Money is a path-way for economic activities. However, “subsistence living” in the present days is rarely possible as money is a facilitator in every step of life.
Subsistence structure of life is a way of living in which people live on their produce. No external support is needed. Even the indigenous population cannot live on subsistence now. Money is a social invention, it makes people become a “jack of all trades” so to speak. In primitive societies, transactions were executed through goods to goods. This was a payment mechanism known as the barter system. This would require matchmaking between demand and supply of two goods for the execution of transactions. But it was not so easy to make double coincidences. As such, a person would need to produce all of his requirements. Payments system resolves the problem of non-matching of demand and supply.
Money, whatever the form is, facilitates transactions without requiring double coincidences. This supports people to come out of subsistence, as a division of labour is created. People work in accordance with their capacity and, in return, they receive money. This capacity makes people a jack of all trades. The system can help people to procure what they cannot produce.
Expenses
There are two types of expenses: Current and capital. The former is met by current income. But this income cannot support capital expenditure which needs extra money beyond current flows. It is said that capital expenditure facilitates economic activity, an example can be cited in this context: If a durable item like refrigerator is bought, it can be assumed how many inputs, including manpower, were used to produce the item. Every input is a cost centre. On the other hand, input providers are income centres. The production of refrigerators is an incremental economic activity which requires payment first for inputs and labour.
Money is needed for such production.
Incremental money is also needed for the person to buy the item. How this money is arranged is a question. In both cases -- producers and buyers -- money is a factor. In a monetary society, the banking system plays the role of intermediaries -- the pooling of savings and extending loans therefrom. Money going to buyers of durable or capital goods is termed as loan. But it is the capitalization of future income. It means that the loans will be settled out of future income in phases. What would happen in case borrowers are unable to repay? That is another reality. It is not easy to repay as smoothly as banking theory says. There are always ups and downs.
We see producers and buyers borrowing from the banking system all the time.
Manufacturing productions or services outputs need different input contents. It is not expected that all will be within reach. There are cases where inputs need to be sourced from external sectors. In this case, import transactions are needed. Import payments need to be settled by the banking system. Again, banks work as intermediaries. Cross-border transactions are executed by international currencies acceptable to relevant parties. There are a few currencies working as international currencies like the US dollar, the euro, etc.
A foreign issue
Banks buy foreign currencies from foreign income earners like exporters, wage earners, etc. They sell these currencies to importers and other remitters. But inflows and outflows are not always matched. In case of inflows higher than outflows, surplus is used abroad as investment generating income. On the other hand, external borrowing is needed in case of outflows higher compared to inflows. The borrowing becomes a cost centre since it needs extra payments as interest.
In domestic economic activities, incremental money in the form of loans can lift the living standard of people to a higher level. In the same way, money is in support to boost supply sides for which production process and infrastructure development need inputs. All economies do not have such support naturally from internal sources. As such, inputs are required to be sourced from external sectors. Economies of inadequate natural content depend on external sectors -- the private sector for economic activities and the public sector for infrastructure needs. Otherwise, economic advancement will never take place. Of course, it is to be considered that external borrowings would have the capability to generate income, including earnings from external sources.
Considering the Bangladesh economy, it encountered externalities due to disruption in the global supply due to the Russia-Ukraine war. Unexpected outflows led the Taka to face huge depreciation. A mismatch between inflows and outflows became unexpectedly high. As a result, our foreign reserves started to decrease. To contain the situation, various measures were taken. The measures were focused on the curtailment of imports. Bangladesh economy is on an upward trend depending on export and import substitutions industries. Dependency on the external sector is inevitable.
Unless input contents are produced locally, economic activities depend on external inputs. On the other hand, infrastructure is a part and parcel of the economy, the establishment of which needs external support from inputs to consultancy. Borrowing is needed whatever the source is domestic or external. But domestic borrowing cannot support the schemes of infrastructures in case of requirements of external inputs. Again public borrowing is essential from external sources to meet payments needs of inputs procurements. Capitalization of future income is not only applicable for individuals, it is equally applicable for an economy. Development policies require money to be injected as investment which was done in our cases.
Foreign borrowing is mandatory unless an economy is sufficient in terms of its input content. Otherwise growth will be stagnant. The recent situation of the Bangladesh economy is not so unusual, given the circumstances. Rather, there needs to be changes in our policy framework.
Not a solution
Import curtailment is not a solution as it may jeopardize trade as it sends the wrong message. The simple solution is to maintain external flows from financial account transactions in the form of investment and import credits to meet immediate needs of outflows. This is a short-term solution, which needs servicing on maturity for which adequate inflows are to be earned. In this context, capacity needs to be focused for enhancement of inflows on account of foreign income.
There are different paths to generate income from external sectors. But the Bangladesh economy depends on a handful of sources: Export income and wage remittance, mainly. Export is still vulnerable, it is not sensitive to exchange rate depreciation. As a result, export trade is still in the brackets of different stimulus supports like export incentives, low cost loans, duty free inputs imports. But the sector is in concentration -- like readymade garments as a single product and Western countries as export destinations. The sector needs to be diversified in either respect, product diversification, and market exploration.
In addition to exports of physical goods, services exports need to be promoted with the same policy support. The second largest source of inflows is wage earning which needs to be kept free from misuse through improvement of official channels for remittances in line with the changed payment ecosystem.
It is impossible to be away from external borrowings until the economy is sufficient in all respects. It will continue with the ever changing situation of development paths. It is not a cause of evil, rather it is supportive of the capitalization of future income and can even act as a pathway to global financial inclusion. It only needs prudent management for which external income flows need to retain an upward trajectory.
Mehdi Rahman works in the development sector.
