In the first article we concluded that the shift in the recent balance of payments, while substantial, was not an immediate problem.
There is too much panic about these developments.
The rapid change of the current account of the balance of payments arose from the rapid economic growth of the economy recovering from the pandemic and the terms of trade turning against Bangladesh, despite a strong export performance.
We projected a deficit of -$4.3 billion for FY22 against a surplus of $9.3 billion in FY21.
As a consequence of the growing demand for dollars to finance imports the effective exchange rate depreciated more than 10%, despite the central bank selling dollars in substantial amounts.
The second article described how the depreciation of the exchange rate has occurred almost in secret.
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The way that this was handled by Bangladesh Bank was very unfortunate as it led to unequal treatment of bank customers.
The central bank, which has the responsibility of ensuring that banks treat their customers correctly, allowed a breakdown of equal treatment and exploitation of the public.
What can we expect in the future?
If the economy grows at 7.25% over the next two years in the present likely conditions of the world economy, then I forecast that reserve loss will total $25 billion dollars over the next two years after a loss of $5 billion in the current year. (Table 1C)
That is an impossible outcome.
The first article noted three actions that can be taken: slow down the economy; increase the use of foreign capital; and increase exports.
We discuss these:
Slow down the economy
This is absolutely mandatory for the next two years as the other actions will take time to bring results.
The type of actions that the authorities have taken to date will achieve little except to annoy everyone.
Over the next two-three years slowing the economy will reduce imports, decreasing capital formation and domestic production.
A reasonable target is to lose another $12 billion in reserves during this adjustment period.
The total position from FY22 to FY24 would result in a loss of —$16.3 billion from a starting level of $46.6 billion. [See Table 1D] The economy would grow at only 4-5%.
But after the transition exports would be increasing and growth could rise to 7%.
This is a difficult position.
But the terms of trade have turned against Bangladesh at the same time that export growth is moderating.
The economy needs a period to regroup policy.
Actually there is no choice.
If one tries to keep the economy growing rapidly, the flow of imports would bring about a substantial depreciation of the currency.
Depreciation would reduce imports and then the position would be the same, slowing the economy.
We conclude that slowing the economy is going to happen and suggest that an orderly approach would be the most efficient and less disruptive.
The first step is to raise interest rates as discussed in the first article. Bangladesh Bank should lift the cap on lending to 15%, except for export industries.
But at the end of two years all interest rate controls should be lifted.
Use more foreign financing
In the forecasts of Table 1C we have increased the inflow of capital but we believe much more could be achieved.
This process should begin with drawing up a list of projects that are close to being ready for starting.
The government can take a chance and start such projects.
These should have a presumptive acceptable benefit/cost ratio.
Emphasis should be on infrastructure and prompt results.
Education, health, housing and soft projects are not what are needed.
There are many projects that come to mind: More work on electrical distribution systems where there are large losses.
Rehabilitate the rental plants or close them.
Reduction of loss in gas pipelines; take this seriously, it is equivalent to producing more gas.
Lease out some government gas fields to a private operator to try to increase production.
Get hold of the projects to improve Dhaka city transport and speed them up.
The waste from the Dhaka transport system is remarkable.
Do a port improvement project; better port management will speed up delays at very little cost.
In a national emergency such as Bangladesh faces, there must be real commitment to achieve rapid progress on increased use of foreign financing.
I am not very optimistic that much could be achieved but correctly done, this is one way to bring more foreign exchange into the country.
Increasing exports
This is an area of development policy.
Bangladesh has made enormous efforts to study and prepare projects with little success.
There are two obvious directions: Let the exchange rate system work as is proposed in the second article, making everything transparent.
It appears that many exporters have not understood the changing implementation of the exchange rate and part of the benefits have been captured by the banks rather than the exporter.
The lack of a transparent system with Bangladesh Bank losing control of the market and not ensuring that everyone understood the system, has had a negative impact on exports.
This can surely be improved.
The second major area where exports can increase is the garment sector.
Small improvements have the prospect of major improvement.
The objective is to raise the competitiveness of the sector. We focus on matters that will increase orders and productivity.
The difficulty is when you list these items you simply repeat what has been said over and over for decades.
There are really no mysteries; what is a mystery is the lack of will and ability to do something about these matters.
It is now absolutely urgent to expand garment exports and earn more foreign exchange or growth will permanently slow.
The overall needs are well explained in the Perspective Plan for 2041.
Changes in trade policies are time consuming battles and Bangladesh cannot wait for that.
The entire spectrum of logistic related issues can be solved very rapidly.
The hand out of export subsidies can be speeded up so the current long waits are avoided.
There is a looming conflict with the USA and the EU over labor. Bangladesh should get ahead of this and try to get it sorted out.
An extraordinarily complex list of actions has been prepared; the most important items should be dealt with first — those tend to be the ones that are hardest to handle and so are delayed.
Government should open immediate discussions on increasing exports with India and China.
Both countries run enormous trade surpluses with Bangladesh.
India in particular has an enormous economic interest in getting along with Bangladesh.
Tough demands for measures to increase exports should be demanded.
I think it is feasible to increase exports to these two countries by five billion dollars in the next three years by demanding improved access and tearing down trade barriers.
It is outrageous that these two countries repress trade from Bangladesh.
These items: Clean up the exchange rate system; tackle the logistics, negotiate a resolution to the labor disputes, and demand better trading terms with India and China will increase exports quite rapidly, particularly in the RMG sector.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics