State of the economy
Iqbal Ahmed/ Drik News
PRIME Minister Sheikh Hasina has taken cognisance of the reported liquidity crisis as well as inward remittance situation of the country. We are very happy about this. For a savings and labour surplus country investment, availability of finance is a major issue, and so are overseas employment and inward remittance. In the recent past, in view of the decreasing foreign direct investment and overseas development aid, increasing non-resident remittance has been providing safety net to our balance of payment.
There has been a surge in our export receipts as well as import payments, both increasing at 40 plus percent during the 8 months of this fiscal. While we welcome both increases, the nominal 4% growth in inward remittance during last 9 months is creating pressure on foreign currency liquidity and local currency liquidity too. The situation has become tough apparently due to the central bank following monetary tightening in view of increasing prices.
Overall credit has grown by 20 plus percent with private sector credit growing at almost 29%. Credit interest rate ceiling has been rightly withdrawn to discourage credit growth in unproductive sectors, repurchase (REPO) is being discouraged for the banks, and maximum asset/deposit ratio is being restricted to 85%.
The current exchange rate of the dollar ranges between Tk.72 and Tk.73, which was around Tk.69 a couple of months back. The taka lost 1.93% of its value in December 2010 from that in July 2010, and lost a further 2.50% in January from that in December. The total foreign aid, including loans and grants, in the first eight months of the current fiscal year(FY) amounted to $400.60 million compared $1.430 billion in the same period in FY 2010.
The export earnings of the country in the same period stood at $14 billion, posting a 40% rise from the corresponding period of FY2009-10, and the import costs in the period amounted to $22 billion, marking a 41% rise from the July-February period of the last fiscal year. The amount of inward remittance during last 9 months was $8.6 billion. Service payments (overseas education, travel, medical and relevant expenses) are also increasing at a high rate. At the same time, the country's foreign currency reserve depleted from $11.16 billion in February to $10.3 billion in March end. Net foreign exchange reserve stands at around $7 billion.
As mentioned above, banks are facing a severe dollar crisis along with a liquidity crisis, compelling them to express inability to open letters of credit for imports. What is worse is that it has become really difficult to get dollars even at that high price, though the central bank has been supporting essential imports in the public sector.
The ongoing unrest in the Middle East might worsen the problem. Many felt that making investment in productive sectors for employment generation, discouraging imports of consumer and luxury goods and investment in unproductive sectors would alleviate the problem. Some also suggested growth curtailing.
Obviously it is easier said than done. Bangladesh is an emerging economy. The policy makers have decided to adjust with inflation rather than growth. The nature and composition of our import bills have warranted this. Most of our import bills are for capital machinery imports for RMG, textiles, pharmaceuticals and food processing industries, or for industrial raw materials or power plant equipments. Dollar price is rising, however growth dynamics in the economy, along with fabulous increase in exports and good harvest seem to have provided a safety net.
Serious interest in other countries for "made in Bangladesh" goods as well as significant rise of demand for consumer items in the domestic market are encouraging our business community to go for massive investment in the production lines. They don't mind paying 2-3% extra for a dollar, while the return on investment in very attractive in Bangladesh. I think there is sufficient space to absorb higher exchange rate as well as higher interest rate cost.
This is a basic symptom of an economy which is going to see some accelerated growth rate in the coming years. While I worry about the slowing down of remittances, I think the situation will get better. May be 20% growth is unrealistic, but it should settle around 5% to 10%. With oil price remaining high, job opportunities in Middle East are expected to improve with undertaking of more construction projects. There may be a bit of time lag though. Saudi Arabia will resume labour import from Bangladesh soon.
However, we need to look at the economic management side with seriousness. The regulators need to work on the supply economics with an integrated approach. They need to maintain a healthy balance, and to ensure that the remitters and development partners are given enough incentives through their commitment to continuous reforms.
Delay in committing budgetary support, disbursement of balance of payment support or release of millennium challenge funds do not make us happy at all, especially when we need more money to finance our growth. The government may alternately explore commercial borrowing from external sources, in view of the better sovereign rating.
Our people are ready to settle for a slight price spiral, provided investment in growth-driving sectors continues with employment generation. However, we do not appreciate any supply side constraint or management debacles. While our exporters are facing rise in import finance rate, they should be happy with increased exchange rate. However, regulators need to draw a balance between dollar price rise and price spiral, since most of our inflation is "imported inflation" and our popularly elected government is committed to save common people from the onslaught of excessive price hike. Along with this, one would emphasise on better asset and liability management in all commercial banks as well as at the central bank with full ownership.
The writer is a banker and economic analyst.
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