Could There Be A Recovery?

Tax cut and high govt spending
Will do little in situation improving.

Taka depreciated to TK 102 against US dollar last week. The record depreciation took everyone off guard. As government is pursuing a managed floating exchange rate, it pegged the rate at TK 87.50. Now at the exchange rate market US dollar is sold at TK 95. Net difference, TK 8,remains same as before. There will be some appreciation when Bangladesh will receive $250 million budgetary support from ADB.

Meanwhile, balance of payments causes lots of worries. There is widening deficit in current account balance. It stands at $14 billion right now.

Remittances keep falling. Though export earnings have increased and show signs of achieving this years target, growth forecast about key export markets throw a wrench into similar growth expectations in the future.International Monetary Fund revised down its growth forecast for 2023 to 3.6%¹.Bloomberg Market recently conducted a survey where a little less than half of the investors apprehended a recession in US economy for 2023. Deutch Bank echoed similar concern. According to a news report, UK inflation reached 9% and 25% of the British find it difficult to get 3-meal per day^2&3.

If we take a look at the country wise export,then we will notice USA,UK,Germany and France constitute our key export destinations. We remember that in 2008-09 Housing Bubble led to recession in the USA. The following year, Bangladesh’s export to USA,Germany,France and Belgium declined ⁵.But Bangladesh got back on track in the subsequent years.Reasons will be explained few para later.

With the rising price level and uncertainty, demand for Bangladeshi goods will be lower in these countries. Though import will be costlier, import of raw-materials and other essential items like oil,foodgrains may lead us to another current account deficit next year.

However, it is not clear what impact the inflation will make on oil revenue even if there is an output contraction in the developed economies. If there is indeed an oil revenue boom in the Middle East,key source of Bangladeshi remittances, then growth in remittances may end up in a current account surplus. However, inflation may cast a shadow over remittances coming from USA and UK. In 2009-10,year after the beginning of the financial crisis,remittances from USA declined to $1.4 billion. Another bout of geopolitical tension will hurt the remittances flow surely.

It is highly likely that government will increase spending as election will be held by the end of 2023. It has to make happy thr grassroot workforce. In addition,govt mulls corporate tax cut from 22% to 21% in the next budget⁴. Such fiscal policy may increase the output but will do little in the end. Why?

• First,such tax cut will do little in bringing new investment. Existing groups close to ruling party will take full benefits of such tax cut
.
• Second, investment spending in a corruption-stricken country hardly translates into new job creation or an increase in output. Rather,in the name of investment spending we may witness opening up of LCs to import capital machinery,raw-materials etc ,making alley of laundering money abroad
.
• Third,for the foreign investors there are already various kinds of tax incentives, so tax cut will do little to bring new FDI
.
• Fourth, in a country where tax-GDP ratio is still below two-digits such fiscal expansion is not a wise move especially when government is taking assistance from others as budgetary support
.
• Fifth, such fiscal expansion will raise the interest rate and Taka will appreciate, making our goods less competitive in the future. Look at the level of depreciation in Pakistan and Cambodia
.
• Sixth, when exchange rate is pegged at some value, now it is at TK 87.50, such fiscal expansion may contract our output more than it is under a free floating exchange rate.

It is indeed interesting to see how the government manages the challenges of inflation and current account deficit in an election year when populist government generally spends more and is shy to reduce interest rate.

I am optimistic about the current account balance. Because our export items to the West are mostly lower-end items. Consumers will purchase trousers, sweat shirt,T-shirts,undergarments, sweaters no matter what their income is.Their demand is inelastic.Despite the long bad spell in the US and Europe,Bangladeshi export took a little hit and did remarkably well. I anticipate the same thing this time. Moreover, we have to make liability into opportunity. As from the next year,we have to start paying an annual obligation of $565 for Rooppur nuclear power plant⁶[*]. However, if we could manage to convince Russia, we could pay it partly as RMG items/ship and partly as agricultural items. Moreover, we have to urge Russia to export wheat and oil to Bangladesh as part of its moral obligation for starting a war.In such case, burden to our US dollar stock will be significantly reduced.

Another thing the government should do is to let Taka lose its value. Now at the open market, exchange rate for a US dollar is TK 95. Government rate should reflect it. If the Taka depreciates further (to TK 120 or somewhere there), then our exportable item will be more competitive and output contraction will not be severe in the wake of a growth cut.

Like the populist regime,government embarked upon taking expansionary fiscal policy ahead of election year. No course correction is in sight. But further depreciation and reduction in interest rate would be more welcoming.

Notes And References:

1. “IMF Cuts Global Growth Outlook, Here Are The Warning Signs”, Reshma Kapadia,Barrons,April 19,2022. For more read at https://www.google.com/amp/s/www.barrons.com/amp/articles/imf-global-growth-outlook-warning-signs-51650326199
2. “Investors Predict US Recession 2023-Here Are The Facts”,Felix Richter,Statista,April 12,2022.For more read at https://www.weforum.org/agenda/2022/04/recession-investor-bank-pandemic-united-states/
3. “Teen Bela Khabar Pacchey Na 25% British;Mullosphitete Navishash(25% British Do Not Get 3-meal A Day; Awful Inflation)”,Jamuna Television, April 19,2022. For more watch https://m.youtube.com/watch?v=dNkAqd3C-4w
4. “Corporate Kor Abar Komchhey”,Daily Prothom Alo(p-12),May 21,2022.
5. Bangladesh Economic Review 2019,2020.
6. "Rooppur Ki Shethosti?(Is Rooppur A White Elephant?)", Bangladesh Military News,Facebook,May 13,2022. For more read at https://bit.ly/3LBCVOULBCVOU

[*Note:This piece has been updated at 21:15 PM BST on May 22,2022.The update includes link to annual repayment of Rooppur Nuclear Power Plant.]