Regulatory moves target private sector, not public sector
Bangladesh Bank has recently taken some serious decisions, the speed and approach of which seem unusual.
Such hard decisions are supposed to come after intense negotiations among the top business organisations, the industries, commerce and finance ministries, and the Bangladesh Bank. It's surprising that decisions are suddenly made without involving the stakeholders in the negotiations.
Apparently, the BB has taken major decisions to discourage imports except for food, fuel, and raw materials, the impact of which is far-reaching. If the necessary import economy too is discouraged in this way, the dollar will be saved for sure. But will export be saved too?
Our exports depend on imports! And how to save the employment and the economy as a whole?
Some of the decisions taken together to solve the dollar crisis are: a reduction in banks' dollar holding limit; the obligation to monetise 50 per cent of US dollars held in the Exporter's Retention Quota (ERQ) accounts; and the reduction of deposit limit as ERQ to half, halving of the deposit limit of realised export proceeds.
The restrictions on the transfer of foreign currency funds from offshore to domestic banking units and transfer terms have been relaxed. An order to inform the central bank 24 hours before opening any private import letter of credit (LC) worth more than $5 million has been issued. In addition, there is a reporting obligation for transactions of $5 million or more.
Earlier banks could reserve 20 per cent of their operational capital in foreign currency. The limit is now 15 per cent. However, this will lead to a shortage of funds in foreign currencies for importers.
The purpose of extending the ERQ status was to save exporters' required dollars for the next imports, meet sudden needs and make payments hassle-free and fast. In this, exporters could save themselves from multi-stage currency conversion loss.
If businessmen need money suddenly, they have to take permission from the Bangladesh Bank to meet all those liabilities. Simply put, the Bangladesh Bank's decision has made export-import a bit more difficult.
Moreover, reducing the net open position (NOP) limit of commercial banks to 15 per cent will add another $569 million to the market but it will reduce the capacity of banks to provide LC service.
The regulatory agency, on July 18, suspended the issuance of bonds worth about $2.5 million of five institutions. In the history of the central bank, there was no such incidence of withholding valid loan documents.
Due to the fuel price hikes in the spot market, the government has reduced the import of fuel oil. Planned electricity load-shedding has started across the country by reducing the supply of gas and oil in the power sector.
The government has a maximum fuel oil reserve of 40 days. This is a sign of an extended fuel crisis. The government has decided to stop diesel-based power generation of 1,125 megawatts for the time being.
The burden of 'unjust' capacity charges from idle power plants has also increased. It was Tk 21,600 crore in the last financial year. The non-producing rental power plants are claiming $1.5 billion more!
The government is going to take unexpected decisions like closing petrol pumps once a week, shutting shops after eight o'clock in the evening, enforcing compulsory load-shedding for 1-2 hours a day, and reducing office hours by 1-2 hours.
In the private sector, which accounts for 89 per cent of the formal labour market, the government's contractionary policies have reached a peak. However, the government's own imports and public administration expenditure did not experience a major contraction.
There is no initiative to stop unnecessary 'development' projects. There was no direct announcement of cancelling the contract of inefficient rental and quick rental power plants that produce less electricity by burning more fuel.
Even in the electricity-fuel crisis, there is no new understanding of green power generation strategy.
There is not enough 'fuel diplomacy' with OPEC's major oil and gas producers instead of a commission-friendly spot market for continuous and sustainable fuel supply. It is surprising to know that a 14-year-old government lacks so much in primary energy diplomacy. It does not have any large-scale constant fuel supply agreements with OPEC countries.
There is no implementation of available reform proposals to increase the country's gas production and offshore exploration.
There is no effective initiative to discover new labour markets or means of remittance income by sending workers abroad at a lower cost. In other words, although contraction has been imposed in the private sector, there is not enough initiative to reduce the 'dollar expenditure' in the public sector.
Some of Bangladesh Bank's initiatives as part of the monitoring framework are certainly useful. But the political integrity of regulatory audit of under-invoicing in exports, over-invoicing in imports, and monitoring of the number of dollars kept in Nostro accounts of private banks are missing. That is, rather than a direct effort to save the dollar, the government's efforts are inadequate and, in some cases, indirect.
Discouraging the opening of LCs via several active and passive measures will have a profound impact on the economy.
The obligation to open LCs at a 100 per cent margin means blocking the flow of trade capital, affecting both import and export trade. The price of goods will rise again. Much-needed imports too will be blocked, and industrial production will be disrupted. This will further increase inflation, reduce export earnings and will lead to layoffs and more misery in public life.
Aberrant monetary policy in favour of 'cheap money and credit', running single-digit interest despite double-digit inflation, loaning more than the NBR and non-NBR revenue can sustain increased expenditure of public administration, unfair selling of government bonds to Bangladesh Bank, reckless money supply, mismanagement in the banking sector, policy in favour of black money, reducing collateral numbers in bank lending, and giving incredible opportunities to defaulters were all political decisions. It was the process of creating new riches and profit-centred 'development' policies. Due regulation was completely absent.
Now in crisis, we are seeing the severity of the regulatory decisions, yet the government is unable to take political decisions to reset the energy security policy. Good governance, accountability and transparency should also be the focus.
Foreign currency reserves are now $39.7 billion, according to the government, but $32.5 billion, according to the International Monetary Fund. But some sources claim that the EDF, non-investment grade bonds, reserve loans given to various government banks, development projects, loans given to Sri Lanka and Sudan etc are in the reserve accounts, but not in hand and not usable. At this point in time, expendable reserves are incredibly low.
The massive waiver of interest rate to defaulters (4 per cent instead of 10 per cent) will not work and it never worked before.
If the exporters have smuggled or laundered a part of the EDF loans, it should be audited properly by LC audit and the prime minister herself should take initiative to bring back the funds. The Bangladesh Bank policy will not work here because many of those loans were politically motivated.
The author is a sustainable development critic. He can be reached at [email protected]