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Forex reserve falling short of target |
Bangladesh has started negotiations with the IMF for the second instalment of its $4.75 billion credit package. One of the criteria set by the IMF is to keep reserve at $23 billion by September. However, reserve is somewhere around $20 billion after clearing the bill of Asian Clearing Union, a settlement mechanism by few Asian countries to clear the import bill of member countries in every two months. I have recently come across a social media news clip that claims Indian state credit is likely on the table and it will improve the forex reserve situation. The veracity of which is still unknown.
Growing concern now is the falling growth of remittances. A large part of the blame is attributed to the artificially pegged value of taka; market rate is still 6/7 taka more. As I mentioned earlier, govt sticks to this policy because any depreciation would mean increase in expenditure of the ongoing infrastructure and development projects and increase in cost of transferring money abroad. Depreciation of taka,approaching the true market value,will work as incentive for foreign workers to send more money. But that is not happening in spite of repeated urge from various quarters.
Meanwhile, interest rates have been raised and lending caps have been removed. Yet nominal interest rate is still lower than the inflation rate. Food inflation is more than 15%. For some kitchen items ,it is even higher than 40%. Middle class and lower income group has lowered their protein consumption. In this backdrop, people are net loser as real interest rate is still negative.
On the other hand, rising inflation,artificial pegging of taka and negative real interest rate cast shadow over profitability of the firms and have remained source of unexpected collusion between businessmen and authority. I watched a news report where one businessmen shared a candid account on how his bitter interaction with the customs led him to raise the price of the commodity he imported earlier. Depreciation of taka and delay by the customs cost him extra bucks that he intended to recuperate by raising the prices.
Moreover, political impasse also casts shadow over investment projects. Investors anticipates that nominal interest rate will rise further as inflation is still higher than interest rate and taka will depreciate further. Any investment project in this scenario will raise their cost. So they will wait till a favorable time (when interest rate is significantly high that means it may fall in the future, commodity prices are coming down and taka is stable ) to go ahead with their investment projects. This is perhaps the right time to raise the interest rate further, but govt is reluctant to take such decision ahead of election.If the decision were taken then a positive picture may emerge in January-March quarter. I have already told earlier whichever political creed form the next government tough time lies ahead for people as utility bill will rise further, further imposition of supplementary duty to fill the revenue shortfall, further depreciation and further rise in policy rate.[Central bank may raise the policy rate further through the MPS. To see its impact we have to wait till April-June quarter.Raising the policy rate in every six months under gradualism should be changed.Policy rate change should be more frequent,every two months is even better.It means in six months we will have three changes in the policy rate.This will have more quick impact at the ground.*]
A lot of uncertainty hangs in the air about the clearing of second tranche of IMF credit. I assume govt may manage some credit from foreign banks at special concessional rate. But will that be enough to meet the reserve target set by IMF is the matter under scanner.
[*Update: This piece has been updated by me on September 09,2023 at 8:03 AM Bangladesh Standard Time.Update includes suggestion of frequent policy rate change.]
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