On comforts and crises
Tuesday, 3 May 2011
Abdul ayes
There was a time, not long ago perhaps, when the economy had to struggle with too little of foreign exchange reserves (forex for short). The eye was always on the minimum three-month worth of imports. Gone are those days and now the country seems to be well-fed with forex. Bangladesh Bank sources say that, from roughly US$ 6.0 billion in March 2009, the forex reserve rose to about $11 billion on April 12, 2011and perked at $11.3 billion in the most recent periods. It is perhaps the highest ever. One of the important reasons for this upturn could be the efforts at formalizing remittance channels through articulating an arsenal of instruments e.g., approval of 31 exchange houses abroad and 180 drawing facilities. It could also be due to investment-friendly policies. But remittances per se, unless put to productive use or significantly sterilized, could affect inflation via money supply. One must accept the fact that a part of the current inflation owes to increased inflows from remittances of which roughly three-fourths are spent for consumption purposes. The expansionary monetary policy on the heels of economic recession could also have contributed to this. However, as I mentioned earlier in an earlier column, the forex reserve position at certain point of time could be deceptive, if not counter-productive. For example, and as the governor of Bangladesh Bank has rightly put it, the upcoming payment to the Asian Clearing Union (ACU) might put some pressure on the balance. Further, import data tend to show that huge imports on the pipeline on account of capital and intermediate goods, food imports etc., would mount the pressure on the reserve position. To make it sustainable, the government should put an all-out effort in netting-in grants and aid pouring into the pipeline. That in turn, requires proper utilization of the funds allocated under the Annual Development Programme (ADP) and improvement upon governance. But the cloud lurks elsewhere. The global economy is increasingly becoming grim. The rise in food prices is further fueled by a rise in oil prices at the behest of the political crisis in the Middle East and Gulf states. The price of oil could perk at $200 per barrel if the current conundrum continues. The on-going political crisis in the Arab sates might cut Bangladesh in two ways: a rise in oil prices and a fall in remittances. Thus, foreign exchange earnings would dwindle in the wake of rising import bills. The gap would then impact upon the reserves. Thousands of Bangladeshi workers in those countries are reported to be fleeced and fleeing those countries. Although remittance inflow has been showing a positive sign till now, the sustainability of the flow could be threatened in the face of a prolonged stalemate in the region. The earthquake and tsunami in Japan has, to a large extent, jeopardized our aid and assistance from that country - a long- standing donor to our development. The prices of daily necessities are soaring each day. This means, more and more people would loose buying power to fall below the poverty line. The World Bank estimates that millions of people around the globe could be driven towards poverty. A rise in food prices, when food expenditure account for half of the total household expenditure, would limit the capacity of people to save and invest. In a country like Bangladesh where food prices determine political power, the soaring prices of essentials remains at the top of all government agenda. Inflation has been itching every country and Bangladesh is no exception to this. Newspaper reports say that in Vietnam, a country with sufficient food for exports, food inflation has been going up. In a globalised world, countries have to face imported inflation although the "pass-through" effect depends on domestic policies also. Are the prices rising in tandem with world prices and if not why? There is no consolation in arguing that the inflation rate is relatively low in comparison to some other countries as the income and poverty levels are not the same across countries. However, the inflation rate is reported to be 10.49 per cent (till March) -- higher in rural than in urban areas. In other words, pockets of the poor are experiencing more price hike than pockets of the non-poor. High inflation in an economy cuts in two ways: it reduces people's real purchasing power and diverts investible resources of the government to safety-net programmes, thus denying developmental drives. Apparently, Bangladesh Bank (BB) has been judiciously trying to reign in spiky inflation. The money supply at 22 per cent coupled with few quantitative controls (such as use of the Cash Reserve Ratio and the Statutory Liquidity Ratio), the current interest rate and other measures seem to have helped stem the rot to a large extent. There is ample space within the instruments to trim triggering inflation, and BB has to be vigilant. The bottom line is that the era of growth with low inflation seems to be over: high economic growth would be associated with high inflation, and there is a trade-off between inflation and unemployment. We should strive at generating more growth to create employment opportunities for people. The other options of reducing inflation are to increase domestic production of essentials through technological breakthrough and improving marketing infrastructure; rationalisation of duty structure, liberalizing the markets and ensuring a proper investment climate. The challenge is to fight inflation without jeopardizing the growth rate. It is an up-hill task but quite well within the reach of a party with political commitment. The writer is a Professor of Economics at Jahangirnagar University. He can be reached at e-mail:abdulbayes@yahoo.com
There was a time, not long ago perhaps, when the economy had to struggle with too little of foreign exchange reserves (forex for short). The eye was always on the minimum three-month worth of imports. Gone are those days and now the country seems to be well-fed with forex. Bangladesh Bank sources say that, from roughly US$ 6.0 billion in March 2009, the forex reserve rose to about $11 billion on April 12, 2011and perked at $11.3 billion in the most recent periods. It is perhaps the highest ever. One of the important reasons for this upturn could be the efforts at formalizing remittance channels through articulating an arsenal of instruments e.g., approval of 31 exchange houses abroad and 180 drawing facilities. It could also be due to investment-friendly policies. But remittances per se, unless put to productive use or significantly sterilized, could affect inflation via money supply. One must accept the fact that a part of the current inflation owes to increased inflows from remittances of which roughly three-fourths are spent for consumption purposes. The expansionary monetary policy on the heels of economic recession could also have contributed to this. However, as I mentioned earlier in an earlier column, the forex reserve position at certain point of time could be deceptive, if not counter-productive. For example, and as the governor of Bangladesh Bank has rightly put it, the upcoming payment to the Asian Clearing Union (ACU) might put some pressure on the balance. Further, import data tend to show that huge imports on the pipeline on account of capital and intermediate goods, food imports etc., would mount the pressure on the reserve position. To make it sustainable, the government should put an all-out effort in netting-in grants and aid pouring into the pipeline. That in turn, requires proper utilization of the funds allocated under the Annual Development Programme (ADP) and improvement upon governance. But the cloud lurks elsewhere. The global economy is increasingly becoming grim. The rise in food prices is further fueled by a rise in oil prices at the behest of the political crisis in the Middle East and Gulf states. The price of oil could perk at $200 per barrel if the current conundrum continues. The on-going political crisis in the Arab sates might cut Bangladesh in two ways: a rise in oil prices and a fall in remittances. Thus, foreign exchange earnings would dwindle in the wake of rising import bills. The gap would then impact upon the reserves. Thousands of Bangladeshi workers in those countries are reported to be fleeced and fleeing those countries. Although remittance inflow has been showing a positive sign till now, the sustainability of the flow could be threatened in the face of a prolonged stalemate in the region. The earthquake and tsunami in Japan has, to a large extent, jeopardized our aid and assistance from that country - a long- standing donor to our development. The prices of daily necessities are soaring each day. This means, more and more people would loose buying power to fall below the poverty line. The World Bank estimates that millions of people around the globe could be driven towards poverty. A rise in food prices, when food expenditure account for half of the total household expenditure, would limit the capacity of people to save and invest. In a country like Bangladesh where food prices determine political power, the soaring prices of essentials remains at the top of all government agenda. Inflation has been itching every country and Bangladesh is no exception to this. Newspaper reports say that in Vietnam, a country with sufficient food for exports, food inflation has been going up. In a globalised world, countries have to face imported inflation although the "pass-through" effect depends on domestic policies also. Are the prices rising in tandem with world prices and if not why? There is no consolation in arguing that the inflation rate is relatively low in comparison to some other countries as the income and poverty levels are not the same across countries. However, the inflation rate is reported to be 10.49 per cent (till March) -- higher in rural than in urban areas. In other words, pockets of the poor are experiencing more price hike than pockets of the non-poor. High inflation in an economy cuts in two ways: it reduces people's real purchasing power and diverts investible resources of the government to safety-net programmes, thus denying developmental drives. Apparently, Bangladesh Bank (BB) has been judiciously trying to reign in spiky inflation. The money supply at 22 per cent coupled with few quantitative controls (such as use of the Cash Reserve Ratio and the Statutory Liquidity Ratio), the current interest rate and other measures seem to have helped stem the rot to a large extent. There is ample space within the instruments to trim triggering inflation, and BB has to be vigilant. The bottom line is that the era of growth with low inflation seems to be over: high economic growth would be associated with high inflation, and there is a trade-off between inflation and unemployment. We should strive at generating more growth to create employment opportunities for people. The other options of reducing inflation are to increase domestic production of essentials through technological breakthrough and improving marketing infrastructure; rationalisation of duty structure, liberalizing the markets and ensuring a proper investment climate. The challenge is to fight inflation without jeopardizing the growth rate. It is an up-hill task but quite well within the reach of a party with political commitment. The writer is a Professor of Economics at Jahangirnagar University. He can be reached at e-mail:abdulbayes@yahoo.com