In the last 18 months, Bangladesh has failed to take appropriate measures to control hyperinflation and reverse the decline in foreign exchange reserves.
Some measures have been introduced under pressure from the International Monetary Fund (IMF), but they fall short of meeting the needs of the times and thus bringing the expected results.
The current stance of policymakers and the central bank will continue until the national elections in January, as they do not want to initiate any measures that could put short-term pressure on the economy.
But economists say the delay could further worsen macroeconomic conditions, warning that waiting until elections for key measures would be costly for the country, reeling under pressure from external factors such as the Russia-Ukraine war and high commodity prices. Internal factors such as persistently high consumer prices and falling foreign exchange reserves.
They called for immediate interventions to halt the erosion of the reserve, which has halved its size since August 2021.
An IMF mission, its end A 16-day review of $4.7 billion in debt On Thursday, monetary tightening, supported by neutral fiscal policy and greater exchange rate flexibility, should restore near-term macroeconomic stability.
„Who comes to the government or who doesn’t is linked to the democratic process. However, the administration has to ensure that the economy functions properly, progresses and de-stresses,” said Zahid Hussain, a former leading economist. World Bank Dhaka Office.
He warned that as the reserves are depleting by about $1 billion every month, if the government waits longer while taking the necessary steps, it will be $13-14 billion after three to four months.
According to an IMF document, the country’s foreign exchange reserves stood at around $40.7 billion in August 2021 and $33.4 billion at the end of 2021-22. It stopped $20.96 billion on WednesdayBB’s stats showed.
Raised commodity prices and concomitant global monetary policy tightening have led to a persistent payments deficit, weighing on foreign exchange reserves, the WB said.
Inaction in making the exchange rate market-oriented also affects the economy. Although Dhaka has fallen nearly 28 percent against the US dollar since February last year, making imports expensive, effective measures are still lacking.
„If the exchange rate becomes market-based after three to four months, if there is any disturbance, the government will not have enough scope to stabilize it. So, waiting is risky,” Hussain said.
„In order to increase the supply of foreign currency, the exchange rate should be market oriented. And the delay will increase the risks. They are taking more risk by waiting.”
„But if the central bank takes the right steps now and the problems subside, it will benefit the government and give them satisfaction. So, why wait?”
Currently, exchange rates are set by the Association of Bankers (ABB) and the Bangladesh Foreign Exchange Dealers Association (BAFEDA) as per the unofficial order of the central bank. This means rates are still controlled.
„The system is not working properly,” Hussain said.
„The central bank is planning to take action after the elections. In the current economic situation, economic cycle and political cycle should not be confused. We don’t have time to wait for political cycle,” Mustafizur Rahman said. Distinguished Fellow of the Center for Policy Dialogue.
„Macroeconomic stability must be the main priority now. If stocks continue to decline at the current pace, macroeconomic indicators may deteriorate further unless timely steps are taken to reverse the flow. No other options, no other option. Delay.”
He said pressure on external balance and reserves is the main source of all major economic problems.
High inflation is observed mainly due to supply side constraints as letters of credit (LCs) cannot be opened. Remittances play an important role in the short term when export earnings are dependent on many issues to stimulate reserves.
„Remittances are a low-hanging fruit and will grow rapidly. For remittances, a market-based exchange rate should be introduced.”
As some of Dhaka’s depreciation was allowed recently, remittances by migrant workers increased in the first 15 days of October.
But given the number of workers who have migrated in recent years, the flow has not been enough.
Remittances fell to a 41-month low of $1.34 billion in September. Although more than 11.35 lakh Bangladeshis left the country for work abroad last year, this is almost double the 6.17 lakh migrant workers who flew to other countries the previous year.
„If remittances are stimulated further, there will be a positive impact on foreign exchange reserves,” Rahman said.
Inflation eased to 0.29 percent in September from the previous month, but it is still 9.63 percent. Consumer prices are at their highest level since the war broke out in February last year.
WB says pressure on foreign sector in Bangladesh economy may persist in current fiscal year.
Rahman said the government has financial instruments to control inflation and should focus on market management such as curbing syndication.
He said reforms related to non-performing loans and capital could begin after the elections.
Hussain and Rahman both advocated market-based interest rates and welcomed recent moves to this effect.
In June, the central bank withdrew the lending interest cap that had been in place since April 2020.
It implemented a unified exchange rate in September It raised the policy rate by 75 basis points to 7.25 percent in the current monthIt paves the way to raise the debt ratio and reflect the reality.
Former Governor Prof. Atiyur Rahman supported the central bank’s actions.
He added: „Monetary policy should be concise. Efforts to make the exchange rate flexible through innovative means should continue.”
For example, since almost half of the funds transferred by migrant workers are sent through informal channels such as hundi, the central bank may allow banks to provide incentives to send more money through formal channels, he said.
The government is already providing 2.5 percent incentive.
„Thanks to the additional stimulus, the remittance exchange rate will come closer to market rates.”
The economics professor feels that the central bank has already devalued the local currency and remitters and exporters will benefit from the move.
„Hence, remittances and export inflows are likely to pick up in the coming months.”
„Oddany rozwiązywacz problemów. Przyjazny hipsterom praktykant bekonu. Miłośnik kawy. Nieuleczalny introwertyk. Student.