280Published on August 4, 2022
Dr. Atiur Rahman:
Like many other emerging economies, Bangladesh is also a victim of the global economic crisis. As indicated by the World Economic Outlook of the IMF, a fear of global recession coupled with rising inflation has been looming large leading to unprecedented financial turbulences across the board. When the world economy was trying to recover from the economic slowdown forced by the pandemic, it confronted severe supply chain disruptions. And then came the Russia-Ukraine war out of blue creating further risks of supply chain disruptions.
The sudden imposition of sanctions on the tested payment system made trade finance not only difficult but also pushed up more disruptions of supply chains. There is still the risk of sanctions against shipping lines delivering Iranian and Russian oil which may further escalate the prices of the vital input with huge implications for imported inflation. The world economy was already awash with a liquidity glut created in response to addressing the global financial crisis in 2008-09 and it further witnessed pumping in of unbelievable amount of liquidity to cope with the challenges of economic slowdown, a fallout of covid-19.
Since nobody knew about the breadth and depth of the pandemic in addition to when this will come to an end, the global response of expansionary monetary and fiscal policy was perhaps fine at that moment. The central banks of the developed countries led by the Federal Reserve, however, suddenly started tightening their monetary policies to avoid an embedded expectation of a high rate of inflation which has already crossed nine percentage points in the US, UK, and Europe. In particular, the Fed became very aggressive in raising rates of interest to contain inflation which was going out of control. This was followed by most other western central banks to contain the weakening of the home currencies. Even the European Central Bank resorted to raising its rate after about twelve years.
The Bank of Japan, however, has not yet rallied with other developed central banks and did not touch the interest rate which is still either zero or below at a huge cost of fast erosion of the value of the Yen against US dollars. Most other central banks of the emerging markets also have started raising their rates, though not that aggressively. Simultaneously, they have started depreciating their home currencies to stop the tide of outflow of the dollar-denominated investments in their frontier and emerging markets.
It may be noted here that cross-border outflows by international investors in Emerging Markets stocks and domestic bonds amounted to about 38 billion US dollars during the last five months, says Jonathan Wheatley of the Financial Times. What is more worrying is that these outflows are not region specific. It seems the wildfire is spreading over all regions leaving not much room for compensating one region with the other on balance. Bangladesh is not an outlier either in this external economic landscape. However, it was able to navigate smartly and effectively out of the muddy ground created due to the 2008-09 global financial crisis by quickly undertaking inclusive, resilient, and sustainable developmental central banking and as well as a socially responsive fiscal policy supporting the ‘investment in people strategy’ including better and larger social protection initiatives. However, some of these hard-earned gains have now been challenged by the ongoing global economic crisis creating some uncertainties and instabilities, particularly in the external economy.
Due to the factors mentioned above, there has been pressure on Taka which Bangladesh Bank has been trying to defend by selling built-up reserves. However, the demand for the greenback has been so high that Taka had to be allowed to slide down to maintain macroeconomic stability. This is a familiar strategy followed by most economies of the emerging markets. Our nearest neighbor India did the same by shedding dollars from its heap of reserves to stabilize the exchange rate. Yet, like Bangladesh Taka Indian Rupee lost ground against US dollars by about nine to ten percent. The Sri Lankan and Pakistan currencies could not give a fight like India and Bangladesh due to their meager foreign exchange reserves. It is difficult to say what will be the turn of events in the global financial ecology which hangs on the balance for many embroiled economies like that of Sri Lanka and Pakistan. The Chinese financial system is also under stress, thanks to the reappearance of the pandemic along with lockdowns and limited capacity of its banks to refinance loans in emerging markets. So, the world may not have the benefit of the Chinese drive to recovery in other developing countries like it was seen during the last global financial crisis.
The major concern right at this moment is how to stabilize the exchange rate of a home currency against US dollar which has been getting bullish every day. This is reflected in the Wall Street Journal Dollar Index which measures the dollar against sixteen currencies put in a basket. This index has gone up by 13 percent during the last year. It is believed that the US dollar will continue its bull run through the year-end. Many currencies in the emerging markets will continue to suffer due to psychological and speculative reasons even if the macroeconomic fundamentals of those sovereigns are quite strong. If people in general and economic agents start believing that their currencies may not be defended as the central banks do not have enough foreign exchange reserves. Then they tend to go for dollarization of their domestic assets and contribute further towards the depreciation of their own currencies. Hence, the ill design of speculators ought to be killed by decisive action by the central bank preferably by invoking appropriate economic solutions in addition to complementary supervisory actions. For example, despite a persistent current account surplus, the Turkish lira could not be defended by selling foreign exchange from the reserves as the central bank remains reluctant to raise interest rates requiring a high fiscal cost. Indeed, the downslide of the home currencies will be difficult to be arrested unless policymakers go by the rules of good economics. The flexibility in foreign exchange rate must by simultaneously accompanied by the same in the interest rate of deposits and loans to gain macroeconomic stability. There is a need for walking on two legs to ensure macroeconomic stability.
Given this broad perspective of the global situation, let me come back to Bangladesh’s response to this global economic crisis. Bangladesh moved fast to address the trade deficit issue which went up to thirty-plus billion US dollars by suppressing import of 27 luxury and unnecessary imports through both raising tariffs and increasing letter of credit margins. This regulatory push is apparently working in reducing the dollar bills, though gradually. This came down to about six billion US dollars in June compared to 6.5 billion USD in April. We should continue to press hard on this strategy until we have a more favorable balance of trade. BB and NBR should continue to monitor more in-depth to see that all the regulations are complied with. Once the trade deficit is reduced, the current account deficit will also reduce releasing some pressure on the overall balance of payments which erodes reserves.
While depressing unnecessary imports for the rest of this year, the policymakers should focus more on how to increase exports and remittances to improve the current account balance. Fortunately both export and remittance are improving following flexible exchange rate adjustments driven by the market imperatives. For that matter, both the central bank and the government should be well advised to at the least continue the incentives given to both exporters and remitters, if they cannot enhance them, even if marginally. Bangladesh Bank has already taken some strategic moves to ease the opening of Foreign Currency accounts for non-resident Bangladeshis. These FC accounts should be made more user-friendly so that NRBs can use the interests in Taka in Bangladesh and take back the principal whenever they wish. There is still room to further ease the payment system using digital financial systems like MFS and Agent Banking so that remitters can send money digitally from their workplaces. Also, the richer NRBs should be encouraged to invest digitally in Bangladesh Foreign Exchange Bonds at a higher return. Bangladesh Bank should work more closely with the Ministry of Finance to get more inflows from the developed world by making the investment ecology paperless and attractive.
Some people are doing a great disservice to the nation by undermining the image of the government which is nowhere near the indebtedness of Sri Lanka or Pakistan. The foreign debt to GDP in Bangladesh is 19.5% now compared to 104% in Sri Lanka. The total debt to GDP in Bangladesh is about 40% compared to 119% in Sri Lanka. And most of these debts are publicly taken from multi-lateral agencies. The private commercial loans are not that high. But we ought to be careful about such loans as debt problems originate mostly from such loans. Yet, it is painful to see noted economists spreading panic with ‘doomsday’ predictions like an astrologer that our debt repayment structure will collapse in 2024-26. Will the economy stand still in the next few years or contract drastically so that it will not be able to repay the loans that are mostly long-term? Did they give any future projection or cash flow analysis of the year-by-year debt burden and the foreign exchange earnings (from export, remittances, FDI, and foreign assistance from our multilateral development partners) before giving to the press these ‘doomsday’ predictions? If not why is this attempt at destabilizing our macroeconomic gains?
However, all said and done Bangladesh is also facing currency turmoil like its peers including India. There are two components in the foreign exchange market: the Kerb or the retail market and the inter-bank foreign exchange market. The former is an insignificant portion of the total market, say comprising one to two percentage points involving mostly cash notes managed by licensed money changers. It is quite possible that the rates in this street market may go up with the sudden reopening of tourist or medical and educational destinations. There could be some irregularities as well. Bangladesh Bank has rightly started monitoring them with the help of law enforcement agencies. Some of the illegal entities have been locked down as well. BB may think of establishing a regular Foreign Exchange Market Intelligence Team to monitor these service providers. The media should not have created this hype on this minuscule FX market by portraying it as the mainstream foreign exchange market, which it is not.
However, there is certainly a problem in the inter-bank FX market. If the interbank market is dysfunctional then the international counterparties may think that there is no FX liquidity in the market even at a price. This gives a wrong signal globally. While import bills are being reduced gradually due to macro-prudential measures by the central bank and government it can safely be argued that there will be further improvement in foreign exchange liquidity. Several measures have been taken by the central bank that will ease the liquidity situation. However, there is a divergence between the market rate and the guided rate. Rather, the market forces should be allowed to play in the inter-bank market that will show a transparent benchmark to all stakeholders. The increased competition in this market helps keep the margin low for all stakeholders. We can certainly learn from India on this. In India, RBI guides all stakeholders to reach an acceptable interbank foreign exchange rate. All banks are free to transact in the interbank platform and are required to report to the RBI portal. Based on the interbank rate, banks publish their rate sheet on the following day. The rate sheet is normally for a smaller amount. During the day also rate sheet may get changed depending on the demand and supply of FX. RBI oversees the rate and manages the demand and supply to keep the market stabilized. RBI sells US dollars at the market-driven interbank as well to increase supply if the rates tend to go too high. That is why we see stability in the foreign exchange market including the money exchanges.
Bangladesh Bank can certainly avoid selling dollars only to public banks at a rate that is not market driven. If the organizations like BPC need subsidies, they should get the same from the government. BB should not be pushed hard to give them FX support at less than the market rate. This is creating distortion in the market making the interbank platform dysfunctional. As indicated above BB should continue to discuss all these issues with BAFEDA, ABB, and independent experts to create a vibrant interbank FX market which will remove a lot of incongruences. In addition, Bangladesh Bank should continue to encourage the Government of Bangladesh to go forward with negotiations for low-cost loans from IMF, WB, ADB, IDB, and other new multi-lateral institutions plus tested partners like JICA, JETRO for long-term loans that would promote resilient inclusive climate-friendly growth process in Bangladesh. ERD is already doing a great job in this regard and should be encouraged to move to negotiate new loans plus the release of already agreed ones lying in the pipelines.
Bangladesh’s decision to go for budget support from IMF, ADB, and WB has been smart move and it should be prepared to undertake reforms that could help further stabilize the macro-economy. The policymakers will be well advised to provide- calm, credible, well-informed, and professionally articulated messages to the nation to avoid unnecessary misinformed controversies. Surely, together we will overcome this turbulence imposed by the global economic crisis as we have strong macroeconomic fundamentals.
The author is a noted economist and former Governor, Bangladesh Bank.