The six-step method

An investor walks by a share price board at a security firm in Hefei, eastern China's Anhui province. Chinese share prices closed up after the government announced a multi-trillion yuan stimulus package to boost the domestic economy. Photo: AFP

No prizes for guessing the latest 'burning issue' doing the rounds of our seminars, talk shows and roundtables (where the tables are always oval) and no, its not about which party is refusing go to election and why, this time around. Hint: economic meltdown, Bangladesh, effects.
Before we flog this issue to death by discussion, I must add that even I am guilty of diagnosing the problem and not even thinking about the cure. This is because I believe that the many wise heads that we have in our midst will heed our cries and devote their considerable intellects to put forward the outlines of a plan. We are not so naïve as to believe that we can fully predict or even prevent the extent of the fallout on the Bangladesh economy. But 'chicken little' cannot be the preferred policy reaction either.
Let's look at what others have been up to:
* China has stepped up its policy support to promote employment.
* Hong Kong names crack financial crisis taskforce.
* Sarkozy unveils job-boosting measures.
* China unveils nearly $600 billion economic stimulus plan.
So, what can Bangladesh do?
First and foremost, who are our people tasked to monitor and develop responses to the crisis? The financial crisis taskforce in Hong Kong includes the chairman of Standard Chartered Plc, vice chancellor of a Chinese university, chairman of a real estate firm, a KPMG partner, chairman of the International Chamber of Commerce and executive director of an arts group.
In Bangladesh, our taskforce consists of seven bureaucrats. Is it too much to expect that as the affected parties, business leaders, bankers and consumer along with academics, all these parties should be represented? I leave it to you, fair reader, to decide.
The second issue is the value of the Bangladeshi taka. I can already hear the chorus of dissent -- here we go again, these spoilt, inefficient exporters, here they go again whining for handouts. Equally popular: Bangladesh is an import dependent economy so devaluation will lead to importing inflation. And my favourite: the taka is fairly valued already.
My response: when the model of efficiency, globalisation and corporate responsibility, Toyota Motors, announces that net profit for the last quarter is down by more than two-thirds, it is not just a business cycle downturn. If GM can ask for help today, why not Bangladeshi exporters?
To the imported inflation theory, we see that the prices of most our major imported commodities have already suffered major decline in prices (rice, petroleum, soybean oil, scrap iron) so now maybe there is some cushion for adjustment without stoking inflation.
In the last three months, the IRS has gone from 42 against the US dollar to 48, a devaluation of 14 percent. In contrast, the Bangladeshi currency has actually strengthened by 1 percent against the dollar going from Tk 67.76 per dollar to 66.92 in the same period. So simply put, assuming fixed prices, Indian garments have become 15 percent cheaper than Bangladesh in just three months, in terms of the dollar.
The two largest sources of foreign exchange for our country are remittances and exports. Remittances maybe less sensitive to exchange rates but if due to our exchange rates, exporters lose competitiveness then ultimately we lose foreign exchange to pay for imports.
Devaluation is not the only way, why cannot we consider preferential exchange rates for exporters and remittances along the lines of the wage earners scheme? In the UK they have announced that VAT payments can be deferred for six months for small businesses. In China they are offering multiple incentives to boost the real estate sector. Why are we so reluctant to help business?
Third, the difference between the buying and selling rates of the taka against the euro and the dollar is almost double than that of India and six times than that of Pakistan. So not only are we getting less for every dollar that we export in taka terms today but we are also having to pay much more for every dollar of imports that we make compared to the competition. So revenue going down in taka terms but import costs are not going down as much. What does that do to the bottom line?
Fourth, lending rates. The Bank of England has reduced rates by a record 1.5 percent to 3 percent and instructed banks to reduce mortgage rates. The Reserve Bank of India has cut both its repo rate and cash reserve ratio to infuse additional liquidity and also lower interest rates. In Bangladesh, our private banks continue to charge 11-14 percent for local and export businesses. Here, unless the government allows deposit rates to drop, lending rates can never come down. As a manufacturing friend remarked: “You have to be a fool to manufacture here and struggle to make a 10 percent net profit, when you can put the money in the bank and earn 12-13 percent."
Fifth, it is time for Bangladesh to expand its basket of currencies and move beyond the simple dollar peg. This exaggerates our movements against other major currencies such as the euro. The taka has gained 16 percent against the euro in the three months, which means that where every euro of export was earning Tk 101 in August. Today it earns only Tk 85. Do we really believe this is a correct reflection of the relative strength of our economy?
Sixth is the new focus interest on productivity and efficiency that enterprises must develop. As margins erode, we all need to pay more attention to learning ways to boost productivity, as has been pioneered by the BKMEA recently.
So there it is -- my six-step process to help us cope with this crisis. I am the first to admit that many of these ideas might be flawed or impractical but I hope that this will at least provoke action. Time to move from seminar to shop floor.
The writer is the managing director of Apex Adelchi Footwear Ltd and welcomes feedback at [email protected].