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How open is B'desh economy?

GDP grows faster than foreign trade

Siddique Islam | September 24, 2019 00:00:00

The Bangladesh economy's degree of openness has seen a mixed trend in the last 10 years as economic expansion outstripped foreign trade rise.

Bangladesh's trade-GDP ratio reached 46.30 per cent during fiscal year 2012-13 rising from 37.8 per cent in FY '10. But such a ratio has fluctuated during the next six fiscal years until FY '19.

The higher such a ratio the more integrated an economy is.

The trade-GDP ratio came down to 38.89 per cent in the FY '19 from 44.51 per cent in the FY'14, according to a measurement on the basis of Bangladesh Bureau of Statistics (BBS) data.

The Financial Express has used the common measure to determine the country's economic openness index that adds imports and exports in goods and services, dividing the sum by GDP (gross domestic product).

The growth in foreign trade including goods and services showed a mixed trend after FY '14 while the country's GDP growth recorded a faster rise during the period, the data showed.

Trade analysts and economists said such a fluctuation in foreign trade happened mainly due to the lack of synchronisation between GDP growth and overall foreign trade.

They also emphasised focusing on export-orientated trade policy along with rationalising tariff structure to help achieve sustainable economic growth.

Protection should be time-bound and tariff rates must be rationalized, they said warning economic growth will falter otherwise.

"The level of average tariffs provides one indication of trade openness. Higher tariffs indicate higher protection and greater restrictions on trade (competing imports)," Zaidi Sattar, chairman of the Policy Research Institute (PRI) of Bangladesh, told the FE.

Average higher tariffs put brakes on the economy's degree of openness, he said.

The senior economist also said the higher the tariffs the lower the trade openness of an economy.

"Exports have to be diversified along with exploring new markets to bring parity with the fast-growing economy," Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue (CPD), noted.

Dr Moazzem also said the country's export earnings still depend on a few sectors, especially readymade garment.

"More products and services should be included in the export basket to bring parity with the GDP growth," he noted.

As reform and liberalisation measures are being pursued, the degree of integration of Bangladesh economy with the global economy has increased gradually, the official data showed.

As part of the measures, Bangladesh Bank introduced floating exchange rate instead of fixed regime in 2003 by way of relaxing foreign exchange regulations.

Under the floating regime, the banks are empowered to fix the exchange rate of Bangladesh taka freely against the US dollar on the basis of market force.

However, the central bank intervenes in the country's foreign exchange market frequently in the name of keeping the market stable.

The central bank had earlier fixed the exchange rate of taka against the greenback on a regular basis under the fixed regime.

But the banks are practising 'managed' floating exchange rate.

However, the local currency is interfacing with the global market following the introduction of free floating exchange rate in Bangladesh.

The convertibility of currency is linked to the globalisation process because making the currency convertible to other foreign currencies eases foreign trade transactions.

Besides, the central bank allowed the taka to be convertible in current account in 1994 to facilitate trade and investment in the country.

The taka is also partially convertible in the capital account on a case by case basis with fulfilment of some conditions, set by the BB earlier, including bringing back return on investment in Bangladesh.

Allowing capital to flow freely in or out of a country without controls or restrictions is known as capital account convertibility.

At least seven local conglomerates have already been allowed to invest abroad.

The flows of capital-debt, equity, direct and real estate investments-from one country to another are recorded in the capital account of the balance of payment.

Capital market liberalisation is considered an integral component of the overall economic openness process in any developing country like Bangladesh.

The central bank had already introduced non-resident investors' taka account to encourage foreign investors, including expatriate Bangladeshis, to invest their hard-earned currencies in the country's capital market.

The net inflow of FDI in Bangladesh stood at US$ $3.61 billion in 2018 registering around 68 per cent growth over 2017, according to the United Nations Conference on Trade and Development.

Also, Bangladesh had opened cross border financing mechanism allowing the private sector to avail foreign currency loan from overseas sources.

The use of foreign currency loan has been increasing gradually by both public and private sectors since 2012, according to official figures.

The inflow of foreign currency credit in the public sector jumped by more than 65 per cent to $42.98 billion in 2018 from $25.95 billion in 2012.

Such loan in the private sector climbed by nearly 568 per cent to $12.17 billion from $1.82 billion, the data showed.

Currently, the businessmen are now allowed to avail buyers' credit to import capital machinery and industrial raw materials in line with the BB directives.

No economy is totally open or closed in terms of trade restrictions, and all governments have varying degrees of control over the movement of capital and labour.

The degree of openness of an economy is determined by a government's freedom to pursue economic policies of its choice, and the susceptibility of the country to international economic cycles. "Bangladesh has broadened openness to global trade and finance for spurring investment and growth during the last decade or so," former BB governor Dr. Atiur Rahman told the FE.

He also said Bangladesh has also been moving towards reducing the cost of doing business by undertaking necessary reform measures.

Bangladesh went for generous investment policy regime by opening up the industrial sector to foreign investors, according to the former governor.

Currently, the foreign investors are allowed to operate both as wholly-owned foreign firms/companies or joint ventures.

They are also allowed forge public- private partnership (PPP) in the infrastructure sector.

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