Economic crisis and the new theory of western conspiracy

Over the past couple of months the prime minister's energy advisor Tawfiq-e-Elahi Chowdhury has been coming up with all sorts of new theories of western conspiracy to explain the prevailing crisis. I feel the need to explain that blaming the West is a strategy to cover up the failures of the government's policymakers.

Recently Bangladesh Bank suddenly hiked the price of the dollar by Tk 7 to Tk 117. This has given rise to all sorts of debates. The claim that this is that "crawling peg" promise of Bangladesh Bank, is absolutely untrue. Neither will it meet the absurd expectation that this will resolve the reserves crisis. This is not any "crawling peg". This is simply "a sudden jump due to pressure from IMF", in other words, a "jumping peg" -- determining the exchange rate in leaps and bounds.

Thank you IMF. In a single day's meeting IMF conjured up such magic that brought about three major changes overnight: 1. the price of the dollar jumping up by a record seven taka; 2. increase in policy interest rate; and 3. an "unsmart" exit of an absurd "smart" system.

Speaking about the prevailing situation, the Bangladesh Bank governor unhesitatingly said that he had never seen such crisis throughout his entire career. This is true. It is ever truer that the wavering between laxity and edginess in drawing up policies has served to extend the crisis further. The energy advisor refuses to acknowledge this and prefers to come up with a new theory of "western conspiracy".

In 2022 when inflation was on a rise and all countries had taken up an integrated exercise to increase policy interest, then it was only Bangladesh that sent the inflation galloping by holding onto the interest cap in order to appease the businessmen and defaulters. In order to keep the big importers happy, the price of the dollar wasn't hiked and adjusted to the market. The penalty for that is still being paid now. Once cholesterol increases in the blood, one can't bring down blood pressure overnight. Economist Keynes first came up with the downward price rigidity theory which we now call 'sticky price'.

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A few days ago at a book launch, economists said that the country's economy was now paying the price for past mistakes. Unlike the energy advisor, none of them discovered any ulterior motives of America or the West behind the crisis.

The advisor further said that western conspiracies were behind inflation, the shortage of dollars and other problems that afflicted developing countries. Needless to say, neither inflation nor any dollar crisis is that intense in most developing countries. Not even in India. These are only extreme over here. This is a result of our errors.

Inflation in India is now controlled, falling to 4.8 per cent. In February India's reserves were USD 643 billion. In 2022 India's GDP was USD 3,417 billion, when Bangladesh's was USD 460 billion. In other words, India's economy is seven to eight times bigger than that of Bangladesh. In that sense, Bangladesh's reserves should have been USD 80 billion to USD 90 billion. Yet Bangladesh's reserves are hovering around USD 19 billion to USD 20 billion. Even if one takes the gross reserves to be USD 25 billion, that still is nowhere near USD 80 billion. There is no point in dragging in the examples of other developing countries to prove one's point. They have resolved or are resolving their own problems by means of certain financial exercises. Sri Lanka is a proof.

Just a couple of months ago the energy advisor said that US oil companies have made off with an additional USD 14 billion, at the expense of Bangladesh, for which the country is suffering today. That is why we are seeing this macro instability. Noticeably, no economist felt the need to reply to this absurd, vague contention which is not based on any research.

Take, for instance, there is a couple living in Mohammadpur. The husband has a fixed income. But due to inflation, the family's savings have shrunk. Their purchasing power had decreased and unrest had increased. It would be ridiculous if the husband told his wife that he is in a financial crisis because the fishmonger had taken thousands of taka extra from him over the past two years. That is exactly what the advisor is saying. Whoever has the need, will buy. The seller is not forcing anyone. Bangladesh bought oil because the use of the oil pushed up consumption and investment. Even if anyone hikes the price and we still buy oil, that means we need it.

Why did Bangladesh not increase its interest rates? The US is a country with an inflation rate of two per cent. Inflation shot up to 10 per cent during the Putin-driven aggression. The US reined in this galloping inflation by speedily pushing up the interest rate. That is the rule of economy

Just when the post-Covid economy got a new vibrant lease of life, the "champion of democracy" Vladimir Putin launched an attack on Ukraine in the style of the Pakistani army. There are many in our country who shy away from calling this "Putin's attack on Ukraine", and refer to it as the "Ukraine war". It is as if Ukraine started the war. At that juncture, at the behest of Russia, the Middle East countries increased the price of oil. US traders also hiked the price of oil because the cost of supply and raw materials had gone up. Bangladesh was forced to buy oil at the increased price, just as the city folk are forced to buy vegetables at high prices. That doesn't make the vegetable seller a conspirator.

Bangladesh paid for this additional cost of oil by means of its current account. No company came and held a gun at Bangladesh's head to collect the dues. That is not the reason why the crisis is so extreme. The wise advisor failed to understand a country's balance of payment in its transactions.

The crisis basically intensified when a deficit of around USD 17 billion appeared in Bangladesh's financial account. Overnight the USD 15 billion financial account fell empty. Within a few days it went down to minus two billion. This was unprecedented.

It is from here that the main blow of the crisis hit, as even the governor mentioned. Come, let's see if there is any western conspiracy behind this! I must disappoint the advisor and say, the capital flow happened in accordance to the norm -- high interest from outside has pulled away the capital. We had forcefully put a cap on interest rates back then. Those who do not understand this simple rule, can resort to their conspiracy theory for the time being in an attempt to conceal their own weakness in policy formulation.

The advisor comes up with yet another allegation -- the "geopolitical factor". Why did America hike its interest rates? This strengthened the dollar and weakened our taka.

The question is, why did Bangladesh not increase its interest rates? The US is a country with an inflation rate of two per cent. Inflation shot up to 10 per cent during the Putin-driven aggression. The US reined in this galloping inflation by speedily pushing up the interest rate. That is the rule of economy.

When blood pressure shoots up, the body must be cajoled into taking rest. The central bank followed the Taylor Rule of economy with due respect and confidence. It is as if the Federal Reserve chair Jerome Powell did a grave injustice by not consulting Bangladesh's energy advisor before increasing their interest rate.

Even when following the rules of economics, a country can fall into a crisis, but this crisis will not be that intense. However, it does not bode well if one proceeds down the wrong way with no heed to the rules and regulations, and then simply put the blame on the bigger power. Today's high inflation and dollar crisis is the result of wrong and wavering policies.

The prime minister has surely selected her advisors for their knowledge and wisdom. We can only hope that the knowledge and research of these high class advisors are duly reflected in their words as they guide the nation ahead.

* Dr Birupaksha Paul is a professor of economics at the State University of New York at Cortland, USA.

* This column appeared in the print an online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir

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