On deficit and dilemma
Tuesday, 12 April 2011
Abdul Bayesz
After reaching a historic height and claiming a celebration, the foreign exchange reserve situation in Bangladesh is seemingly on its way to a big slide. The current account surplus generated in last few years -- arising mostly out of remittance inflows -- has drastically dwindled. The payment due to the Asian Clearing Union (ACU) may worsen the situation further. The recent import surge has been claiming a huge amount of foreign exchange than before. The shortage of dollar to make imports has been putting a pressure in the market leading to a depreciation of taka and appreciation of import costs. If continued unabated then, along with food inflation, the non-food inflation may go up causing sufferings for the people. By and large, the balance of payment pressure and the perceived consequences have apparently created a 'panic' in the business and banking circles. Ipso facto, it would be pertinent to shed some light on some of the misplaced and misconceived notions regarding balance of payments. From our lessons in international economics, we come to know that a deficit in current account is not always a curse; nor the surplus always breeds blessings. The former may impinge benefits and the latter might claim some costs, at times. However, since the slide in the surplus in current account (choking up surplus) is raising storm over a cup of tea, we shall limit our comments on the issue of hugely growing demand for foreign exchange in the market. And, as readers might get fatigued with figures, we shall try to be qualitative in the total approach. A priori, we can hypothesize that the current deficit is a blessing, not a curse. We can also call it a 'growth-pain'. As an economy experiences a higher rate of growth, some of the side-effects are reflected in terms of inflation and foreign exchange shortage. The Bangladesh economy is expected to reach a growth rate of 6.7 per cent during the current fiscal year. Available indicators so far on agricultural, industrial and services sector show that the economy is poised to achieve the targeted growth rate This necessitates an investment rate of about 27 per cent of our gross domestic product (GDP). To meet this investment target, import payments are likely to shoot up, especially in the face of import-intensive activities. For example: (a) imports of capital machinery and raw materials, needed for running the wheels of the economy, warrant huge imports; (b) if we allow rental power stations, for example, import bill on petroleum would increase, given its price; (c) to keep food inflation low, food grain imports also claim a part of the total import-pie. By and large, if the imports are used for productive purposes, the current pressure may yield short-term pains but bring long-term pleasure in terms of economic growth. Is there any indication to that? The quantum of industrial production index tends to show that it has significantly increased over time, pointing to increased imports being used to grease industrial production. In this context, one can possibly take into due cognizance the concern of the critics: a part of the supply of dollar could have been siphoned-off through over- and under-invoicing of imports and exports. This is an issue of rigorous research that falls outside the purview of the present write-up. The capital account in the balance of payments is called the mirror image of the current account. In other words, a deficitsurplus in the current account is duly matched by the surplusdeficit in the capital account. The moot question is: how much of the on-going current account deficit can be matched by the inflows in the capital account? In the capital account, there are many items but foreign aid and grants is obviously the most important ones. Available estimates show that aid inflow has decreased over the years. This year particularly, the construction of the Padma Bridge will bag in a substantial amount of foreign exchange. If that is so, much of the woes would be waned. However, the million dollar question that continues to hunt is the absorptive capacity of the economy in the utilization of foreign aid. There are many reasons for which aid money can not be utilized on time and for which aid in the pipe line does not get disbursed. First, in funding a project, the requirements from donors' side become time consuming and tedious, taking much longer time than justified. Added to this is the conditionality imposed by the donors and Bangladesh's wrestling in reigning over their demands. The donors must shed their traditional mind-set to help Bangladesh achieve its development goals. The second important constraint is the bureaucratic hurdle. Bangladesh's bureaucracy is infamously known as one of the most inefficient ones in talents, if not in making foreign trips. The bureaucrats sit on file related to development projects causing a dilly-dally. Thus, unless bureaucratic barricades can be bashed, the chances of more aid inflow would remain a remote possibility. Third, donors view that some of the projects are economically unsound and driven by political interests to negate any commitment of disbursement. And finally infrastructural problems and absence of good investment climate constrain inflow of foreign direct investment (FDI) which is another source of supply of foreign exchange. The on-going drive at meeting energy crisis and the reforms at governance should pay a dividend in the medium- to long-run. By and large, given that already a huge amount of foreign exchange is in the pipe line and given that the constraints are reduced to make them available on time, the current crisis in the foreign exchange market is likely to witness a modicum of calm in the very near future. Meantime, the Bangladesh economy would have to pay price in terms of inflation and volatility in the foreign exchange market. But come what may, there is a little chance that the foreign exchange crisis would hit the bottom line when our foreign exchange reserve has to be ready to buy three-months' imports. Meantime, assuming no deep dip in remittances and assuming that imports capital goods and raw materials would enhance export earnings, the 'crisis' may turn into a comfort. Abdul Bayes is a Professor of Economics at Jahangirnagar University. He can be reached at e-mail: aabdulbayes@yahoo.com
After reaching a historic height and claiming a celebration, the foreign exchange reserve situation in Bangladesh is seemingly on its way to a big slide. The current account surplus generated in last few years -- arising mostly out of remittance inflows -- has drastically dwindled. The payment due to the Asian Clearing Union (ACU) may worsen the situation further. The recent import surge has been claiming a huge amount of foreign exchange than before. The shortage of dollar to make imports has been putting a pressure in the market leading to a depreciation of taka and appreciation of import costs. If continued unabated then, along with food inflation, the non-food inflation may go up causing sufferings for the people. By and large, the balance of payment pressure and the perceived consequences have apparently created a 'panic' in the business and banking circles. Ipso facto, it would be pertinent to shed some light on some of the misplaced and misconceived notions regarding balance of payments. From our lessons in international economics, we come to know that a deficit in current account is not always a curse; nor the surplus always breeds blessings. The former may impinge benefits and the latter might claim some costs, at times. However, since the slide in the surplus in current account (choking up surplus) is raising storm over a cup of tea, we shall limit our comments on the issue of hugely growing demand for foreign exchange in the market. And, as readers might get fatigued with figures, we shall try to be qualitative in the total approach. A priori, we can hypothesize that the current deficit is a blessing, not a curse. We can also call it a 'growth-pain'. As an economy experiences a higher rate of growth, some of the side-effects are reflected in terms of inflation and foreign exchange shortage. The Bangladesh economy is expected to reach a growth rate of 6.7 per cent during the current fiscal year. Available indicators so far on agricultural, industrial and services sector show that the economy is poised to achieve the targeted growth rate This necessitates an investment rate of about 27 per cent of our gross domestic product (GDP). To meet this investment target, import payments are likely to shoot up, especially in the face of import-intensive activities. For example: (a) imports of capital machinery and raw materials, needed for running the wheels of the economy, warrant huge imports; (b) if we allow rental power stations, for example, import bill on petroleum would increase, given its price; (c) to keep food inflation low, food grain imports also claim a part of the total import-pie. By and large, if the imports are used for productive purposes, the current pressure may yield short-term pains but bring long-term pleasure in terms of economic growth. Is there any indication to that? The quantum of industrial production index tends to show that it has significantly increased over time, pointing to increased imports being used to grease industrial production. In this context, one can possibly take into due cognizance the concern of the critics: a part of the supply of dollar could have been siphoned-off through over- and under-invoicing of imports and exports. This is an issue of rigorous research that falls outside the purview of the present write-up. The capital account in the balance of payments is called the mirror image of the current account. In other words, a deficitsurplus in the current account is duly matched by the surplusdeficit in the capital account. The moot question is: how much of the on-going current account deficit can be matched by the inflows in the capital account? In the capital account, there are many items but foreign aid and grants is obviously the most important ones. Available estimates show that aid inflow has decreased over the years. This year particularly, the construction of the Padma Bridge will bag in a substantial amount of foreign exchange. If that is so, much of the woes would be waned. However, the million dollar question that continues to hunt is the absorptive capacity of the economy in the utilization of foreign aid. There are many reasons for which aid money can not be utilized on time and for which aid in the pipe line does not get disbursed. First, in funding a project, the requirements from donors' side become time consuming and tedious, taking much longer time than justified. Added to this is the conditionality imposed by the donors and Bangladesh's wrestling in reigning over their demands. The donors must shed their traditional mind-set to help Bangladesh achieve its development goals. The second important constraint is the bureaucratic hurdle. Bangladesh's bureaucracy is infamously known as one of the most inefficient ones in talents, if not in making foreign trips. The bureaucrats sit on file related to development projects causing a dilly-dally. Thus, unless bureaucratic barricades can be bashed, the chances of more aid inflow would remain a remote possibility. Third, donors view that some of the projects are economically unsound and driven by political interests to negate any commitment of disbursement. And finally infrastructural problems and absence of good investment climate constrain inflow of foreign direct investment (FDI) which is another source of supply of foreign exchange. The on-going drive at meeting energy crisis and the reforms at governance should pay a dividend in the medium- to long-run. By and large, given that already a huge amount of foreign exchange is in the pipe line and given that the constraints are reduced to make them available on time, the current crisis in the foreign exchange market is likely to witness a modicum of calm in the very near future. Meantime, the Bangladesh economy would have to pay price in terms of inflation and volatility in the foreign exchange market. But come what may, there is a little chance that the foreign exchange crisis would hit the bottom line when our foreign exchange reserve has to be ready to buy three-months' imports. Meantime, assuming no deep dip in remittances and assuming that imports capital goods and raw materials would enhance export earnings, the 'crisis' may turn into a comfort. Abdul Bayes is a Professor of Economics at Jahangirnagar University. He can be reached at e-mail: aabdulbayes@yahoo.com