Bangladesh Stabilizing The Macroeconomy

Following an extended period of accelerated growth and poverty reduction, Bangladesh is facing tremendous macroeconomic pressures since 2022 that are reflected in rising inflation, rapid depletion of foreign reserves, and a severe foreign exchange shortage. Lack-luster tax revenue performance is contributing to a stagnation in the tax to GDP ratio at a low level of 7-8%. Low fiscal revenues is constraining the government's ability to finance adequately its infrastructure, human development and social protection programs and contributing to aggregate demand pressures from higher budget deficits and reliance on Bangladesh Bank financing of deficits. Import constraint emerging from import controls and an acute shortage of foreign exchange is hurting GDP growth and private investment. Confidence in the macroeconomy has been weakened that has hurt FDI flows and lowered the Bangladesh global credit ratings. Ongoing political turmoil linked to the national elections scheduled for January 07, 2024, is further contributing to macroeconomic instability and the slowdown in growth. It is clear that urgent policy actions are needed to arrest and reverse the economic downslide and stabilize the macroeconomy. The restoration of macroeconomic stability is key to restoring the growth momentum. This book is an effort to contribute to the government's policy making on the macroeconomy. The book reviews the ongoing policy efforts and points out the gaps that are preventing these policies from having the required impact. The book is a living document in the sense that it evaluates all policies taken so far since the advent of the present macroeconomic crisis and provides evidence about why these policies are not working. It then moves on to suggest policies that are necessary to secure the reform objectives. The fundamental argument of the book is that macroeconomic imbalances have emerged from three sources: inflationary pressure; the balance of payments pressure, and fiscal pressure. Addressing these issues require the use of at least three policy instruments that best relate to each of these areas: monetary policy instruments to ease the inflationary pressure; exchange rate policy to ease the balance of payments pressure: and tax/ expenditure policy measures to ease the budgetary pressure. Their combined use as a coordinated set of policy actions can help avoid the bluntness of any single instrument and reinforce the effectiveness of each of the policy reforms. The required reforms are tough but there are no soft options. The earlier the tough policy decisions are taken, the better the prospects for economic recovery.