High current account deficit may lead to financial crisis
The economy might fall into a financial crisis and face a growth slowdown if the existing pace of higher current account deficit persists for three to five years, warned the Policy Research Institute of Bangladesh (PRI) yesterday.
The economic crisis triggered by the Russia-Ukraine war, supply chain disruption and soaring prices of commodities in the post-coronavirus period has already caused Bangladesh's foreign exchange reserves to fall, consumer prices rising and the current account deficit remaining very high.
The current account deficit, a situation where a country imports more goods and services than it exports, was 4 per cent of gross domestic product (GDP) in the fiscal year of 2021-22, overshooting the 3 per cent mark termed as the red line.
"And historical and cross-country analysis shows if the current account deficit runs over 3 per cent for three to five years, the economy will fall into a financial crisis and inevitable growth slowdown," said PRI Chairman Zaidi Sattar at an event at the Sheraton Dhaka hotel.
"We can't allow that to happen."
The think-tank organised the event to discuss issues related to the realisation of Bangladesh's development aspirations with domestic resource mobilisation amidst macroeconomic challenges.
Recently, the International Monetary Fund said Bangladesh will continue to see a high deficit in its current account balance till 2027. The current account deficit will be 3.8 per cent of the GDP in the current fiscal year, compared to 4.1 per cent in the last fiscal year, it said.
It came as import bills rocketed for higher commodity prices globally. On the contrary, exports have not gone up as expected.
"I don't think we can sustain a current account deficit of 3-4 per cent of GDP for three to five years. We can't afford it," Sattar said.
The former World Bank economist said inflation faced by consumers is mainly imported driven by a supply shock.
"No silver bullet is available. Various options have to be carefully reviewed and actions have to be taken."
He suggested a reduction of regulatory duties on imported items to reduce the inflation pain facing the people.
Inflation surged to a 10-year high of 9.52 per cent in August. It, however, fell to 9.10 per cent in September.
"The crisis that Bangladesh is facing originates from the external front. But we have to protect our economy," said PRI Executive Director Ahsan H Mansur.
The former economist of the IMF said the interest rate, which is used by central banks around the world to curb demand and contain inflation, has not been utilised to find a solution.
Stability in the exchange rate has not been achieved as no uniformity in rates has come about though the taka has lost significant value against the US dollar.
"Foreign exchange reserves are still falling," he said, suggesting the Bangladesh Bank adopt international best practices to define the reserves.
The IMF has long been suggesting the central bank exclude the dollar-denominated local investments from reserves – to be nearly $8 billion—from the calculation of reserves, used to meet the country's external obligation, including import payments.
Mansur also cited the recent power crisis, which has affected manufacturing and trade.
"Our industry is crying," he said.
"It was initially told that the power crisis will be over in a month. But two more months have gone and there is no solution."
Mansur stressed taking appropriate measures to produce and supply food, saying there is no chance to believe that there would be a famine under the current circumstances and Bangladesh's state of development.
At the event, Mashiur Rahman, economic affairs adviser to the prime minister, said uniformity in the exchange rate is needed to restore stability to the foreign exchange market.
Shamsul Alam, state minister for planning, also talked about the unified exchange rate.
"We should work on the method and process. Serious thoughts need to be given regarding the interest rate cap on loans."
He said managing the economy and containing higher inflation should be the prime focus. "Increasing revenue may not be the thrust in this testing time."
According to the state minister, efforts should be made to reduce non-performing loans.
Default loans in the banking sector surged 19.3 per cent year-on-year in the first quarter of 2022, driven by the withdrawal of the relaxed loan classification policy.
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