Macroeconomic Risks in Bangladesh
Macroeconomic management has been good, with low levels of deficits, public debt, and single digit inflation, and may not be a critical constraint to investment or growth. Despite conflict/civil war and political instability, Nepal has maintained sound macroeconomic management. Nepal was the beneficiary of an IMF poverty reduction and growth facility (PRGF) between 2003 and 2008. Among other things, the PRGF focused on ensuring sound macroeconomic management. At completion of the PRGF in 2008, the IMF concluded that the PRGF was broadly successful in achieving its macroeconomic targets, noting that macroeconomic stability, the overarching aim, was preserved even during the conflict/civil war and in difficult political circumstances. The IMF further noted that most numerical targets set under the PRGF were achieved, in some cases with significant margins (IMF 2008a).As discussed in earlier sections, Nepal has had a positive current account balance despite a negative trade balance during recent years. Nepal was able to bring its fiscal deficit down from about 5.5% of GDP in 2001 to 2.0% by 2007 (Figure 3.47) due to an improved tax effort and privatization of public enterprises. During this period, revenues increased by 74% in nominal and 27% in real terms, and total tax revenues increased by 80% in nominal and 32% in real terms. Although revenues have been rising, both total revenues and tax effort as a percentage of GDP remain low compared with those in other South Asian countries (Figures 3.48 and 3.49). In 2007, Nepal’s total revenues were about 11.7% of GDP; they were 16.1%, 15.8%, 14.0%, and 12.0% in Bangladesh, Sri Lanka, Pakistan, and India, respectively. Similarly, the tax effort amounted to 9.7% of GDP in 2007, while it was 23.8%, 14.6%, and 10.7% for Maldives, Sri Lanka, and India, respectively. Comparatively lower levels of revenues and tax effort suggest that there may be room to raise revenues and boost investment in public infrastructure and services without overly burdening investors. Increased revenues are especially required to meet the vast public sector expenditure needed for providing infrastructure and other services.Nepal has effectively kept its inflation at low levels compared with those in other South Asian countries (Figure 3.50). Growth in the consumer price index stayed below 5% during 2000–2004 before rising to 6–8% during 2005–2007. Despite inflationary pressures from surges in food, fuel, and construction material prices, the country was able to keep inflation to single digit levels (Figure 3.51). Ginting (2007) found that inflation in India passes into Nepal after about 7 months and inflation