Global depression and its impact on Bangladesh economy
Wednesday, 4 January 2012
The Bangladesh Taka (BDT) has depreciated by 15.55 per cent against the US dollar last calendar year mainly due to large settlements of outstanding import bills, particularly of fuel oil. The net fuel import cost is estimated around US$6.80 billion for the current fiscal against $3.60 billion of the previous fiscal. This amount in value terms, may be doubled in the next fiscal while the inflow of US currency has not been increasing significantly. All concerned are worried over the situation as depreciation of BDT is continuing for which inflation is escalating.
The worries are turning as to whether rising dollar would even be available for timely payment of import bills in the near future. Rising import with price-hike in the international market, along with less inflow of foreign currency remitted by expatriates, are putting due pressure on the country's balance of payments and on its foreign exchange reserve situation. The situation becomes worse while the disbursement of foreign loans and inflow of forign direct investment (FDI) are coming down in the same tenure.
The average inflow of FDI per annum in the last five years has been below US$ 1.0 billion. This is a dismal picture compared to that of other Asian economies. Our economic growth targets of above 8.0 per cent within the current five-year plan period requires increasing rate of investments from its current level of 24 per cent of gross domestic product (GDP) to 34 per cent. This makes us believe that such massive uptick in investments can only be possible with rapid influx of FDI.
But due to political instability, the pleadings for even more aggressive incentives and tax-breaks seemed to have fallen on deaf ears. The rapid growth of FDI even in tiny Cambodia puts our efforts to shame. Struggling to make incremental improvements in our ease-of-doing-business rankings and making us more attractive as an investment destination do not work practically.
The remittance flow through the official channel is losing its momentum as the dollar exchange rate against BDT has gone up in the informal market. Among other causes of the diminishing flow, low interest rates for expatriates' investing their money in various savings instruments are identified.
In fiscal 2008-09, the remittance growth rate was about 22 per cent. This rate came down to 13 per cent in the last fiscal. In the first few months of the current fiscal year, the growth was negative. Although the amount has marked a slight increase recently, it is still below 4.0 per cent in the nine months of the current fiscal year. So the remittance inflows through illegal channels are high.
The Bangladesh Bank(BB), in its study said, the exchange rate rise which crossed Tk 73 with a large difference -- almost Tk 4.0 -- between official and unofficial rates during the period between May and November 2010 had a negative impact on the remittance flow. The experts predict to reach it to Tk100 soon if no pragmatic policy is considered.
The report said the remittance inflow slowed down as the rate of interest was slashed in different savings instruments from 12 per cent to 10.5 per cent, including the wage earner development bond, and due to the imposition of tax at source. From July to February in the current fiscal, the investments in wage earner development bond stood at 0.95 per cent of the total remittance which was 1.5 per cent during the same period of the last fiscal.
Imports rose 23 per cent to $11.7 billion in the first four months of the 2011/12 fiscal year from a year earlier. Exports increased 20 per cent to $8.1 billion, widening the trade deficit to $3.6 billion from $2.8 billion a year earlier. The import costs look unlikely to fall in the near future while the export earnings show a negative trend.
Thus the widening of the country's external trade deficit particularly due to rise in fuel oil and slow growth of inward remittances amid a cooling global economy along with declining external assistance in foreign currency and alleged outflow of money in foreign exchange ( smuggling out of operation) have ultimately led to the present dollar crunch.
The country's foreign exchange reserve slid to $9.28 billion at the end of November 11, the lowest since August 2009 from $10.34 billion in October due to soaring import costs, mainly of oil. Thus the rise in import cost has also created pressure on the foreign exchange reserve, leading to depreciation of taka against US dollar, fuelling inflationary pressures persistently.
The government's deficit spending already rose to about 19.0 per cent of the total expenditures which was 9.0 per cent in FY 2009-10 and 14.0 per cent in FY 2010-11. But the execution of Annual Development Programme (ADP) is slow though the government borrowing is continuing, resulting in short supply of credits to the private sector for investment. Meanwhile, the double-digit inflation has steped in and if it continues for a long time, it would affect the macro-economic management, undermining the growth prospect of the economy. The situation would raise the cost of doing business and discourage investment and ultimately lead to an increasing rate of inflation.
The western world is awash in debt which can only be serviced by sharp reductions in spending and tax increases. But such measures compound the problems relating to slow economic growth. The slowdown in Europe and the US would mean fewer exports. High unemployment, a burgeoning debt and huge deficits especially in the US, would mean reduced purchasing power which may affect our exports.
Following two years of anaemic and uneven recovery from the global financial crisis, the world recovery is teetering on the brink of another major downturn because of the escalating debt woes on both sides of the Atlantic. Unfortunately, such economic woes that have troubled the world last year are very likely to linger on in the new year. To imagine that Bangladesh could remain immune from these doleful economic surroundings is fanciful.
The global economic depression may last for several years. It requires that efforts should be stepped up to improve competitiveness of our economy in a situation where competition for the minds, the ideas and the resources would otherwise get stiffer. The scope for recovery of the economy is narrowing down dew to the global financial crash; it would take time spreading over few years. If no alternative is found, austerity should become a fact of economic and political life.
According to most of the economists, a mild recession in the region is almost inevitable, while the failure of the government to keep the macro-economic management from going down particularly due to its high borrowing from the banking system may make things even worse. If the government cannot come up with some radical measures to regain discipline about overall publis expenditures, we cannot escape a critical situation of the economy as it would be affected by both, European recession affecting our exports and excess borrowings of the government from the banking system.
Under such a simultaneous pressure, the Bangladesh Bank (BB) is trying to cool down the market by releasing more dollars through public banks to meet the payment of import bills, mostly meant for tooting oil and food import bills. However, it is a short-term prescription. From a macro-economic perspective, an effective policy right now should couple modest fiscal stimulus in the near term, with credible deficit reduction in the long run.
Government should have a pragmatic plan to reduce subsidy, to adopt austerity in public spending, to increase revenues, to stop increasing money supply and to reduce borrowing from the banking system. Necessary steps should be taken to continue adjustment of exchange rate so that the incentives for remittances and exports remain attractive.
We need to be more integrated with the global market, establish rule of law without differentiating between pauper and prince, and enforce discipline and ethics both in the business transactions and among the key position holders in the society, to whom the people look up. Tolerance, accountability, mutual respect, improved governance in a pluralistic society providing the scope for expression diversity of views, and transparency should bear the same meaning in Bangladesh, too. then, we will be able to establish ourselves successfully in the league of respected nations.
The writer who is Executive Vice-president, Islami Bank Bangladesh Ltd., can be reached at E-mail: jabbarcrd@yahoo.com
The worries are turning as to whether rising dollar would even be available for timely payment of import bills in the near future. Rising import with price-hike in the international market, along with less inflow of foreign currency remitted by expatriates, are putting due pressure on the country's balance of payments and on its foreign exchange reserve situation. The situation becomes worse while the disbursement of foreign loans and inflow of forign direct investment (FDI) are coming down in the same tenure.
The average inflow of FDI per annum in the last five years has been below US$ 1.0 billion. This is a dismal picture compared to that of other Asian economies. Our economic growth targets of above 8.0 per cent within the current five-year plan period requires increasing rate of investments from its current level of 24 per cent of gross domestic product (GDP) to 34 per cent. This makes us believe that such massive uptick in investments can only be possible with rapid influx of FDI.
But due to political instability, the pleadings for even more aggressive incentives and tax-breaks seemed to have fallen on deaf ears. The rapid growth of FDI even in tiny Cambodia puts our efforts to shame. Struggling to make incremental improvements in our ease-of-doing-business rankings and making us more attractive as an investment destination do not work practically.
The remittance flow through the official channel is losing its momentum as the dollar exchange rate against BDT has gone up in the informal market. Among other causes of the diminishing flow, low interest rates for expatriates' investing their money in various savings instruments are identified.
In fiscal 2008-09, the remittance growth rate was about 22 per cent. This rate came down to 13 per cent in the last fiscal. In the first few months of the current fiscal year, the growth was negative. Although the amount has marked a slight increase recently, it is still below 4.0 per cent in the nine months of the current fiscal year. So the remittance inflows through illegal channels are high.
The Bangladesh Bank(BB), in its study said, the exchange rate rise which crossed Tk 73 with a large difference -- almost Tk 4.0 -- between official and unofficial rates during the period between May and November 2010 had a negative impact on the remittance flow. The experts predict to reach it to Tk100 soon if no pragmatic policy is considered.
The report said the remittance inflow slowed down as the rate of interest was slashed in different savings instruments from 12 per cent to 10.5 per cent, including the wage earner development bond, and due to the imposition of tax at source. From July to February in the current fiscal, the investments in wage earner development bond stood at 0.95 per cent of the total remittance which was 1.5 per cent during the same period of the last fiscal.
Imports rose 23 per cent to $11.7 billion in the first four months of the 2011/12 fiscal year from a year earlier. Exports increased 20 per cent to $8.1 billion, widening the trade deficit to $3.6 billion from $2.8 billion a year earlier. The import costs look unlikely to fall in the near future while the export earnings show a negative trend.
Thus the widening of the country's external trade deficit particularly due to rise in fuel oil and slow growth of inward remittances amid a cooling global economy along with declining external assistance in foreign currency and alleged outflow of money in foreign exchange ( smuggling out of operation) have ultimately led to the present dollar crunch.
The country's foreign exchange reserve slid to $9.28 billion at the end of November 11, the lowest since August 2009 from $10.34 billion in October due to soaring import costs, mainly of oil. Thus the rise in import cost has also created pressure on the foreign exchange reserve, leading to depreciation of taka against US dollar, fuelling inflationary pressures persistently.
The government's deficit spending already rose to about 19.0 per cent of the total expenditures which was 9.0 per cent in FY 2009-10 and 14.0 per cent in FY 2010-11. But the execution of Annual Development Programme (ADP) is slow though the government borrowing is continuing, resulting in short supply of credits to the private sector for investment. Meanwhile, the double-digit inflation has steped in and if it continues for a long time, it would affect the macro-economic management, undermining the growth prospect of the economy. The situation would raise the cost of doing business and discourage investment and ultimately lead to an increasing rate of inflation.
The western world is awash in debt which can only be serviced by sharp reductions in spending and tax increases. But such measures compound the problems relating to slow economic growth. The slowdown in Europe and the US would mean fewer exports. High unemployment, a burgeoning debt and huge deficits especially in the US, would mean reduced purchasing power which may affect our exports.
Following two years of anaemic and uneven recovery from the global financial crisis, the world recovery is teetering on the brink of another major downturn because of the escalating debt woes on both sides of the Atlantic. Unfortunately, such economic woes that have troubled the world last year are very likely to linger on in the new year. To imagine that Bangladesh could remain immune from these doleful economic surroundings is fanciful.
The global economic depression may last for several years. It requires that efforts should be stepped up to improve competitiveness of our economy in a situation where competition for the minds, the ideas and the resources would otherwise get stiffer. The scope for recovery of the economy is narrowing down dew to the global financial crash; it would take time spreading over few years. If no alternative is found, austerity should become a fact of economic and political life.
According to most of the economists, a mild recession in the region is almost inevitable, while the failure of the government to keep the macro-economic management from going down particularly due to its high borrowing from the banking system may make things even worse. If the government cannot come up with some radical measures to regain discipline about overall publis expenditures, we cannot escape a critical situation of the economy as it would be affected by both, European recession affecting our exports and excess borrowings of the government from the banking system.
Under such a simultaneous pressure, the Bangladesh Bank (BB) is trying to cool down the market by releasing more dollars through public banks to meet the payment of import bills, mostly meant for tooting oil and food import bills. However, it is a short-term prescription. From a macro-economic perspective, an effective policy right now should couple modest fiscal stimulus in the near term, with credible deficit reduction in the long run.
Government should have a pragmatic plan to reduce subsidy, to adopt austerity in public spending, to increase revenues, to stop increasing money supply and to reduce borrowing from the banking system. Necessary steps should be taken to continue adjustment of exchange rate so that the incentives for remittances and exports remain attractive.
We need to be more integrated with the global market, establish rule of law without differentiating between pauper and prince, and enforce discipline and ethics both in the business transactions and among the key position holders in the society, to whom the people look up. Tolerance, accountability, mutual respect, improved governance in a pluralistic society providing the scope for expression diversity of views, and transparency should bear the same meaning in Bangladesh, too. then, we will be able to establish ourselves successfully in the league of respected nations.
The writer who is Executive Vice-president, Islami Bank Bangladesh Ltd., can be reached at E-mail: jabbarcrd@yahoo.com