Govt, BB steps well-timed

Bangladesh's recent austerity and regulatory measures aimed at curbing non-essential imports, suspending the implementation of projects with high import components and cancelling the foreign tours of officials will send a positive signal to the market and the economy, according to economists.

In order to deal with the challenges stemming from the persisting supply chain disruptions, higher commodity prices, the fallout of the Russia-Ukraine war, and the declining foreign currency reserves, the government and the central bank have taken a raft of measures.

On April 11, the central bank instructed banks to impose up to a 75 per cent margin on the opening of letters of credit for non-essential consumer items in a bid to curb the soaring imports, which brought down the level of reserves since exports and remittance receipts could not keep pace with the foreign purchases.

Just a month later, the government cancelled the foreign tours of its officials and pushed back the implementation of less important projects that require imports.

The BB, on Monday, devalued the taka against the US dollar, the sixth time this year, amid the sliding supply of the American greenback.

On the same day, the National Board of Revenue raised the import duty on 135 products and withdrew the VAT on the import of refined soybean, palm, rapeseed, canola and olive oil.

Besides, the central bank has exempted remitters from submitting documents while sending more than $5,000 back home to qualify for the government incentive.

All of the measures aim at containing inflation, safeguarding the economy, and protecting the poor and low-income groups from the higher cost of living.

"All of the steps are in the right direction. The impact of the measures will be there," Zahid Hussain, an economist, told The Daily Star.

Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue, said: "These steps will send a positive signal to the economy that both the government and the Bangladesh Bank are trying to do something. This is positive."

According to Hussain, some impacts on the demand and supply of foreign exchanges will be visible from next month. But the effect of the austerity measures related to the government expenditure will not be felt soon since they take time to produce results.

And the lasting impact of the measures, he thinks, will depend on their reflection in the budget for the next fiscal year, set to be unveiled on June 9.

"If the measures get highlighted in the budget, there will be some positive results in the next fiscal year."

Rahman does not think that the slapping of the duty on the imported items will bring about a significant positive outcome since they account for a small portion of the total imports.

The former professor of the University of Dhaka advises the BB to keep injecting dollars into the economy since there are adequate reserves.

"The US dollar supply and the exchange rate should be backed by the central bank. More depreciation will be needed and the central bank should support the rate."

Zahid Hussain thinks that the exchange rate set by the BB at Tk 87.9 has become irrelevant since banks are charging importers more than Tk 95 to settle imports.

"There should not be any exchange rate since, on papers, we have a floating exchange rate regime. Why does the Bangladesh Bank set a rate that confuses the market?"

The government and the BB measures are not without risks.

This is because the rise in the LC margin, the surging exchange rate, and the hike in the regularity duty on the imported products will eventually stoke inflationary pressures since the moves will increase the cost of the goods purchased from external sources.

"Only the austerity measures such as the cancellation of foreign trips and the postponement of the implementation of less important projects will have no negative effect," said Hussain.

The management of subsidies will be a major challenge for the government in the upcoming budget as well, owing to the squeezing fiscal space caused by higher expenses against lower revenue generation.

"If the government plans to increase the price of electricity, diesel and gas, it should be done in phases and announced in advance, not all of a sudden."

If the government doesn't revise up the energy prices, the subsidy spending will shoot up in the next fiscal year.

So, Hussain urged the government to explore ways to save money from other subsidised sectors so that the subsidy spending in the energy sector can continue and the price adjustment can be minimal.

"Fertilizer prices should not be increased as ensuring food security is the most important task under the current global scenario," added the former lead economist of the World Bank's Dhaka office.

MA Razzaque, research director of the Policy Research Institute, thinks the policy mechanisms introduced by the government have so far been good to tackle the crisis.

"These are what we need at this moment."

However, he says the restricted policy shouldn't be a long-term trade policy.

"Through the policies, the government is giving protection but it comes at a cost. It will make our domestic sector more inefficient. We have already had a restricted policy. Now it is becoming even more restricted."

Razzaque thinks bringing money from abroad by providing incentives without questioning the source of the funds will serve as a disincentive for honest taxpayers.