Shift focus to stability from growth, economists tell finance minister

Economists have urged the finance minister to shift focus from economic growth to economic stability in the fiscal 2022-23, as measures to relieve the foreign currency reserve and calm the surging inflation dominated a pre-budget discussion.

To maintain macroeconomic stability, the economists at a virtual discussion with Finance Minister AHM Mustafa Kamal on Tuesday called for depreciating Taka drastically and lowering the individual-level dollar spending ceiling during foreign tours.

Central bank Governor Fazle Kabir told the discussion that the Bangladesh Bank now has to maintain the forex reserve and tackle inflation at the same time, though the central bank usually does not trade off inflation for anything, finance ministry officials said.

"To control inflation, we are releasing dollars from the reserve and opening LCs for food, fuel and fertiliser imports. As these commodities play a key role in pushing up inflation, we are paying for them from the reserve. We are trying to strike a balance between the reserve and inflation by this measure," the governor noted.

He said Taka has been depreciated by 3.20% in the past ten months since July last year – which is much less than many countries, including Japan, India, the USA and the UK. Bangladesh's current inflation rate is higher than that in Vietnam and Indonesia but lower than many other countries.

Finance Secretary Abdur Rouf Talukder said the government will take a series of measures in the next one to two months to keep the foreign exchange reserve at a satisfactory level.

"The government and the Bangladesh Bank have already started taking some small steps. We do not want to take major steps in the first place as the government wants to see how the market behaves. We will never compromise on anything that will ruin our macroeconomic stability," he added.

The finance secretary said Bangladesh has nothing to worry about the foreign debts.

"In the last fiscal year, Bangladesh repaid $1.419 billion in principal and $496 million in interest, which was 4.7% of the total export earnings of that fiscal year. We will have to repay $1.70 billion in principal and $726 million in interest in the current fiscal year, which will be 5% of total export earnings," he added.

Former governor of the Bangladesh Bank Mohammed Farashuddin, who was also in the meeting, said multiple exchange rates never brought any benefit for any nation. "But in our country, there have been three exchange rates in the past two years. For one the importers, which is cheap. The second one is for remitters, while the third one is for exporters."

He said imports now cost the government $6-$7 billion more than the exports and remittances, which did not happen in the last 12-14 years. Farashuddin suggested reducing the dollar gap between the kerb market and bank by depreciating Taka, adding that exporters and expatriates would be benefitted from the measure.

To tackle a reserve crisis, he also suggested controlling imports of luxury items as well as imports of construction materials and electronics that are manufactured locally.

The former central bank governor criticised the government for taking new loans despite having $50 billion unused in the pipeline.

He said many countries and organisations are willing to convert debt into grants, and urged the government to avail the facility by taking up innovative projects for poverty alleviation and protecting the environment.

Zaidi Sattar, chairman of the Policy Research Institute, said the exchange rate needs to be more flexible to help maintain the balance of payments and retain the current reserve. He said Bangladesh needs to have a forex reserve to cover import cost for at least six months.

"If Taka is depreciated, a 1% cash incentive for exports will no longer be required. If the exchange rate is flexible, exporters will get an additional 3%-4% gains," he noted.

Former senior finance secretary Mahbub Ahmed said when they prepared the budget three years ago, the focus was on increasing growth rate, investment and reducing poverty.

"In the national budgets for the past two years, the focus was on balancing life and livelihood. But the upcoming budget should switch to tackling inflation as people are not concerned about the growth rate anymore. Their main concern is about the price of essential items such as rice, lentils, oil and salt."

Mahbub Ahmed said the United States, India and other countries have already re-adjusted their interest rates to control inflation, and Bangladesh also should think about it.

He said dollar inflows need to be encouraged. The spending limit of $10,000 during foreign travel can be lowered.

Selim Raihan, executive director of the South Asian Network on Economic Modeling (Sanem), said, "Macroeconomic stability was our major achievement over the last one decade. But the pressure on macro-economy is mounting, and we need to think about managing it in the next budget.

"With the foreign reserve, the Bangladesh Bank and the government had been in a comfort zone for so many years. I have not seen such pressure on reserves in the last one decade. I think Taka should be depreciated."

The Dhaka University professor further said the devaluation of Taka would have a positive impact on exports and remittances, but it would not be immediate. But there will be immediate effects on imports – causing further inflationary pressure. Social protection and fiscal measures must be included in the budget to deal with the situation.

Professor Helaluddin, treasurer of the Economic Research Group, said it is necessary to maintain foreign exchange reserves, even if growth and recovery slows down, so that the country's economy can deal with any major external vulnerability in the coming days.

He said, "It is not possible to maintain the reserve by managing inflation. I think the inflation drive needs to be tamed, which requires immediate and drastic Taka depreciation. But there should be fiscal space in some strategic products such as rice, pulses and oil for distribution among the poor."

Economist MM Akash suggested looking into whether foreign currencies are being syphoned off the country through over-invoicing under the guise of imports.

Economists at the meeting expressed frustration over the poor tax-GDP ratio. Former finance secretary Mahbub Ahmed recommended forming a tax commission to identify the existing issues and determine what to do.

He said the government talks about increasing the tax-GDP ratio in every budget, but to no avail.

Former Bangladesh Bank governor Mohammed Farashuddin said the tax-GDP ratio is more than 19 even in earthquake-prone Nepal, while in Bangladesh it is 8.9% and declining. None of the steps taken so far to increase the ratio have worked out.

The experts also suggested the finance minister to focus on export diversification in the next budget.