The greenback crisis and beyond
Monday, 9 January 2012
Shamsul Huq Zahid
One wonders why the government these days is showing unusual boldness in the matters of hiking the power tariff and fuel oil prices and lifting cap on lending rates by banks. It has been taking decisions one after another knowing full well those would draw flaks from all quarters barring the multilateral lenders particularly when a double-digit inflation is hitting the consumers below their belts.
In fact, many tend to consider that all the unpalatable decisions relating to power tariff and fuel oil prices are aimed at appeasing the multilateral lenders; for the government desperately needs substantial volume of aid money to supplement its fast dwindling international reserve and also to overcome the problems with budgetary resources.
The government, it seems, is now desperate to secure at least $1.0 billion from the International Monetary Fund (IMF) as 'Extended Credit Facility (ECF)'. During negotiations between the IMF and the government on the availability of the ECF, the former attached a number of tough conditions, including the reduction of subsidy given to the Bangladesh Power Development Board and the Bangladesh Petroleum Corporation through upward adjustment of power tariff and fuel oil prices. It also wanted the central bank to allow the banks to fix market-based interest rates on their lending.
The incumbent government which appeared unwilling to succumb to IMF suggestions even some months back is now extremely eager to implement the same. However, the change of mind of the government has not been without any reason.
The international reserve situation if seen in the context of its soaring import bills of the country is not at all comfortable. The development has resulted in the scarcity of the greenback in the market. The central bank is not in a position to beef up the supply of the US dollar either. Against this backdrop, the taka has been losing its value against the green back for more than a year and the pace of which of late has become only faster.
The effect of the greenback becoming costlier by a big margin against the taka at a time when the price inflation is high does not require any elaboration. One US dollar now costs nearly Taka 84 in the kerb market. The market is rife with speculation that the rate might hit taka 100 soon. It does not require one to be a rocket scientist to imagine the impact of such erosion in the value of the currency on the price situation in a country which is largely dependent on import of essential goods, capital machinery and industrial raw materials.
There is no denying that before the recent upward revision, there existed wide gap between the cost of procurement and the selling price of both power and fuel oils. The gap still exists and the finance minister the other day made it clear that the upward price adjustments would continue during the next three years.
It is also true that the government's decision to generate more power through the installation of liquid fuel-based rental and quick rental power plants as a quick-fix solution to the nagging power crisis has only exacerbated the resource-related problems for the government.
The government's reserve-related woes would not have been that serious now had the growth in export and remittance inflow maintained the levels of the immediate past years. However, the government has no control over the demand for our manpower as the economic health of the recipient countries largely determines the same.
But the government could have avoided the difficult situation it is facing now with the international reserve had it been particularly attentive to the execution of donor-funded development projects. While the policymakers are burning midnight oil to find ways to appease the IMF in its bid to secure $1.0 billion worth of ECF, project assistance worth over $13 billion has remained unutilised in the pipeline. According to a newspaper report, the incumbent government has shown unusual incompetence in the use of foreign aid. During the past three years, project aid worth over $5.0 billion remained unutilised, leading to further swelling of the aid pipeline.
And the ongoing fiscal is considered the worst year as far as aid utilisation is concerned. Since the implementation of aid-financed development projects has worryingly declined this fiscal, the Planning Commission has reportedly decided to reduce the allocation of foreign aid to the development budget by around 23 per cent.
The prevailing situation demands early availability of sizeable funds from the multilateral donors. But the government cannot remain oblivious of the need for expediting the donor-funded development projects for the sake of growth and employment generation. This in all likelihood would also help ease the scarcity of greenback in the market, to some extent.
Zahidmar10@gmail.com
One wonders why the government these days is showing unusual boldness in the matters of hiking the power tariff and fuel oil prices and lifting cap on lending rates by banks. It has been taking decisions one after another knowing full well those would draw flaks from all quarters barring the multilateral lenders particularly when a double-digit inflation is hitting the consumers below their belts.
In fact, many tend to consider that all the unpalatable decisions relating to power tariff and fuel oil prices are aimed at appeasing the multilateral lenders; for the government desperately needs substantial volume of aid money to supplement its fast dwindling international reserve and also to overcome the problems with budgetary resources.
The government, it seems, is now desperate to secure at least $1.0 billion from the International Monetary Fund (IMF) as 'Extended Credit Facility (ECF)'. During negotiations between the IMF and the government on the availability of the ECF, the former attached a number of tough conditions, including the reduction of subsidy given to the Bangladesh Power Development Board and the Bangladesh Petroleum Corporation through upward adjustment of power tariff and fuel oil prices. It also wanted the central bank to allow the banks to fix market-based interest rates on their lending.
The incumbent government which appeared unwilling to succumb to IMF suggestions even some months back is now extremely eager to implement the same. However, the change of mind of the government has not been without any reason.
The international reserve situation if seen in the context of its soaring import bills of the country is not at all comfortable. The development has resulted in the scarcity of the greenback in the market. The central bank is not in a position to beef up the supply of the US dollar either. Against this backdrop, the taka has been losing its value against the green back for more than a year and the pace of which of late has become only faster.
The effect of the greenback becoming costlier by a big margin against the taka at a time when the price inflation is high does not require any elaboration. One US dollar now costs nearly Taka 84 in the kerb market. The market is rife with speculation that the rate might hit taka 100 soon. It does not require one to be a rocket scientist to imagine the impact of such erosion in the value of the currency on the price situation in a country which is largely dependent on import of essential goods, capital machinery and industrial raw materials.
There is no denying that before the recent upward revision, there existed wide gap between the cost of procurement and the selling price of both power and fuel oils. The gap still exists and the finance minister the other day made it clear that the upward price adjustments would continue during the next three years.
It is also true that the government's decision to generate more power through the installation of liquid fuel-based rental and quick rental power plants as a quick-fix solution to the nagging power crisis has only exacerbated the resource-related problems for the government.
The government's reserve-related woes would not have been that serious now had the growth in export and remittance inflow maintained the levels of the immediate past years. However, the government has no control over the demand for our manpower as the economic health of the recipient countries largely determines the same.
But the government could have avoided the difficult situation it is facing now with the international reserve had it been particularly attentive to the execution of donor-funded development projects. While the policymakers are burning midnight oil to find ways to appease the IMF in its bid to secure $1.0 billion worth of ECF, project assistance worth over $13 billion has remained unutilised in the pipeline. According to a newspaper report, the incumbent government has shown unusual incompetence in the use of foreign aid. During the past three years, project aid worth over $5.0 billion remained unutilised, leading to further swelling of the aid pipeline.
And the ongoing fiscal is considered the worst year as far as aid utilisation is concerned. Since the implementation of aid-financed development projects has worryingly declined this fiscal, the Planning Commission has reportedly decided to reduce the allocation of foreign aid to the development budget by around 23 per cent.
The prevailing situation demands early availability of sizeable funds from the multilateral donors. But the government cannot remain oblivious of the need for expediting the donor-funded development projects for the sake of growth and employment generation. This in all likelihood would also help ease the scarcity of greenback in the market, to some extent.
Zahidmar10@gmail.com