Sustaining the current demand for investment, generated in the current fiscal year, without disturbing macro-economic stability is the major challenge for the next budget, observed the Centre for Policy Dialogue (CPD) on Saturday.

In this connection, the organisation has suggested a thoughtful combination of three macro instruments — interest rate, exchange rate and streamlining of public expenditure — to maintain stability. CPD was of the view that investment demand has put the macro-economic balance under pressure.

No single instrument is applicable to adjust the pressure in the economy originating from enhanced investment demand boosted by robust credit flow, increasing import as well as foreign exchange demand,' said Debapriya Bhattachariya, executive director of the CPD.

He was speaking at a press briefing on ‘State of the Bangladesh Economy FY05' at the CPD conference room in Dhaka , in a pre-budget analysis of the economy to find out near-term and medium-term challenges to the government.

‘The International Monetary Fund's (IMF) suggestion of hiking the interest rate to tighten money supply will do little to both contain inflation as well as lower investment demand,' he said .  ‘Inflationary pressure is mostly caused by cost and it is inappropriate to seek solution of the problem in the IMF's prescribed contractionary monetary policy,' he added.
  

He said the interest rate adjustment should be in line with the inflation rate, making the real interest rate marginally positive. ‘Having inflation above 6 per cent, equal rate on deposit returns zero income,' he explained.  The economist observed that both taka-dollar and taka-euro exchange rates are overvalued in real terms and have to depreciate in line with the market trend. ‘It will make import costly and benefit exports and remittance earnings,' he added.
   

On top of these, Debapriya stressed the need of streamlining public expenditure in the next budget, particularly ahead of the next national election. ‘Revenue expenditure is already significantly higher while development spending is lower due to under-implementation of projects,' he added.

The economist said that pre-election political considerations dominate the nature of economic decisions all over the world, and Bangladesh is not an exception. ‘But we have no monitoring or oversight institutions to check wastage of public resources for political gain,' he added. In this connection, he mentioned eight ‘hazards' of policy-making in the period of political transition. ‘Although the government is not able to implement projects, there is already a bloated Annual Development Programme which increases the scope of misuse of resources,' said Debapriya.

The ADP for the next fiscal year is fixed at Tk 24,500 crore, which is 19.5 per cent higher than the current fiscal. He said wrong and politically motivated selection of projects and programmes would be another matter of concern, and 75 per cent increase in block allocation is a reflection of this.
  

The economist also pointed out tendentious award of tax and tariff relief as another ‘hazard' and said the finance minister should stick to his stance of ‘no whitening of black money'. Expansion of suppliers' credit and undue favour in public procurement and privatisation of SOEs would also destabilise the economy, he affirmed. Among others, research director of the CPD Mustafizur Rahman, research fellows Uttam Kumar Deb and Fahmida Khatun and dialogue and communication head Fatema Yousuf were present.