Time for austerity to get over present crisis
Wednesday, 20 February 2008
Syed Fattahul Alim
THE status of balance of payment (BoP) of an economy is an important indicator of its overall health. A deficit position of BoP for an economy means that it has spent more than it has earned in terms of its economic transaction with other countries at the end of the day. In that case, the economy in question becomes a net debtor. This is a serious matter for an economy whose fundamentals are not very strong. That is because, if an economy has enough internal strength resting on robust industrial, service and farming sectors, it is not hard to repay any debt accruing from its economic transactions with other nations.
The United States of America, for example, is the richest and strongest economy on earth. But at the same time, it is also the most indebted country, if only for its highly negative balance of payment with the rest of the world. Nevertheless, despite its huge gap in BoP, America, to all intents and purposes, appears to be least bothered about it. However, the same is not true, if the economy is a least developed one or what may also be called a least developed country (LDC) like Bangladesh. For it has few internal resources to fall back upon in times of need, especially for repaying any debt resulting from net deficit in its balance of payment.
Bangladesh has of late been importing huge quantities of food grains and other food related items in order to meet shortage. The food grain shortage as everyone knows had to do with the two floods that struck the country with one following close at the heels of another thereby dashing the still flickering hope of the poor farmers in the countryside. The floods damaged the standing crops on vast swathes of croplands across the country. And as if that was not enough, the last knockout punch was delivered by the devastating cyclone Sidr. It literally blew away the last hope of the poor farmers of the affected areas, which are also situated in the rice growing districts. It is therefore not any surprise that unlike other years, this time the country had to go for massive import of food grain from abroad. The soaring price of food items in the international market has further compounded the problem for hard-cash-poor Bangladesh.
As a result, the country's foreign currency reserve has been getting depleted. Such over-expenditure of the foreign exchange reserve due to increased food grain import could not keep pace with the exports to overseas markets and the remittances from the expatriate wage earners. The main hard cash earning industry, the Readymade Garment (RMG), is yet to fully recover from the wounds inflicted by the recent labour unrest and instabilities created during the immediate past political government. But food grain import is also not the main reason for the increased pressure on the forex reserve. Fuel oil whose price in the international market has meanwhile had posted an all time high record around US$100 a barrel is another factor that contributed to the predicament. For Bangladesh has to provide huge subsidy against the import bill of fuel oil in order to avert its multiplier effect on the economy.
Apart from its cost-pushing impact on power generation, industrial production, transport and public utilities, the knock-on effects of increased oil price can also deliver a blow to agriculture. Under any circumstances, the government has to keep the price of diesel lower to keep it within the reach of the farmers in the countryside. But there are also the other inputs like fertiliser which is also a big candidate for government subsidy. The government, therefore, is hard pushed to meet the demands of all these sectors from its limited earning from exports and remittances. On this score, the government had more than once spurned the pressures from the donor agencies to withdraw subsidies on fuel oil. The Asian Development Bank (ADB) team during its recent visit has again advised the government to go for further raise of the oil price. The finance adviser has assured the public that the government is not considering the option shortly.
How would the economy stand this multi-pronged attack on its only sliver of hope that has been the foreign exchange reserve? A recent report in the media has detailed the BoP position of the country against the backdrop of increased food, fertiliser and oil import in recent times. The quarterly report of the Bangladesh Bank says that in the second quarter of the current fiscal year, the deficit in the BoP reached US$63 million between the months of October and November only, whereas the forex reserve enjoyed a surplus of around US$203 million in the previous quarter. But the trend is far from sporadic. The downslide is continuing due to enhanced import of food grains, particularly rice. As for instance, in the first seven moths of the current fiscal, that is between July 2007 and January 2008, the country had to import 1.61 million tonnes of rice worth US$455 million dollars as against an import of around 200 thousand tons of rice imported during the same period in the previous fiscal. Put differently, it is a volume of rice import which is about eight times more than what it was in the fiscal that was.
But that is also not the end of the story. In the same period, different importers have already opened letters of credit (L/Cs) for about 2.2 million tons of rice compared to only about 0.29 million tons in the previous fiscal. To pile on the worry, the import of wheat, of which the price did also show an extraordinary (150 per cent) rise, has also increased phenomenally in the period under review with a proportionate rise in the volume of L/Cs for additional import of the same. As if not to lag behind, imports of edible oil (its price in the local market shooting up by 100 per cent recently) and chemical fertilisers have also joined the race to test the strength of the balance of payment position of the economy.
The consequence of these additional burden on the foreign currency reserve has already been telling. In the first five months of the current fiscal, balance of trade, which maintains the tradition of being on the negative side, has dipped as by US$2.9 billion compared to US$1.6 billion in the previous fiscal. What is of further concern is the foreign currency reserve will have to brace for a bigger shock once the government pays the Asian Clearing Union (ACU) to the tune of US$600 million on account of the bill of imports. After payment of this bill, the foreign exchange reserve will slide much below its rather comfortable level at US$5.44 billion at the moment.
The plunge in the forex reserve will continue with fresh imports and subsidies unless the situation is offset by enhanced export and flow of remittance and even with the help of foreign grants and loans, if available. As one cannot force foreign remittance at an augmented level, nor can the volume of export be raised to a higher level within a short time, the options to restock the diminishing forex reserves are but few. So, unless any miracle is round the corner as a deliverer, the government might well put a temporary brake on imports that include luxury goods as well as others for which one can wait for a while until the present time of contingency is over. For this is exactly the moment that calls for some patience and sacrifice from the public in general.
THE status of balance of payment (BoP) of an economy is an important indicator of its overall health. A deficit position of BoP for an economy means that it has spent more than it has earned in terms of its economic transaction with other countries at the end of the day. In that case, the economy in question becomes a net debtor. This is a serious matter for an economy whose fundamentals are not very strong. That is because, if an economy has enough internal strength resting on robust industrial, service and farming sectors, it is not hard to repay any debt accruing from its economic transactions with other nations.
The United States of America, for example, is the richest and strongest economy on earth. But at the same time, it is also the most indebted country, if only for its highly negative balance of payment with the rest of the world. Nevertheless, despite its huge gap in BoP, America, to all intents and purposes, appears to be least bothered about it. However, the same is not true, if the economy is a least developed one or what may also be called a least developed country (LDC) like Bangladesh. For it has few internal resources to fall back upon in times of need, especially for repaying any debt resulting from net deficit in its balance of payment.
Bangladesh has of late been importing huge quantities of food grains and other food related items in order to meet shortage. The food grain shortage as everyone knows had to do with the two floods that struck the country with one following close at the heels of another thereby dashing the still flickering hope of the poor farmers in the countryside. The floods damaged the standing crops on vast swathes of croplands across the country. And as if that was not enough, the last knockout punch was delivered by the devastating cyclone Sidr. It literally blew away the last hope of the poor farmers of the affected areas, which are also situated in the rice growing districts. It is therefore not any surprise that unlike other years, this time the country had to go for massive import of food grain from abroad. The soaring price of food items in the international market has further compounded the problem for hard-cash-poor Bangladesh.
As a result, the country's foreign currency reserve has been getting depleted. Such over-expenditure of the foreign exchange reserve due to increased food grain import could not keep pace with the exports to overseas markets and the remittances from the expatriate wage earners. The main hard cash earning industry, the Readymade Garment (RMG), is yet to fully recover from the wounds inflicted by the recent labour unrest and instabilities created during the immediate past political government. But food grain import is also not the main reason for the increased pressure on the forex reserve. Fuel oil whose price in the international market has meanwhile had posted an all time high record around US$100 a barrel is another factor that contributed to the predicament. For Bangladesh has to provide huge subsidy against the import bill of fuel oil in order to avert its multiplier effect on the economy.
Apart from its cost-pushing impact on power generation, industrial production, transport and public utilities, the knock-on effects of increased oil price can also deliver a blow to agriculture. Under any circumstances, the government has to keep the price of diesel lower to keep it within the reach of the farmers in the countryside. But there are also the other inputs like fertiliser which is also a big candidate for government subsidy. The government, therefore, is hard pushed to meet the demands of all these sectors from its limited earning from exports and remittances. On this score, the government had more than once spurned the pressures from the donor agencies to withdraw subsidies on fuel oil. The Asian Development Bank (ADB) team during its recent visit has again advised the government to go for further raise of the oil price. The finance adviser has assured the public that the government is not considering the option shortly.
How would the economy stand this multi-pronged attack on its only sliver of hope that has been the foreign exchange reserve? A recent report in the media has detailed the BoP position of the country against the backdrop of increased food, fertiliser and oil import in recent times. The quarterly report of the Bangladesh Bank says that in the second quarter of the current fiscal year, the deficit in the BoP reached US$63 million between the months of October and November only, whereas the forex reserve enjoyed a surplus of around US$203 million in the previous quarter. But the trend is far from sporadic. The downslide is continuing due to enhanced import of food grains, particularly rice. As for instance, in the first seven moths of the current fiscal, that is between July 2007 and January 2008, the country had to import 1.61 million tonnes of rice worth US$455 million dollars as against an import of around 200 thousand tons of rice imported during the same period in the previous fiscal. Put differently, it is a volume of rice import which is about eight times more than what it was in the fiscal that was.
But that is also not the end of the story. In the same period, different importers have already opened letters of credit (L/Cs) for about 2.2 million tons of rice compared to only about 0.29 million tons in the previous fiscal. To pile on the worry, the import of wheat, of which the price did also show an extraordinary (150 per cent) rise, has also increased phenomenally in the period under review with a proportionate rise in the volume of L/Cs for additional import of the same. As if not to lag behind, imports of edible oil (its price in the local market shooting up by 100 per cent recently) and chemical fertilisers have also joined the race to test the strength of the balance of payment position of the economy.
The consequence of these additional burden on the foreign currency reserve has already been telling. In the first five months of the current fiscal, balance of trade, which maintains the tradition of being on the negative side, has dipped as by US$2.9 billion compared to US$1.6 billion in the previous fiscal. What is of further concern is the foreign currency reserve will have to brace for a bigger shock once the government pays the Asian Clearing Union (ACU) to the tune of US$600 million on account of the bill of imports. After payment of this bill, the foreign exchange reserve will slide much below its rather comfortable level at US$5.44 billion at the moment.
The plunge in the forex reserve will continue with fresh imports and subsidies unless the situation is offset by enhanced export and flow of remittance and even with the help of foreign grants and loans, if available. As one cannot force foreign remittance at an augmented level, nor can the volume of export be raised to a higher level within a short time, the options to restock the diminishing forex reserves are but few. So, unless any miracle is round the corner as a deliverer, the government might well put a temporary brake on imports that include luxury goods as well as others for which one can wait for a while until the present time of contingency is over. For this is exactly the moment that calls for some patience and sacrifice from the public in general.