Experts warn of double trouble

The leading bankers, economists and experts of the country Tuesday suggested ensuring deeper understanding among the South Asian countries to face challenges posed by external sector openness.
The suggestion came at a SAARCFINANCE seminar on 'Management of External Sector Openness - South Asian Country Experiences' organised by the Bangladesh Bank (BB) at a city hotel on Tuesday.
They said the dependence on external private flows to finance investment and accelerate economic growth was fraught with many risks.
"Excessive dependence on external financial flows exposes an economy to the double jeopardy of an exchange rate crisis and a financial sector crisis which reinforces each other and causes a vicious spiral," ABM Azizul Islam, former adviser of the caretaker government, said while addressing the seminar as a keynote speaker.
Short-term capital flows such as portfolio and equity investments and bank debt do not have a significant effect on growth and, in fact, have sizable adverse effect in times of crisis and more so in countries with weaker institutions, the senior economist added.
"In recent times some efforts are being apparently made to attract non-foreign direct investment (FDI) flows. Here it would be worth reminding that the East-Asian economic crises of 1997-1998 were substantially triggered by dramatic reversal of these flows which had earlier contributed to accelerate growth," he noted.
Five East Asian countries-Indonesia, Malaysia, the Philippines, the Republic of Korea and Thailand-received a staggering net inflow of bank credit amounting to $56 billion and portfolio equity amounting to $12 billion in 1996, followed by net outflows of $27 billion and $4.0 billion respectively in 1997 leading to a significant negative growth in gross domestic product (GDP) in 1998, according to Mr. Islam.  
"Very recently a number of developing countries including India faced large outflows," the former adviser explained.
"So the question is: to what extent should South Asian countries liberalise their capital account policy regimes and how to balance the potential trade-off between higher growth and greater instability?"
Addressing the seminar as the chief guest, BB Governor Atiur Rahman said such region-wide forging and deepening of contacts for mutual learning and experience sharing were indeed the building blocks of regional integration.
"Regional integration initiatives shore up defences against external instability, putting up a collective front as a single large economic region," the central bank chief said.
While the instability risks could be particularly severe for smaller open economies, even the larger economies with deep, large domestic markets were far from immune, as seen in the last global financial crisis, the BB governor observed.
"We in the SAARCFINANCE member economies are managing our external sector openness in trade and investment flows striking a careful balance between the imperatives of promoting growth and safeguarding macroeconomic and financial sector stability," Dr. Rahman noted.
He also said openness to global capital flows likewise spurs growth by attracting investment inflows, but at the same time heightens instability risks from volatile trends of global capital flows arising both from speculative position taking and from spillovers of persistent imbalances in major economies.
"External opening up also poses new demands on approaches in safeguarding of monetary and financial stability," the BB governor observed.
Mr Allah Malik Kazemi, change management adviser of the BB, said openness was very vital for boosting the country's overall business activities amid some risks.
Mr Kazemi also said the readymade garment (RMG) sector of Bangladesh had expanded by taking the advantage of external trade openness.
"We need deeper understanding for taking better decisions on stability and adjustment of challenges posed by the external openness," the senior central banker told the FE while explaining the main objective of the seminar.
Among others, Mr Abu Hena Mohammad Razee Hassan, deputy governor of the BB, and Mr Akhtaruzzaman, economic adviser of the central bank, spoke on the occasion.     
The SAARCFINANCE was formed in October 1998 as a network of central bank governors and finance secretaries of the SAARC countries-Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, Afghanistan and Sri Lanka.
It is now working to promote cooperation, research, training and exchange of ideas and information on economic and financial issues among its member countries.