Stable Taka should not lull Bangladesh into complacency

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Syed Ashraf Ali Pakistan and India, the two nuclear armed archrivals, normally accustomed to fighting each other at regular intervals, are both currently engaged in a fight of a different kind. The fight this time around is to halt the free fall of their currencies, both named Rupee. Since January this year, Indian Rupee fell by more than 20 per cent hitting a record low of Rs 68.8450 against the greenback. The ailing currency recovered a little to reach around Rs 65 against the greenback in the first week of September when a flamboyant Raghuram Rajan, dubbed by the media as 'Games Bond' (a parody for James Bond) joined as the Governor of Reserve Bank of India to rescue the Rupee. The odds stacked against him are, however, too heavy to make a significant impact due to major changes in the economic fundamentals since it shifted to the unbridled free market ideology. The Pakistan rupee followed closely on the heels of its Indian counterpart, albeit at a slower pace of about 12 per cent, to touch the historic low of Rs 110 against the greenback. The slide persisted throughout the five-year tenure of PPP-led coalition government and plunged by 60 per cent by the time they were eased out of office in the last election. The first 50 days of the new government of Nawaz Sharif brought no respite either. In fact, the troubled rupee shed another 2.4 per cent under the new regime. This time around there is no Pakistani James Bond to rescue the rupee. Only the IMF, the lender of last resort, responded to its distress signal and approved a $6.7 billion loan. The first tranche of $2 billion, however, could not allay the fear of the nervous public and financial institutions. After a brief respite, the beleaguered rupee resumed its downward journey. What caused it? Analysts have been citing different, often bizarre, reasons for the slide. Some attribute it to the government's decision to empower tax officials to access accounts of the depositors and the filing of return forms for declaring cash in bank accounts to levy income tax. The nervous depositors are withdrawing the deposits for conversion into dollar. This process of dollarisation is triggering pressure on the currency. Some blame it on the government's reluctance to regulate import of gold, which cost $500 million in August due to the spurt in its import after the slump of its price in the international market. One renowned economist, Mobarak Zeb Khan, in an article in the Dawn, blamed the fall on the government's decision to import coal to improve electricity generation. "It seems", he said, "dollar grows on trees as government does not look for domestic solution and like to use domestic coal for power generation". The main reasons, of course, are structural problems in the economy that fuel wanton consumerism and arming of its military to the teeth to fight a proxy war against its own people. Lavish spending to pamper the bureaucracy and entrenched elites also took a heavy toll on the financial health of the country. These negative factors inevitably worsened current account deficit while FDI (foreign direct investment) inflow nearly dried up. In the meantime, the costs of imports have doubled the value of exports and the foreign exchange reserve dropped to a bare $5 billion. The economy expanded by a paltry 3.0 per cent a year since 2008 while inflation ran at about 10 per cent. The State Bank of Pakistan's hands are tied because one of the conditions of the IMF bailout package was that the central bank would not intervene in the forex market and forced it to purchase dollars from the market to augment foreign exchange reserve. In the melee created by the demand-supply gap, speculators jumped in to make quick profits. After a long hiatus, however, the State Bank of Pakistan finally intervened when rupee touched the historic low of 110.5 against the dollar. The rupee's fall signals the fragility of the economy and a fear that it will fuel already soaring prices. Pakistan's worsening fiscal conditions are likely to persist in the future unless drastic belt-tightening measures are taken. The government is unlikely to be able to service external debt with its paltry forex reserve. The widening gap between the dollar price in the open and inter-bank markets --currently about Rs 5.0 -- poses a threat to the inflow of remittances from overseas Pakistani workers who send about $13 billion a year. High dollar rate in the open market would drive many to the illegal channels of remittances. THE LESSONS FOR BANGLADESH: While our erstwhile tormentors who never failed to boast that Bangladesh would embrace its doom if it were left alone, we have fortunately a more or less stable currency for nearly a decade in spite of a chaotic political environment. Our performance is far better than Pakistan and India in terms of most of the economic and social indicators. The credit for this goes to our hard-working peasants, the seven million toiling migrant workers and garment workers from the rural background in economic and social terms. However, it may come as a rude shock to the religious zealots who suffer from an illusion that a kilogram of rice would still cost only aat anna (50 poisha) if the country had not broken away from the 'land of pure'. Our modest progress, however, should not lull us into a state of complacence. The chaos on the economic front of our neighbouring countries should serve as a warning signal to avoid the pitfalls that so often characterise the shoddy quality of our economic management. The writer is a former executive director of the Bangladesh Bank. [email protected]