"Poor economic governance manifested in shabby public policy management and inability to manage external variables for maintaining macroeconomic balances plagued the 2005-06 financial year," said Debapriya Bhattacharya, executive director of Centre for Policy Dialogue (CPD), while presenting the review at the CPD office in Dhaka yesterday.

An overall assessment of the development experience of FY06 suggests an impressive performance of the real economic sectors--agriculture and manufacturing, as well as buoyant growth of two major sources of foreign exchange earnings--exports and remittances, he observed.

The second reading of the IRBD for the FY06 was released on the eve of the national budget for FY07 with a view to benchmarking budget-related discussions, including assessment of the outcomes of the current financial year and an outlook for the next fiscal.

"Policymaking in Bangladesh is greatly influenced by myopic political considerations and remains captive to the conditionalities agreed upon while accessing loans from the international financial institutions (IFIs) as well as beholden to powerful and entrenched private interest groups," Debapriya said.

He mentioned that within less than two months of adoption of the national budget for FY06, the government had to undertake major reduction of tariff, in violation of fiscal discipline, to satisfy the IFIs.

Although the finance minister has repeatedly emphasised that he is not inclined to make the economic tasks of the caretaker government more difficult, the fact is that he is not a free agent in terms of policymaking," he said.

Referring to the adjustment of oil price, Debapriya pointed out that the finance minister's inability to undertake a much imperative fuel price revision in the face of opposition from within the ruling party is a case reflecting how much the policymaking is heavily influenced.

"[The finance minister] failed to do so even when the professionals expressed their open support for this unpopular measure while the opposition remained silent about the issue," he added.

The most important economic challenges the caretaker government may face will depend upon the budgetary measures proposed on several areas, he said. These include pricing of fuel and other utilities, foreign exchange management, settlement of aid deals with the International Monetary Fund (IMF) and other bilateral and multilateral development partners, settlement of pending decisions on important economic areas like the Tata investment proposal, installation of new barge-mounted power plants etc.

The caretaker government may be forced to decide on foreign financing for fuel import. If it cannot obtain soft loan for fuel import, for example, from Islamic Development Bank, it might face tremendous pressure. It would be good for the caretaker government if the outgoing government settles all the pending things, Debapriya observed.

The IRBD review indicates that FY07 will be a year of economic hiatus underpinned by slowdown in economic growth, adding that the fiscal year 2005-06 started off with a stressed fiscal balance due to revenue expenditures outpacing revenue receipt and stretched balance of payment (BOP) due to imports outpacing exports.

The macroeconomic fundamentals were further strained as the economy was hit with a double whammy: low net flow of foreign assistance and foreign direct investment, it added.

"The kickbacks from the shocks generated in the external balance was transmitted through high public borrowing to meet shortfall in financing the overall budget deficit," it said.

Cost of pushed inflationary trend as well as the government's need for borrowing had been further fuelled by global price hike of commodities. However, robust growth of exports and remittances were the saving graces for Bangladesh in FY06, the review said.

"The stagnation in industrial credit and decline in agricultural credit disbursement are going to have lagged effect on the GDP growth," it mentioned, adding that the recent letter of credit (LC) opening information also corroborates this apprehension.

The economy, which is poised to be reigned by three governments, cannot expect any spectacular improvement in delivery of private investment programme during the coming year to pick up this slack left behind by the private sector, the review noted.

"Concurrently, the PRSP process will effectively go in a hibernation. Arguably, it is possibly from FY08 that we may expect to have a full-blooded national poverty alleviation plan, whichever party wins the next elections," it said.

Now with data available for nine months, it seems that the government pursued the first option, partly by commission in case of monetary policy and partly by default in case of public investment management.

The anticipated conflict between the contractionary monetary stance and expansions fiscal stance was largely resolved when the government failed to implement the annual development programme (ADP) even at its average low level, it said.

Regrettably, the fiscal space created by the non-implementation of ADP was greatly filled up by the monetary expansion in the quasi-government sector, the review added. "However, by January-March 2006, one observes a certain degree of stabilisation as the import growth slowed down and growth of inflation rate decelerated."

The economic growth rate did not suffer in FY06 as it benefited from the private investment momentum built-up during the earlier year and the intrinsic resilience, which the economy has acquired in the recent past, it explained.

One observes the robust growth of agriculture, manufacturing, exports and remittances, notwithstanding severe breakdown of the policy and institutional support mechanism of the government, it said, adding that such a situation has only worked against the interest of the poor, making the income distribution further skewed.

The caretaker government may face six major challenges related to economic policy and administration.

The first challenge will be to decide on implementation priorities of the over-ambitious budget for FY06-07 without the backing of a realistic revenue flow and foreign aid disbursement and excessive release of development funds during the first quarter of the fiscal year.

The second one may be facing the challenge of BOP and exchange rates and serious fund shortages if fuel prices are not increased and aid deals are not settled by the outgoing government.

The third may be managing inflation at a reasonable level and ensuring food security of poor communities during the lean season when employment opportunities are generally low but high spending on election-oriented activities by certain quarters.

Bearing the additional cost to maintain law and order situation if there is increased violence and conflicts in the country, ensuring power supply in a situation which might be constrained by inadequate supply and low price, and participation at the WTO negotiation as the Doha round comes to a close are some of the other challenges the caretaker government may face.

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