Bangladesh must let forex and interest rates move freely

Bangladesh needs to go for a flexible, market-determined exchange rate to contain volatility in the foreign exchange market and restore stability to the economy, said the chief of the Bangladesh Institute of Development Studies (BIDS) yesterday.

"We have stalled this for a long time and this has been kept stalled to benefit the import lobby. Exporters have suffered. And to compensate exporters, we have to give cash incentive to them," Binayak Sen, director general of the BIDS, said in an interview with The Daily Star.

He shared the view as the autonomous public multi-disciplinary organisation, which conducts policy-oriented research on development issues, concluded its annual conference on development, where several economists suggested letting market forces determine the exchange rate and interest rate.

Sen said a flexible exchange rate would lead to increased cost of import and a reduction in demand for import. Income of exporters will rise and improve the current account balance, he added.

"But you cannot do this unless you change the interest rate policy. Of late, the interest rate cap has been lifted. Yet, the real interest rate is still negative in view of inflation and lending rates. You will never be able to compress import demand by keeping the real interest rate negative," he said.

"The demand for foreign exchange will remain. So, this will not give a true reflection of scarcity," added Sen.

Besides, interest rate abroad is rising and this has become a consideration for wealthy people.

"If one gets low interest by parking funds in banks, then he may choose to buy dollars and keep the money abroad to earn higher interest. Real interest is higher there. How will you compress import and manage demand?" he questioned.

"So, this problem cannot be resolved unless we also revise our interest regime upwards. We should be doing this in the first quarter in the post-election period," he said, adding that this would help improve the foreign exchange reserve albeit with some initial difficulties.

A market-based arrangement for exchange rate would also encourage remittance inflows, said Sen.

During the conference, which had a theme of development, justice and freedom, he said some concerns had been raised about ensuring good governance and delivering results in terms of human development.

"Because the legitimacy of the government rests not just on political legitimacy, but also on economic legitimacy. Economic legitimacy in turn depends on the deliverance of good governance and also on the deliverance of social results in terms of human development of the poor," he said.

From the conference, two findings question economic legitimacy, said Sen.

Firstly, a study on employment outcomes of National University graduates by SM Zulfiqar Ali, research director of BIDS, found that even three years after graduation, the youth remain unemployed.

"Unemployment rate among the educated, as per the definition of Bangladesh Bureau of Statistics (BBS), is 28 percent. This is too high. This is a source of social unrest hidden in our society and needs to be addressed," he said.

Another study by BIDS Research Fellow Abdur Razzaque Sarker revealed that out-of-pocket expenditure for healthcare is 68 percent. Of the expenses, 64 percent is on medicine, he said.

"This raises questions about whether doctors are over-prescribing medicine or whether the cost of drugs is very high. This is a burden. This is pushing poor people below the poverty line," he said.

Hence, the issue of universal public healthcare access cannot be stalled any longer.

This should be resolved soon, said Sen, adding that the reason people have to spend large amounts from their own pocket is because of the poor condition of universal healthcare.

Out-of-pocket expenditure for healthcare is higher than in other countries in the world, where it does not exceed 40 percent, he added.

"We have to go back to the original idea of the 1972 constitution and Bangabandhu. If we are serious about combining market economy and social justice, then we have to think about democratic socialism. And democratic socialist ideas were clearly spelt out in the constitution," he said.

"So, we have to go back to the origin, which mentions social security and human dignity, and stresses on establishing social justice through a democratic process. We have to go back to that path strongly, whichever government is in power. We have to be committed to our constitutional vision," he said.

"As political parties are preparing their manifesto ahead of the election, are they thinking about democratic socialism? We know state socialism has failed but social democracy can be successful," he said.

"Development justice and freedom are interlinked. Justice and freedom are intrinsically valuable in themselves," Sen said, adding that development would be hampered if there was no justice.

For instance, empowerment of mothers is not possible without gender justice. The health of children will not be good if their mothers are not healthy. Schooling choice and future occupational choice of children will not bring any good result, he added.

Sen said political parties should bring the issue into their election manifesto.

Issues of geo-economics and geopolitics were also discussed in the conference, and it was said that we can get the best deal if we can establish economic and political legitimacy out of the external environment.

"We will able to get the best deals then from western actors and other regional actors such as India, China, Russia or the Middle East," he said stressing economic legitimacy.

"Citizens become dissatisfied because they do not get basic services such as education, healthcare, personal security, transport," he said.