Economy bears the brunt of flawed policies

The entire economy is paying the price for artificially holding onto the dollar rate. Bangladesh Bank had held on to the dollar rate for many years. However, when the economy faced a crisis and dollar earnings fell, Bangladesh was at a loss about how to tackle the situation. The impact of the dollar crisis is being felt throughout the economy.

As a result, government transactions have seen record deficit, foreign exchange reserves plummeted, the debt repayment costs increased, the fuel crisis emerged and the pressure of inflation has reached unbearable heights.

Flowed economic policies have intensified the crisis. As a result, the high growth which was achieved through the stabilisation of macroeconomy, is also under threat.

According to experts, the government now must prioritise restoring macroeconomic stability. Instead, the government is displaying more interest in increasing growth. This is intensifying the crisis further

How the crisis began

The global economic crisis was sparked off after the outbreak of the Covid-19 pandemic. This pandemic continued for two years before the situation gradually came under control. In early 2022, when the world was getting ready to revive the economy, the Russian invasion of Ukraine took place. Consequently, the supply chain broke down resulting in the increase of the prices of food, fuel, fertilizer and all sorts of products.

The dollar is bought and sold the most in the world. The value of the dollar escalated and so did inflation. In order to reduce inflation, the Federal Reserve, or the Fed, which is the central banking system of the US, started to raise interest rates aggressively.  That forced further rise in the dollar rate. As a result, those who did not have fuel in their export list faced the biggest crisis.

Bangladesh faced a similar crisis. Dollar rates went up, earnings went down. Commodities had to be imported at high prices. The fuel crisis intensified. The high price of imports increased the pressure of inflation. Despite this situation, Bangladesh did not follow the basic principles of economy and rendered the monetary policy ineffective. As a result, the inflation is now nearing 10 per cent.

The credit rating agency Moody’s has downgraded Bangladesh’s credit rating.

Control of exchange rates

Bangladesh took up the policy of floating exchange rates in 2003 but this was never entirely let it to market completely. Bangladesh imports more than it exports. The exchange rate was controlled to give the importers an edge. Then again, there were political motives too behind projecting the taka as powerful.

At the end of June 2012, the exchange rate of taka against dollar was Tk 81.87. The rate increased to Tk 84.80 at the end of June 2021. The taka was devalued only by 3.58 per cent in those nine years. The Indian rupee was devalued by 32 per cent during this period. As former US president Donald Trump commenced the trade war with China, the latter devalued the yuan by a wide margin to hold on to its export market. Although Bangladesh’s trade competitors followed the same policy, Bangladesh held on to the price of taka artificially. But that could not be sustained in the end. During a crisis period of the economy, it had to be devalued significantly.

Currently the dollar exchange rate is Tk 108. According to Bangladesh Bank, the taka was devalued by 9.25 per cent in the fiscal 2021-22 while by 12.66 per cent in the fiscal 2022-23 so far. In this period the rupee was devalued by 5.82 and 3.47 respectively. As a result, India did not have to face a huge crisis with dollar rates and inflation.

The discrepancy in exchange rates is still not resolved. There are four exchange rates in the country currently. Some problems have been resolved, but not all. As a result, neither is the unofficial money transfer ‘hundi’ being reduced, nor is money laundering through exports and imports being stemmed.

Crisis in government’s financial estimation

Due to the dollar crisis, growth in import costs increased by 36 per cent in the fiscal year 2021-22. At the same time the remittance decreased by 15.12 per cent. As a result, the current account deficit was a record Tk 18.69 billion. During the same period the overall balance of payment deficit was Tk 6.37 billion. Bangladesh never saw such a big deficit since 2009. In the fiscal 2022-23 till March, the overall balance of payment deficit rose even more to Tk 8.16 billion.

Low foreign investment, the pressure of repaying private sector foreign loans and non-renewal of short-term loans, have caused a deficit of USD 2.21 billion according to government estimation. That means a much greater amount of dollars is going overseas than coming in. Generally financial deficit hardly takes place. The last financial deficit in the country occurred in the fiscal year 2011-12 with USD 955 million. So, even this sector is going to set a new record. Failing to reduce this financial deficit will continuously deplete forex reserves.

On the other hand, Bangladesh Bank had to release dollars from its reserve to the market to keep up the supply. During the last fiscal year, the central bank released USD 7.81 billion and sold further USD 11.73 billion till April of the current fiscal year. As a result, the country’s reserve is reduced to USD 29.91 billion, which was USD 42.20 billion even a year ago. That means the reserve fell by 29 per cent in just one year.

Prices fall in the global market

The current inflation rate of around 10 per cent is the highest in the last 11 years. The government is talking about reducing it, but is not taking any effective measures.

The price hike of fuel after Ukraine war was one of the main reasons for inflation. In April 2020 the price of one barrel oil was USD 20 but it was increased to USD 123.21 in May 2022. When Bangladesh increased oil prices by 42 to 51 per cent in the first week of August last year, the oil price was USD 100.3 in the world market. That rate is reduced to USD 76.29 now.

Meanwhile, the United Nation’s Food and Agriculture Organization (FAO) on 2 June said, over the last year the food price index in the world market was reduced by 20 per cent. This index rose to its highest in May last year. Wall Street Journal said in an article, the governors of the central banks throughout the world have a new tool. The previous one was reducing the interest rates. The Bangladesh government is claiming its inflation as imported, but the reduction of prices in the world market does not bring any benefit here. One of the main reasons is adopting flawed policies.

How to reduce inflation

Bangladesh Bank governor Abdur Rouf Talukder said the forthcoming monetary policy will reduce inflation, when he was asked about this at a post-budget press conference on 2 June.

The countries which could apply the monetary policies successfully could control the inflation. Almost every central bank governor around the world reduced money supply by following the fundamentals of economics. The main tool here is increased interest rates.

They increased the policy interest rates to give market a signal that loan must be made costly so the monetary supply is curbed. Bangladesh Bank increased the policy interest rate but this has no relation with the credit interest rate. The credit interest rate is kept at nine per cent basically to please the businessmen. Bangladesh Bank accrued the same amount of taka by selling dollars in the market but it had very little impact. Rather, the government is unwilling to control inflation by reducing money supply. So, there is no such signal in the market. As a result, the experts think the new monetary policy will have no impact. Inflation is higher than credit rate now, so the inexpensive loan is increasing bank defaulters and also creating inflation. The International Monetary Fund ((MF) through their terms and conditions, is asking Bangladesh to leave the interest rate and exchange rate according to the market. But experts think it is way too late now.

Did the expatriates not remit dollars? They must have. They sent dollars through hundi at the rate of Tk 114-115. And exporters saw they would get one taka more if they wait just for a month

Zahid Hussain, former lead economist, World Bank Dhaka office

Apprehensions about production

Government control has reduced imports. A World Bank publication said on Wednesday, this resulted in a reduced supply of raw materials. Former South Asia chief economist of the World Bank, Sadiq Ahmed, showed through research that the big reason for Bangladesh’s growth accelerating from 2014 to 2019, was an increase of imports by eight per cent. As the import is reduced, the overall growth will be reduced too.

There is a serious fuel crisis in the country currently. This too is from flawed policy. In 2015 even the government sources said gas reserves of the country are diminishing. There was talk of the import of Liquefied Natural Gas (LNG). The power sector thus completely became dependent on imports. So, when fuel prices increased following the Ukraine war, the situation became critical. Coal could not be purchased due to shortfall in dollars, diesel-run power plants had to be stopped, the LNG market could not be penetrated due to prices, and Bangladesh even failed to pay the gas price. Meanwhile, the price of electricity and gas was increased. Production costs were increased but power is not available even at increased costs.

Zahid Hussain, the former lead economist of the World Bank’s Dhaka office, said to Prothom Alo, “The main crisis is the dollar crunch. Fuel could be purchased if dollars were available. Production could be maintained by importing raw materials. This would reduce the pressure on inflation. So, the ease of the crisis depends mainly on the dollar.

How can the dollar problem be solved? Zahid Hussain said, “The government is controlling demand to mitigate the dollar crisis. This technique may work temporarily, but we now see the result of controlling the demand month after month.”

Zahid Hussain further said, look at the result of controlling monetary exchange rates. Exports were not that bad in the last few months.  But dollars were not earned in that proportion. Moreover, not as much remittance has arrived as the volume of people working abroad. Did the expatriates not remit dollars? They must have. They sent dollars through hundi at the rate of Tk 114-115. And exporters saw they would get one taka more if they wait just for a month. If someone brings in USD 10 million, they would get Tk 10 million more. The government is raising the dollar rate regularly and this creates expectations among the exporters.  If the dollar rate would be left to the market, this expectation would not have been created and exporters would bring dollars in to the country right after the exports.

According to Zahid Hussain, the dollar price should be left to the market. This was not done in fear of rising inflation. But that could not be halted. Even the dollar crisis could not be averted. That means both sides are lost. If the dollar price is left to the market, it would lead to resolving both the inflation and the fuel crisis. If this is not done, it will be extremely difficult to find the solution to the crisis.

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