Primary users of these data are the policymakers, bureaucrats, investors, researchers, and international agencies. The data structure has to be radically changed, considering the users’ demands. 

Bangladesh Bureau of Statistics (BBS) is doing a decent job as the only data-provider agency in the country, working as the government’s mouthpiece. But a diverse range of data needs to come. Take South Africa as an example, where such data-preparing agencies work as autonomous commissions, which are called statistics commissions (Statistics South Africa). They do not report to the government; they have the freedom to report directly to the parliament. 

Back to that point again: Data is politics; that’s why it needs freedom. Otherwise, different government bodies will always try to pressure these agencies to manipulate data. This government seems to be positive about transparency, but we are not sure how much freedom the agencies will get. We hope to see the data agencies working strongly and independently in the future.

Digitalization is a big challenge for Bangladesh in terms of data transparency. As many sectors haven’t yet digitally transformed enough, how can Bangladesh overcome this challenge?

Digitalization should happen in two ways: regarding demand side and supply side data. Data users on the demand side want to buy data easily. In the case of international agencies, their data is expensive but easily and instantly achievable through credit cards. However, buying data from BBS involves a complex process. So, keeping in mind the demand side needs, this process needs to be simplified to enable any user to buy data easily. On the supply side, data needs to come regularly from government agencies. A census in our country is conducted every ten years. Whereas our public policy structure is changing fast, we must rethink this huge gap. These data need to come within shorter periods here. Even industrial surveys are conducted every five years, and labor force surveys happen every two or three years; these time gaps must be reduced. Also, these data don’t always have to be based on census; they can be based on surveys. 

We have a massive lack of sector-based data. For instance, is there any separate database for the RMG sector? Private? Yes. Government? No. For the textile sector, the answer is the same. There are 6-7 indicators in the industrial survey. But if you ask for sector-specific supply chain-oriented data that the users require, you will see a huge lag. Therefore, digitalization has to happen on both the demand and supply sides so that supply-chain data can be prepared and provided digitally faster. Data availability and accessibility have to increase for the users. 

Apart from RMG, we made significant progress in the pharma and ceramics sectors. But other manufacturing industries, like lather, home appliances, processed food, and jute products, haven’t reached their potential. The question is, which industries would you pick that require special attention now to boost Bangladesh’s export basket?

First, we have yet to have a sector prepared enough for exports like RMG. However, several small sectors are doing billion-dollar business in the local market. However, these sectors are not yet prepared to transform into export-oriented sectors. For instance, apart from RMG, the processed food market has become a huge sector. From packaged rice to puffed rice, biscuits, cakes, and numerous other processed items are available in this market. After meeting local demands, we have to aim to produce these items for export purposes. 

Another thing is a critical minimum, which means a sector has to have a minimum number of investors (a big number) and manufacturers involved in production in this sector. So buyers or retailers get several options to negotiate and buy products at a fair price. RMG industry has this critical minimum number. However, this critical mass has not been created in any other sector apart from RMG. Every sector is dependent on a few companies. You can guess the names – three for the footwear industry, no more than four or five companies for the processed food industry, and so on. Such markets, confined to four/five names, are not competitive. As a result, there will be anomalies in pricing and monopolies in the supply chain. Or there will be a quality compromise, which will be hard to rectify. With many investors and producers, these problems are sorted through market competition. Buyers also feel comfortable to work there. 

When the same companies provide for the local market and also export, it doesn’t expand our export volume much. Those companies might grow, but the dream of the next billion-dollar markets remains elusive, except for a few industries. 

Potential sectors that can go big immediately are agro processed products and processed food. A market has developed for passive products as well, like pharmaceuticals. Nevertheless, the challenge remains the same: not having a critical minimum. 

Another thing is that compliance standards in other countries are more complex for products other than RMG. Environmental standards for garments products are not as much required as textile and leather. That’s why we cannot export textile and leather products much. We get stuck with environmental compliance. Likewise, our processed foods are barred from exporting, failing to comply with ICAP or other international standards. Information is crucial here. Information regarding ingredients used in the food, harmful ingredients, material sourcing, etc. must be revealed. For the same reason, we cannot earn much from pharmaceuticals. The bottom line is that environmental compliance is not enough to create the next big thing after RMG. We must make progress in other market-specific compliances such as health compliance, safety compliance, etc. Else, exports won’t grow much. 

We saw serious developments from the West regarding labor law and the workplace environment in Bangladesh. Possible sanctions and other measures were speculated. Do we have any such threat in the current changed political scenario? Also, you mentioned earlier that Bangladesh will seek budget support from global donor organizations. Will Dr. Yunus’s global acceptance be a positive factor in this regard?

If I answer the second question, Chief Advisor Dr. Yunus’s acceptance will make an impact in Europe and the USA. As a result, our development partnership negotiation with the European Union – which was canceled before this government was formed, might resume. Also, we can expect financial and other assistance from the USA will continue. And GSP facilities currently suspended for Bangladesh in the US market might see some positive developments, provided that we progress in human rights issues. Overall, in my opinion, Bangladesh will experience a positive situation regarding global financial aid and cooperation. 

Now, come to the first question. We need to keep in mind that whatever Europe or the USA has said regarding human rights recently is not country-specific. This is their global stance–every country where their buyers, brands, suppliers, and investors are working. All the agencies connected to their supply chain must comply with the new rules. Definitely, we will face these compliances, too.

Whatever we have been hearing as whispers will be heard clearly and loudly soon. Because after 2026, it will be legally mandatory for all EU buyers or companies not to buy any product from suppliers who fail to comply with the labor law and standards the EU has set. So, we cannot just assume that they are targeting us. We should avoid this mentality of seeing these laws as unwanted interference on us or singling us out, as these laws apply to all. Rather, we need to work to make progress in pressing issues like human rights and labor laws. It will do good for us in the end, not harm.