It was apparent from beforehand that the economic crisis would not abate so easily. Neither is there any solution in sight regarding inflation, foreign exchange reserves and the unrest in the dollar market. In fact, the uncoordinated manner in which makeshift measures are being taken in an attempt to tackle the situation, are likely to exacerbate the prevailing uncertainty and instability. What is needed is a transparent process to determine an integrated strategy to resolve the overall economic problems and restore a stable environment.
While it had been possible to rapidly curb import expenditure in the last fiscal, the foreign exchange transactions haven’t been resolved. The drastic fall in foreign exchange reserves may have been halted but it is still on a downward curve. We have reached a low level in imports and exports at the moment, which will not help in reviving an import-dependent economy like ours or to bring inflation under control.
Actually we made certain mistakes in drawing up our policies even before the present global economic problems emerged. For example, holding on to the taka-dollar exchange rate, overly relying on a product like fuel oil rather than increasing revenue income, and considering foreign exchange reserves as an investment asset rather than a symbol of economic strength and safeguard in times of emergency. And so when the global economic crisis suddenly appeared on the scene, there was no time to make amends. It can also been seen that there have been attempts to dillydally with the payment of fuel oil dues and certain other foreign debts so as to hold on to foreign exchange reserves, but actually there should be negotiations to reach an understanding on fixing a schedule for repayment.
In the meantime, international credit rating agencies have lowered our credit ratings, which means loan conditionalities in future will be even more stringent.
Lack of confidence is a serious problem in times of economic crisis. This is not conducive to reducing inflation, creating an investment environment or attracting investment. Once inflation increases, a sort of inflation expectation is created in the economy. As a result, the price of commodities automatically shoots up. The budget management and monetary policy at present may also serve to instigate inflation.
It is not clear as to why the monetary supply ratio with the GDP has increased despite the stagnancy in private sector investments. When monetary transactions increase in the forthcoming election season, inflation may come under further pressure. On top of that if there is a food shortage, it will be even more difficult to keep the situation under control.
A large chunk of remittance is also being used to launder money. Meanwhile, it seems that the government’s concerned agencies are simply shifting the blame onto each other’s shoulders.
Indiscipline in the banking sector creates additional problems in the economy. It is not understandable why Bangladesh Bank, instead of taking action against massive financial irregularities, is facilitating loan defaulters even further and providing loan facilities to salvage banks that are overridden with problems and corruption. This can only offer a temporary solution to the problems, but at the end of the day, the entire economy will have to bear the burden of the accumulated debts in the financial sector.
Everyone will acknowledge that huge sums of money are being siphoned out of the country every year. But this is an even bigger problem in these critical times compared to normal times. And a large chunk of remittance is also being used to launder money. Meanwhile, it seems that the government’s concerned agencies are simply shifting the blame onto each other’s shoulders.
The Export Development Fund had been created with around USD 12 billion from the foreign exchange reserves. It is heard that some of the private sector loans taken from that fund are now in default. Bangladesh Bank will eventually have to bear the burden of these default loans.
Policymakers may be breathing a sigh of relief that the foreign debt burden is still within 30 per cent of the GDP. But if the debt burden continues to increase at the present rate, there are reasons to be apprehensive about the future, not to mention the fresh debt piling up.
Over the last three years the debt burden has increased by 50 per cent to near around USD 100 billion. These loans are being spent on massive infrastructure projects. It is undeniable that physical infrastructure development is essential for economic development, but there are questions about the priority of the projects, expenditure and efficiency in implementation.
Whether the country will fall bankrupt or not is not the only matter of consideration. The main economic reasoning behind spending on physical infrastructure is to attract export-oriented local and foreign investment so that economic growth increases and there is not hitch in debt repayment. The net one billion dollar foreign debt that looms large is in no way warranted. But the manner in which the foreign debt is piling up, in the coming years repayments of 4 million to 5 million dollars will have to be made every year. So we should only take up new infrastructure projects taking into consideration our economic capacity to repay all these debts.
* Wahiduddin Mahmud is an eminent economist and former finance advisor of the caretaker government
* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir