In a time of economic challenges marked by high inflation and volatile exchange rates, Dr. Atiur Rahman, an esteemed economist and former Governor of Bangladesh Bank, urges policymakers and stakeholders to address the country's macroeconomic concerns with sensitivity and pragmatism. He delves into the impact of these issues on the daily lives of the people and questions whether these challenges are temporary or deeply embedded in the economic psyche.
Mainly due to high inflation and volatile exchange rates, there is a debate between experts and major stakeholders around the macroeconomics of Bangladesh. The effect of these is also felt by the people. Both stress and heat are increasing in their daily life. So it is true that the policymakers have to be more sensitive to face the overall economic challenges of the country.
Certainly, Bangladesh economy has the capability to overcome such challenges. The achievements of Bangladesh cannot also be ignored. Yet, there are concerns. Are these concerns a part of a temporary phase of uncertainty? Or these have been embedded in the people’s psyche. If it is the latter, there is a need for appropriate and immediate look into these concerns that matter to the people. Does that mean that we have not paid enough attention to the structural problems of our economy that have been brewing over time? Or have we missed stepped while facing the global economic challenges that arose due to the war in Ukraine? Or have we misunderstood the mood of the market and annoyed it so much that it is now behaving erratically? Were we prudent enough to respond to the calls of the market sensitivity? Is there nothing to do with our own policy mismatch?
A mighty blue ocean is ahead. Future Bangladesh surely has the ability to cross that. But the huge waves that are hitting the shore at the moment are raising the alarm. But the achievement of Bangladesh is not at all ridiculous.
But why is this concern? Is this bad feeling very temporary? Or is there a real reason for the lingering? Have we not paid enough attention to the structural reforms of our economy? Or in the face of global economic pressure, we have taken a slightly messy step? Understanding the mood of the market, do we hesitate to show prudent policy activity?
The words are right; just the economic crisis outside will not be responsible for our way forward. We must also accept the responsibility that lies with us. Rabindranath Tagore felt this exactly in his letter to "Bataiyoniker Potro" in the "Kalantar" section when he realized that when the water is understood inside the ship's hull, it is only then that the external water becomes an enemy. The water inside is not visible like that, its movement is not so intense, it dies from the impact, not from the blow, and therefore it can be satisfied by blaming the surge and pressure outside, but to die, one day it will come to mind that the real death is in the water inside, it has to be thrown away as soon as possible... Remember that it is not easy to drain the sea, it is easier to drain the water inside the hull.
No doubt, there are certainly still plenty of external barriers to our economy. Fuel oil prices are still increasing. The dollar market is volatile. The price of imported goods is skyrocketing. These are real problems and one cannot just wish these away.
Have we really fired the cannon known to bring inflation down, especially food inflation, which has been bugging our public mind? Have we pulled out the arrows of integrated monetary and fiscal policy from the quiver in time? Have we not been oblivious to the need for serious contractionary policies on both fronts? Have we only tolerated too long the presence of multiple exchange rates divergent from the existing market expectations and thus created ground for a thriving ‘shadow market’ of foreign exchange?
If Sri Lanka and now Turkey have had the guts to hike policy interest rates so much to reduce inflation, why can't we? Isn’t it time to raise the policy rates by a few hundred percentage basis points to tame inflation? It is difficult to give straight answers to these questions. Many structural questions are related to the issue. The issues related to political economy are also pertinent here. I am also aware of the fact that this is an election year and all steps have to be taken with utmost prudence. However, we must also face major problems like inflation and the dollar crisis with the same prudence and care so that people at large do not misunderstand the policymakers.
There is no denying that the foreign exchange market is in doldrums now. Again, this has a deep relationship with the posture of monetary policy. In other words the degree of interest rate flexibility has a direct bearing on the level of foreign exchange volatility. Due to the crisis of the corona pandemic and the war in Ukraine, our prices of imported commodities and services have gone up massively. Our foreign exchange reserves have been depleting consistently due to vast trade deficits mostly created due to disruptions in supply chains and costly US dollar. The fact remains that the import price could not be fully repaid only by export and repatriation income. There has been a persistent gap in the current accounts.
So, Bangladesh Bank has been trying to handle the situation by devaluing the value of Taka. It may be noted that our domestic currency Taka has been devalued nearly 30 percent against the US dollar during the last one year. It, therefore, pushed up prices of imported goods and services. Import duty also increased at almost the same rate with huge implications for the prices of these goods and services. Also the high cost of imported items had cascading effects on the prices of domestically produced goods and services.
Why are our exporters earning less cash despite offering various incentives? Is the significant difference between the official and unofficial exchange rates responsible for this? Does it lead to the perception that the dollar's value will increase in the near future? So, if foreign banks are not interested in bringing the entire amount into the country, isn't it better for them to receive foreign exchange income from other sources rather than cash? Is the exchange rate surge also affecting remittances? Or do many expatriates lack the necessary documentation for their formal work? Could it be that regulatory authorities are subtly obtaining cooperation from banks to monitor all imports, including LCs? Hence, they are going to the shadow market to meet the demand for dollars. What can be done to reduce this demand? Could tightening monetary and fiscal policies be one of the answers to this crisis? Rather than avoiding these questions, it seems that there is no alternative but to engage in discussions with stakeholders about both the positive and negative aspects of these issues.
In this context, there is a need to understand why our exporters are not repatriating the full amount of export earnings from abroad despite so much stimulus being given to them. Is it just because of the bulging difference between the official and unofficial exchange rates or something else related to the flight of capital? All this deserves to be investigated more in-depth and appropriate policy adjustments may have to be made in addition to conventional regulatory monitoring measures. Is it just because of the expectations of rising exchange rate that the exporters are holding their earnings abroad or the foreign banks are not providing enough short term import credit to them due to bad behaviour of some banks who have been failing to pay for their timely settlement of bills? So, is there a real crunch in the import finance by foreign banks?
So they go to the shadow market more in numbers and increase the demand for dollars in that market. The exchange houses of banks are indeed struggling hard to attract the remitters to send money through official channels in this difficult time. So what is the way to reduce this demand for FX in the shadow market? Could monetary policy and fiscal tightening to mop up the additional liquidity from the market be one of the answers to this crisis? It seems to me that there is no alternative but to face these questions squarely. For that matter, the regulators ought to talk with the participants about what is going on in both the official and shadow FX markets. I am happy to note that the central bank has already started mulling this exchange of views with the relevant stakeholders. There is no other way at this juncture of our economic management, I suppose. Rather, we should have started this process of discussion even earlier when the rapid depletion of FX reserves started a couple of years ago.
We must also acknowledge that Bangladesh has been reaping the benefits of import-dependent industrialisation for a long time. If raw materials, intermediate goods and machinery cannot be imported, how can the export industry be kept running? In other words, import is a must for export as well. In this context, import substitution industrialisation also becomes critical as there is a huge domestic demand due to rising income of the various consumer groups in the country.
Bangladesh Bank wisely introduced the special facility for manufacturing industries to settle import prices through OBUs or offshore banking units. But it is necessary to know why the foreign banks are now reluctant to give short-term import loans through their time-tested UPUS letters of credit settlement arrangements. There is an immediate need for intensive talks with foreign banks and their representatives about what went wrong in those arrangements.
After these discission we can make the following propositions:
1. Making general transactions of current account including imports seamless.
2. Giving more policy support to repatriation income and removing any impediments to its transactions.
3. Identifying and taking action against banks that have not paid the import price on time for short-term loans granted by foreign banks. At the same time talking to the representatives of those foreign banks and giving a positive message to remove all obstacles. Monitoring the foreign transaction payment system of our banks is more important than monitoring the exchange rate and import bills.
4. Banks need to be guided and helped instead of panicking in the name of price monitoring of imported products. Those who can afford less will be less likely to join the UPAS system—that message needs to be conveyed.
5. Allowing service sector income to be channeled through banks with tax exemptions and other incentives.
6. Initiatives can be taken to implement dollar-rupee 'swap' arrangements with the Central Bank of India under SAARC Finance.
7. Opening a special credit line of at least two billion dollars for importing fuel oil with multinational organizations like IDB. Saudi Arabia can be discussed for this.
8. Banks with large capital deficits should be stopped for the time being from all major lending activities including import loans. Bangladesh Bank has done so in some cases. This system should be applicable to all weak banks.
9. Every taka spent has some foreign exchange cost attached to it. Therefore, except for the projects that are going to be completed soon, the cost of other development projects should be suspended or slowed down for the time being.
10. Banks are said to be selling dollars at higher prices citing import costs in advance. Rather than looking at it from an administrative point of view, this issue should be seen in light of market-based imbalances of demand and supply and subsequent supportive policy support.
11. In times of crisis there is no substitute for dialogue with stakeholders. It would be wise to keep in constant conversation with those who are aware of this, those who are struggling to deal with this problem, and experienced experts.
I have just provided some advice. In times like these, it is undoubtedly possible to find a way to navigate economic uncertainty by engaging in robust discussions and dialogues with economists, businesspeople, representatives, and foreign bank delegates. I want to remind everyone that over the past decade, despite the continuous global crisis, we have ensured the security of our food supply. The mega infrastructure projects that have been completed recently and those that are almost finished have also enabled significant development in our internal economic activities, in addition to enhancing connectivity in international trade. We have the potential for immense economic success on a collective scale. However, before that, we need to effectively address the existing problems. Issues such as smuggling, lack of governance, and evasion of bad loans need to be acknowledged and collectively discussed for solutions. Remember that we have successfully navigated crises in the past, such as the 2008 economic downturn, by diligently implementing policies and budget coordination, which eventually led to significant inflation reduction within a few years. Why can't we do it now when the footprints of those policies are still present? To achieve this, everyone involved needs to have the mindset of facing the existing reality and working together to overcome it.
The writer is Emeritus Professor at Dhaka University and former Governor of Bangladesh Bank
Messenger/Atiur/Disha
