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Tuesday, March 22, 2016

Economic pain exposes policy failure

Maruf H Khan Noorpuri

Over the past six months we have witnessed a dramatic and accelerating deterioration of economic conditions in Bangladesh. This has been severely aggravated by poorly calculated fiscal, monetary and foreign exchange policies. This is no longer a matter of opinion but a painful fact for economic agents (employers, employees, exporters, importers, entrepreneurs and so forth) of all description.
Fiscal policy execution, as is now well-known, has been aggressively creating a widening budget deficit. In a country that is devoid of a proper government bond market it has succeeded in squeezing liquidity and creating a rising public debt burden. It would be tolerable if the borrowed funds from the economy were appropriately invested in infrastructure. There is unfortunately limited evidence for this. The funds seem to be applied to support an expanding government and a fuel bill caused by government tardiness in removing fuel subsidies. It is fair to note, with regard to the latter, that the government has commenced, albeit rather late, to remove fuel subsidies that this country cannot and should not support.
Foreign exchange policy has been poorly managed for quite some time. The designated guardians of the currency have failed to instill policy that would inspire confidence in the country. The treasury bill market for instance is closed to foreign investors on the pretext (according to some Bangladesh Bank officials) that foreigners would add to the volatility. Readers please note that in the past year the stockmarket was down by nearly 50 percent and the Bangladesh taka by 20 percent without the assistance of the “foreign investors”. A lack of understanding of the global market and inadequate anticipation of foreign exchange reserve decline has clearly contributed to this dismal outcome. This decline in the currency is serious as it is an unambiguous indictment of existing macroeconomic policy. It is nothing short of destroying the wealth of the country, whatever there was. It crushes the country's purchasing power, discourages foreign capital investment and of course increases the cost of imports. Exports cannot be goosed up by just dropping the price. Beggar-thy-neighbour policies have been shown through multiple examples to be an unmitigated failure. China today, Japan before, Germany and Switzerland still, have strong currencies that have corresponded with strong exports. A strong taka should be at the core of policy.
Monetary policy execution adds violently to the toxic mix that the Bangladesh economy has had to endure in the recent months. It is important to look back at the track record of the Bangladesh Bank. In 2009 and 2010, monetary policy was far too lenient as money expansion led to unsustainable events, namely the sharp appreciation of the stockmarket in those two years and rapid credit growth. This was made worse by wholly inappropriate margin policy for which the finance ministry and the Securities and Exchange Commission (SEC) were also responsible. Headline inflation did increase in early 2011 much of that however was food and energy. Monetary policy was rightly tightened in late 2010. However, in the recent months one would have to be blind not to note the sharp deceleration in economic growth. Exports are falling, real estate prices are weaker, consumer durables are softer and jobs are being lost. Credit growth has fallen sharply, admittedly from unsustainable levels (consequence of poor policy in 2009).
Inflation is rightly a target, but the wrong focus measure will cause a false reaction, and make any healthy economy unbearably sick. In most countries the focus on inflation is “core' inflation. This usually refers to inflation excluding food and energy. Interest rates are a blunt instrument, and unless one is delusional, interest rates do not have an effect on the change in food and energy prices. In the past year in the global markets, soybean oil is down 20 percent, wheat is down 30 percent, sugar is down 33 percent and rice is unchanged from a year ago but down 25 percent from the late summer peak. The rate of change referred to here is based on the USD price change on the Chicago Board of Trade Futures Exchange. Oil prices are up but adjusting taka interest rates cannot and will not change the price dynamic, just as it did not with regard to the food items mentioned. We believe the core inflation is falling and is probably below 5 percent and average real rates are therefore 6 to 10 percent (depending on the term) on the real economy. This rate burden coupled with the sharp domestic and global economic decline (factually based) makes the recent additional monetary tightening not only absurd but suggestive of severe weaknesses in the monetary policy operator's comprehension of economic and financial reality.
Bangladesh's GDP in real USD terms is probably currently only growing at 3 to 4 percent and possibly less. No matter who you are in Bangladesh, this is a disastrous situation. The much stated objective of the finance ministry for 7 percent growth is not going to be achieved with the current policy mix as described, in particular given the recent decline in the taka exchange rate. Bangladesh has a dynamic and able private sector; unfortunately the policymakers are handicapping the entrepreneurs of Bangladesh in an untenable manner. We actually believe that Bangladesh's potential growth rate is well north of 7 percent and achievable, however it requires a radical change of course by those currently responsible for policy design and implementation.
The policymakers should be commended for working to remove fuel subsidies, the removal of the commercial bank's lending cap and the stated (but yet to be official) removal of capital gains tax. However, much more needs to be done urgently. Interest rates need to be cut, taxes in the corporate sector need to be slashed, foreign capital enabled in all maturities of the government debt market and not least the size of government needs to be cut aggressively. If these measures are not taken then Bangladesh will inevitably lose its competitive edge and capital will not enter the country. Capital that is critical to create jobs, lift incomes and drive entrepreneurship. South Asia and Southeast Asia is full of opportunity for international capital but Bangladesh is not at an obvious investment destination unless the policy mix is altered rapidly. Far too much has been squandered recently and the Bangladesh economy cannot afford the government's current policy mix to continue.

The writer is the chief executive officer of Timurid Investment Management Company (TIMCO).
Source:   The Daily Star, 24 January 2012