Electoral Bond For Election Financing

Resort to blame game, skirting the issue core Can’t help much only generates smoke more.

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Recently, a debate over the number of millionaires running for election in Bangladesh resurfaced. Number of mega rich in election has registered a marked rise in 2024 compared to 2018. The electoral spirit is dead when the main opposition rejected the next election, demanding transfer of power to interim govt to supervise the election. Yet this debate is lingering in the air.

As part of election rules a candidate has to disclose details of his assets and liabilities to the public so that voters can know well the candidates they vote. The issue is here why so many rich people join politics nowadays. Clearly, there is dividend in joining politics so more and more rich people join politics nowadays. There is no taboo or crime in rich people joining the politics. But there is no radical shift in policy making. Rather, we witness a sharp increase in corruption, crimes, breaching of consumer and worker interests, wrong policies that bleed the economy and jeopardize the stability.

If things were improved a lot than what they were in the past, no one would bother about the rich in politics. I think if there is an abstract mean in dealing with various stakeholders in politics then this whole debate of electoral financing could be avoided. Electoral bonds introduced in India and many other countries could be an alternative. Any party that receives 1% of the national election vote is eligible for receiving electoral bond. The party then encash the bond from the central bank, which is the issuer of electoral bond. Recently, supreme court of India asks for more clarity in the country’s electoral bond that does not disclose identity of individuals/corporate group. In some countries, identity of individuals/groups needs to be disclosed if contribution is crossed a certain limit.(Source: “What Is Electoral Bond? Why Is It Under SC Scanner? “,Between The Lines With Palki Sharma,First Post,November 05,2023. Youtube link: http://tinyurl.com/3z7zy94e )

Implementation of electoral bond in Bangladesh will improve the political situation. As corporate groups and individuals rely on such bonds ,less strings will be attached to their contributions to political parties. Authority will have a close tab on money flow. Corporate groups will maintain impartial role. No one can dub them as coffer of certain political party. Their need could be met through policy formulation. Policy makers will also be able to make policy in an objective and less biased manner.

Lobbyist firms will emerge as key negotiator between policy makers and different stakeholders for policy formulation. So the need for rich people coming into politics could be avoided.

The kind of one-sided election we are witnessing now where agencies are doling out taxpayer’s money is another example of public money is being misused to wrong end. There is no accountability in it. Electoral bond will let the authority know who will finance whom. And corporate groups will show their spending on bonds in the balance sheet that will be reflected in the audit reports. Wealthy individuals will show the spending in their tax returns. The point is electoral spending will get the much needed documentation.

In the previous Parliament ,we witnessed how MPs with mysterious support and financings brought shame to the nation by getting involved in human trafficking, money laundering, land grabbing and indecent conduct. With the introduction of electoral bond, greater transparency is ensured and MPs with such character flaws may not make it into the Parliament.

Without addressing the structural flaws in our electoral process, we may not drastically improve the situation. Pointing fingers to the rich and passing the blame to others only generate more smoke and avoid the core issue. Introduction of electoral bond may be the beginning of beginning the reform process.

La Semaine Dernière A Mes Yeux

(23 décembre --- 29 décembre)

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Ma Semaine Gastronomique

Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
23	Pain,Chou	Riz,Tête de Ruhi dans soupe aux haricots mungo	Riz,Tête de Ruhi dans soupe aux haricots mungo	Lait,Goyave
24	Pain,Soupe aux haricot mungo	Riz,Épinard malabar,Soupe aux haricots mungo	Riz,Épinard malabar,Soupe aux haricots mungo,Omelette,Banane verte	Goyave
25	---	Riz,Lait,Mélasse de dattes	Riz,Banane verte,Omelette	---
26	Riz,Lait	Riz,Purée de pomme de terre,Soupe aux lentilles	Riz,Soupe aux lentilles,Omelette,Banane verte	---
27	Riz battu,Lait	Riz,Soupe aux lentilles,Banane verte avec poisson chat	Riz,Soupe aux lentilles,Banane verte avec poisson chat	---
28	Riz battu	Riz,Koi poisson avec chou-fleur et pomme de terre	Riz,Koi poisson,Chou-fleur	Riz gonflé, Mélasse, Lait
29	Riz,Œuf poché, Chou-fleur	Riz,Chou-fleur,Soupe aux haricot mungo, Papaye et pomme de terre	Riz,Soupe aux haricot mungo,Purée de papaye et pomme de terre	Lait,Riz gonflé et mélasse

IMF First Review: Optimism & Uncomfortable Truth

Despite cautious optimism about the economy, It still screams in agony.

Last week,IMF published first review report of its $4.7 billion credit dealings with Bangladesh. Key takeaways of this report are:

• GDP growth has been slowed down (projected 6% in FY-24 from 6.5%).Private demand may decline further. Food inflation stands out the prime reason for pushing up the general price levels.
• Current Account Deficit improved ,became 0.7 % of GDP at the end of 2023. Budget deficit is 5.2% of GDP.
• Poor revenue collection, fall in private consumption, and import shrink cause tax-to-GDP ratio to decline to 7.4%. Public debt rose to 39.8% at the end of 2023.
• Net International Reserve was $15.9 billion on October 31,2023. It fears further downward pressure on reserve in near future but remains optimistic about maintaining 4-month worth of reserve in the long run.
• The joint IMF-World Bank debt sustainability analysis finds that Bangladesh’s risk is low in case of any debt distress situation.
• Bangladesh Bank so far implements interest corridor, market determined exchange rate, reporting forex reserve as per BPM-6 manual and publishes amount of true non performing loan in annual financial stability report.
• Bangladesh has yet to introduce the Finance Company Act 2020.
• Bangladesh introduces new income tax act and digitization of tax system along with other reforms that will likely increase the revenue collection by 0.5% of the GDP.
• Nonperforming loans cast shadow over growth in medium term. And state owned commercial banks suffer liquidity crisis to meet the capital adequacy ratio. Despite the 9.1% credit growth to private sector, private sector credit has not reached yet the pre-COVID level.
• Subsidy to GDP ratio is still high,2% of GDP. Govt is contemplating market based fuel price adjustment.
• Bangladesh Bank continues monetary tightening policy. Policy rate has been increased by 200 basis points since the start of credit negotiation. An interim crawling arrangement with band corridor suggested till the country fully moves towards flexible exchange rate regime.

Despite the fact that debt situation of Bangladesh is not worrisome, we have to keep in mind that the central bank remains the sole authority to issue assets like treasury bond and legal tender. There maybe no demand for bonds in the market,government may artificially create need for it in a bid to legitimize printing money. Remember, public debt is rising. And government has the power to redefine the status of bad loans. The point is our true loan could be more than the official figure and resources at the hands of government may not be true resources. In addition, spill over effect of the crisis in the Middle East and US threat of economic sanctions cast shadow over our external sector,which still remains a beacon of hope. It is also remarkable to see that allowing flexibility in exchange rate put monetary policy into work. Flexible exchange rate mechanism is a precondition for using monetary policy as a policy instrument. This IMF credit programs also unfolded some uncomfortable truths:

1. An IMF letter to central bank objecting non-monetary use of reserve assets led to exposure of $7 billion misuse.
2. First instalment negotiation revealed that government for far too long shown interest spending on National Savings Certificates as social security spending. It was unjust and gave an erroneous swollen estimates of social security spending.
3. Recently, a news report divulged that a state body PetroBangla has not cleared its VAT obligations of TAKA 220.84 billion to NBR for the last 12 years. In fact, PetroBangla deposited money on several accounts in the banking system but avoided NBR payments willfully. Another news report claimed visiting IMF team raised the issue with the govt.
4. Newly formed Universal Pension Scheme authority decided to invest part of the pension fund to treasury bond while inflation was higher than the bond rate. It was clearly a loss project for the pension funds.
5. IMF suggestion led to publication of GDP data quarterly instead of annually. It helps stemming leakages and showing policy impact at ground level.

IMF exercised cautious optimism throughout the first review report. However, the level of economic governance we are witnessing leaves little room for optimism. Crop yield may be very good, food prices in international market may come down but bringing trust and confidence in the economy is the vital thing.

La Semaine Dernière A Mes Yeux

(16 décembre --- 22 décembre)

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Ma Semaine Gastronomique

Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
16	Pain,Chou	Riz,Ruhi avec pomme de terre	Riz,Ruhi avec pomme de terre	Vermicelles, Lait
17	Pain,Ruhi	Riz,Épinard malabar,Soupe aux lentilles,Goyave	Riz,Chou-fleur, Soupe aux lentilles	---
18	Pain,Chou-fleur,Lait	Riz,Soupe aux lentilles,Ruhi	Riz,Ruhi,Soupe aux lentilles	Vermicelles
19	Riz,Poulet	Riz,Soupe aux lentilles, Épinard,Chou-fleur	Riz,Soupe aux lentilles, Épinard,Chou-fleur,Omelette	---
20	Riz,Soupe aux lentilles, Œuf,Chou	Riz,Soupe aux lentilles, Feuilles de gourde calebasse	Riz,Soupe aux haricots mungo,Chou-fleur, Pakora	Lait
21	Riz,Soupe aux haricots mungo,Pain,Chou-fleur	Riz,Purée de Pomme de terre,Tête de chèvre	Riz,Purée de Pomme de terre,Tête de chèvre	Goyave
22	Pain,Tête de chèvre	Riz,Guntea loche poisson	Gâteau de riz («Bhapa Pitha»)	Pulpe de noix de coco

The Bizarre Case Of Exchange Rate Fixing

Bizarre fixing of exchange rate Only changes few people’s fate. Reconciliation is a must To bring confidence and trust.

IMF has cleared second tranche of $4.7 billion credit package for Bangladesh. In addition to this $689 million, Bangladesh Bank also confirmed that this month the country would receive $90 million as budget assistance from South Korea.

No sooner the decision has taken Bangladesh Foreign Exchange Dealer’s Association (BAFEDA) and Association of Bankers Bangladesh (ABB) raised value of Taka against the US dollar by 25 paisa. It is still unknown what is the rate outside Bangladesh. So far no information indicates that exchange rate of taka against major currencies appreciated in the unofficial market. International money transfer companies like Western Union and other similar companies have not yet updated their exchange rate. Bangladesh Bank has not been raised the policy rate again. Most important thing is that demand for dollar is still high. This decision is not market based and undoubtedly will give benefits to ABB and BAFEDA, which for a long time enjoy the privilege to fix the exchange rate. Taka's interaction with major currencies could be the determinant for the exchange rate. However, this latest development will pave the way for BAFEDA and ABB to make some gain: they may buy the USD at official rate from Bangladesh Bank and sell it at a higher rate (most likely the unofficial rate) to the clients. Not only the few foreign remittance houses ,Bangladeshi platforms of foreign exchange dealers join the club of exploiting the currency market.

I think Bangladesh Bank should monitor taka's value against the major currencies of major trading partners plus the rate offered by major international banks and money transfer houses and project an uniform rate on its website everyday (if possible)/every week.

It has widely been reported that reduction in tax rebate is on the table as part of the IMF conditionalities. For far too long corporate tax has been kept low,around 22%. In many countries, it is around 40% or 35%. Meanwhile, country is facing a budget deficit. What is the point of keeping it low while you are borrowing from abroad to finance the deficit here. Think of an individual household on a tight income. Any spending increases in one month forces it to borrow from somewhere else. To keep the debt low and to keep the spending-earning gap low, it has to cut spending and/or increase the earning. Same holds true for a government. In the face of growing budget deficit, it has to raise taxes and cut spending to narrow the budget deficit. If the government kept the tax low for some period, then it has to raise the taxes later to maintain at least an affordable level budget deficit. As our budget deficit is growing year after year, our taxes (including corporate tax) are also kept low. It only contributes to worsening the problem. It appears govt shelves the unpopular part of raising the taxes for future generation/government. In future,we have to pay more taxes just to keep the budget deficit low or zero. The longer this issue remains unaddressed, the higher the magnitude of the taxes we have to pay later. This is as simple as that. And standard economics text book corroborates this.

The budget deficit is growing because there is no reconciliation between the two major political parties. Amid this if one sided election is held there may be a silent capital flight. Because capital associated with the main opposition party may find it difficult to operate here in this country. Domestic investment may become sluggish. So government’s revenue collection target may hit a dead end because of lack of economic activity. In this backdrop, it is worthless to go ahead with an election that has a price-tag of taka 14/20 billion. Government needs to curtail its spending amid austerity instead of amplifying it.

A quick economic recovery demands government settle electoral issues with the main opposition party. Bypassing it may widen our deficit and delay the recovery.

La Semaine Dernière A Mes Yeux

(09 décembre --- 15 décembre)

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Ma Semaine Gastronomique

Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
09	Pain,Tête de chèvre dans soupe aux pois blanc	Riz,Poisson bombili,Épinard malabar, Soupe aux lentilles	Riz,Épinard malabar,Lait	---
10	Pain,Omelette, Lait	Riz,Chou-fleur,Purée de pomme de terre,Soupe aux lentilles	Riz,Soupe aux lentilles,Purée de pomme de terre	---
11	Pain,Chou-fleur,Omelette,Lait	Riz,Petit taro chinois	Pain,Omelette, Chou,Tomate	---
12	Pain,Chou,Omelette, Lait	Riz,Purée de pomme de terre,Chou,Soupe aux lentilles	Riz,Chou,Omelette	Goyave
13	Pain,Omelette, Lait	Riz,Soupe aux haricots mungo,Ompok pabda poisson,Chou-fleur	Riz,Soupe aux haricots mungo,Ompok pabda poisson,Chou-fleur	---
14	Pain,Chou-fleur, Goyave	Riz,Soupe aux haricots mungo,Pama croaker,Radis	Riz,Soupe aux lentilles, Pabda,Radis	Lait,Nouilles
15	Pain,Pama croaker	Riz,Chou-fleur,Banana verte avec poisson chat	Riz,Chou-fleur	Vermicelles, Pain

Bangladesh Bailout: Repeat Of Pakistani Incident

Recent dealing of macro woes kept people in the dark without clues

Bangladesh Bank claims in December Bangladesh is going to receive $1.8 billion as credit and budget assistance. This addition will not lower further the forex reserve, Bangladesh Bank believes. Asian Development Bank(ADB) will give $400 million as assistance and IMF may endorse $680 million as second tranche of the $4.07 billion credit. And Bangladesh is pretty confident that it is likely to get the second pack.

Despite the improvement in current account balance, inflation is still high,around 10%. Exchange rate of taka against major currencies like USD and Pound sterling has not yet been stabilized. The loans and assistance we are receiving may be a condition of IMF's ongoing support. IMF Special Drawing Right (SDR),a special reserve asset comprised of several currencies (USD,Pound,Euro,Yen,Yuan), may be transferred toward other causes like aiding countries in dire financial situation. IMF in its website acknowledges that¹:

->SDR Department participants with strong external positions have historically used some of their SDR holdings to help countries in need. For instance, during the current crisis, several countries have used part of their SDR holdings to expand the IMF’s concessional financing by scaling up the IMF’s Poverty Reduction and Growth Trust’s (PRGT) loan resources. …
->We are also exploring other options for voluntarily channeling SDRs from members with strong external positions to support poorer and more vulnerable countries to help their recovery from the pandemic. Depending on the priorities of the membership, a new Resilience and Sustainability Trust could be considered to facilitate structural transformations, including greener recoveries from this crisis, for resilient and sustainable growth in the medium term. Another possibility could be to channel SDRs to support lending by multilateral development banks.

ADB being one of the development institutions as prescribed holder of SDR may be using IMF SDR to assist Bangladesh in addressing its budget deficit. Richer countries sympathetic towards Bangladesh may be using their SDRs to provide soft credit to bail out Bangladesh.

One of the conditions set by IMF to get the next credit pack is that reserve should be $18 billion by December 2023. As per BPM-6, Bangladesh's net reserve stands at $19.40 billion at the end of first week of December. As Bangladesh sells dollar from its reserve, downward pressure on reserve still remains. Meanwhile, we witnessed that Bangladesh leased Potenga Container Terminal to Saudi Red Sea Gateway Terminal (RSGT) for 20 years. Similar incident took place in Pakistan when the country leased its Karachi port to UAE for $220 million in June². Later Saudi Arabia came into the scene. It perked $2 billion in Pakistan central bank to get it vital IMF loan³.

The strange behavior of one specialized bank and its Saudi shareholder lent credence to the argument that Middle Eastern countries may play a role in achieving the second credit pack from IMF.In November 2023,the bank lent a huge some of money to a fraudulent group ,which laundered the money in a Middle Eastern country, and put the whole banking sector in a precarious situation. It was the Saudi exchange house that charged higher rate for USD in recent weeks. Last week, exchange houses in the UK charged higher rate for Pound. It indicates that the exchange houses abroad are stockpiling taka to gain more from appreciation of taka in the event of IMF loan approval / significant interest rate hike. They have this prior information.

Back in October last year,I penned a piece titled “Macro-Woes”⁴ where I highlighted how strategic relations shape economy, citing Saudi money perking in Pakistani bank with strings attached. I strongly believe the Parliament comprised of MPs with popular mandate should have the last word on making strategic decisions. Few regimented people in a close door meeting making key decision about strategic relations is not good for the country while leaving the people in the dark. At the end of the day ,country and people bear its consequences. And our constitution does not allow such kind of decision making as Parliament’s approval is required for any military engagement with other country besides multilateral initiative. Strategic decision making including forming alliance to wage war is a political matter, not a military one. Political matter should be solved by political stakeholders. Anyway, the way Bangladesh is addressing its macroeconomic issues hints that it is similar to the way Pakistan has dealt with its recent macro woes.

Notes And References

1. ”Questions And Answers On Special Drawing Rights(SDRs)”,IMF.For more read at https://www.imf.org/en/About/FAQ/special-drawing-right
2. “Cash Strapped Pakistan To Lease Part of Karachi Port To UAE For $220 Million”, NDTV,June 22,2023.For more read at https://www.ndtv.com/world-news/cash-strapped-pakistan-to-lease-part-of-karachi-port-to-uae-for-220-million-4144226
3. “Saudi Arabia Gives $2 Billion as IMF Bailout To Pakistan, says Country’s Finance Minister”,Reuters,July 11,2023. For more read at https://www.tbsnews.net/world/global-economy/saudi-arabia-gives-2-billion-imf-bailout-pakistan-says-countrys-finance
4. “Macro Woes”, Rezaul Hoque,October 28,2023.https://hoquestake.blogspot.com. For more read at https://hoquestake.blogspot.com/2022/10/macro-woes.html?m=1

La Semaine Dernière A Mes Yeux

(02 décembre --- 08 décembre)

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Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
02	Pain ,Omelette,Chou-fleur	Riz,Feuilles de gourde calebasse,Tête de chèvre dans soupe aux pois blanc	Riz,Tête de chèvre dans soupe aux pois blanc	---
03	Pain,Tête de chèvre dans soupe aux pois blanc,Œuf poché	Riz,Pama croaker poisson,Chou-fleur,Soupe aux lentilles	Pain,Chou-fleur, Omelette	Lait
04	Pain,Omelette	Riz,Pama croaker poisson,Chou-fleur,Soupe aux lentilles	Riz,Pama croaker poisson,Chou-fleur	Lait
05	Pain,Omelette	Riz,Soupe aux lentilles, Pama croaker,Chou-fleur	Riz,Soupe aux lentilles, Chou-fleur	---
06	Pain,Omelette	Riz,Pama Croaker	Riz,Pama Croaker	---
07	Pain,Omelette	Riz,Soupe aux lentilles, Épinards, Purée de pomme de terre	Riz,Purée de pomme de terre	Lait
08	Pain	Riz,Poisson bombili,Feuilles de radis,Feuilles d'oignon	Riz,Feuilles d'oignon, Tête de chèvre dans soupe aux pois blanc	---

Need Policies For Domestic Defense Production

Two trainers finally take-off, Leaving behind issue still remains stand-off.

Last week social media and Bangladesh Air Force(BAF) in its annual graduation program confirmed successful development of two basic trainers,named Bangabandhu Basic Trainer (BBT) 1 and 2. BAF in its own facility, known as Bangabandhu Aeronautical Centre(BAC), developed the two models with funding assistance from the government. It is not known how much money was spent and what are the specifications. But pictures surfaced on the social media hint that one is similar to kitplane preferred by amateur pilots in the West. The other one is just a trainer similar to occidental trainer to train air force cadet pilots. Things would be much better if it were done by private companies.

In fact, in Bangladesh, we do not have proper policies and regulations that allow engagement of private sector in defense production. Private sector involvement could significantly reduce cost and ensure efficient use of resources, which is vital for the country facing budget deficit. In addition, accountability and transparency can be established in defense spending. Right now no law obliges defense community to offer explanation to the Parliament and the press about their conduct and spending behaviour. Vital organ of the state stays outside of accountability system, undermining our institutions responsible for ensuring check and balance and strengthening democracy.

To make sure private participation in defense production, proper policy should be introduced. India has Defence Acquisition Procedure(DAP). DAP 2020 set up rules regarding engagement of private companies in defense production and reservation for them in some sectors, liberalization of licensing and test/trial policies, focus on indigenous content in defense article production. It also incorporates a strategic partnership model that allows Indian companies to manufacture hi-tech equipments at home and to partner with global companies to manufacture defense equipments under technology transfer agreement.

In USA, Defense Production Act(DPA) 1950 allows US president to divert resources and engage private companies to produce defense article to comply national security emergency. The DPA also allows president to provide loans, subsidies to private sector so that private companies can expand their production capacity to address the security needs.

In Bangladesh we need similar laws and regulations. It will stop leakage in public spending. Another good thing about engaging private sector is that private companies are subject to audit and stakeholders will keep a close tab on the spending and appropriate measures taken. So issues like misuse of money or cost overrun will be reduced and accountability is ensured.

Similarly, parliamentary committee on defense can convene people from respective institution to attend hearing and offer explanation on issues like cost overrun, corruption or other issues that we are not allowed to discuss now on public domain citing reason of “national security “.Good thing is these things will be documented and this step may stop recurrence of similar issues in the future. Opaque culture in defense policy,procurement and production will be altered completely.

Crucial thing is allowing private sector will enhance research facility in tertiary education institution. At the moment, setting up dedicated labs in various departments of science faculty in universities and engineering universities is untenable due to huge cost and limited prospect of end usage of research outcome. Private sector will divert part of their investment to set up such labs and research facilities that will come up with outcomes ultimately having industrial application too. So government or public spending at the end of the day spurring growth in the domestic private sector, ushering in new possibilities and creating other eco systems elsewhere. Unfortunately, here public money spent seldom lands in domestic private sector. It is particularly true for the defense sector.

I find this BBT-1 and BBT-2 trainer development initiative without proper policies and regulations a kind of cart-before-the-horse thing. Sustainable defense production requires greater transparency ,accountability and unfolding the true potentials of both public and private facilities. Without having that, money spent is just meant to contribute in ongoing leakages in defense spending. In our country, we have confined the meaning of accountability to hold the politicians and political parties accountable. That is not the case across the world! We have to get ourselves out of this narrow definition of accountability and make sure that its perimeter gets wide enough to bring all the institutions inside it.

La Semaine Dernière A Mes Yeux

(25 novembre --- 01 décembre)

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Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
25	Pain ,Omelette	Riz gluant,Tête de chèvre dans soupe aux pois blanc	Riz gluant,Tête de chèvre dans soupe aux pois blanc	---
26	Riz,Tête de chèvre dans soupe aux pois blanc	Riz,Papaye verte,Soupe aux lentilles	Riz,Fritures des oignions et lentilles, Soupe aux lentilles, Omelette	---
27	Pain ,Omelette, Chou-fleur	Riz,Radis,Soupe aux lentilles, Ruhi	Riz,Tête de chèvre dans soupe aux pois blanc	Riz,Tête de chèvre dans soupe aux pois blanc	---
28	Pain,Tête de chèvre dans soupe aux pois blanc	Riz,Radis, Tête de chèvre dans soupe aux pois blanc	Pain,Omelette	Lait
29	Pain,Chou-fleur	Riz,Petit poissons, Soupe aux lentilles	Pain,Petit poissons	---
30	Pain,Omelette	Riz,Feuilles de Radis,Pama croaker,Chou-fleur, Soupe aux lentilles	Riz,Chou-fleur, Pama croaker	Lait,Pomme
01	Pain ,Omelette	Riz,chou-fleur, Cerveau de chèvre, Purée de Haricot	Riz,Chou-fleur,Pianju,Purée de haricot	---

Wrong Move And Slow Policy Alignment

50 paisa raise without hike in policy rate A wrong move that may not improve the current state.

Recently, Bangladesh Foreign Exchange Dealers Association and Association of Bangladesh Bankers decided to raise the exchange rate of taka against USD by 50 paisa. Exchange rate of taka has become 110 against the USD from taka 110.50/USD. But this appreciation is not result of interest rate hike rather it is set by some platforms. Meanwhile, local banks unofficially and foreign remittance houses are offering USD at taka 120 or below , slight appreciation from the previous week. It is unclear how the move may help improving the inflationary situation. On the contrary, banks and local exchange houses are likely to gain from such appreciation. This is the right time for another significant raise in policy rate amid dull economic activity. Yet it did not happen. Back in October I penned a piece titled "Slow Alignment Costs Investment", highlighting the costs of slow alignment. Sharing it again:

Recently, the World Bank has downsized Bangladesh growth forecast. It also predicts that inflation in the next fiscal year will be hovering around 8.5%. Earlier IMF in its economic outlook said that it would take at least 2/3 years for Bangladesh to stabilize its economy.

Bangladesh Bank has already said that it has no intention to change its monetary policy before the next general election. This means easing of inflationary pressure may take some time.[However,on October 04,2023,Bangladesh Bank has raised the policy rate/repo rate by 75 basis points.]

Meanwhile, soaring inflation dents in the pockets of lower income group and casts shadow over the investment projects outside the economic zones. If there were several raises in policy rates in one/two quarters( that I argued in a previous piece,see "Could Bangladesh Get The Second Credit Pack?" ), things might have improved one/two quarter later. Now, real interest rate is negative, meaning nominal interest rate is still below the inflation rate. Notion such as this misalignment will be addressed future—interest rate will rise further ---will hold back investors to go ahead with investment projects. Why?

Answer lies on how big investors make their decision. If you look at the discounting criteria then it is not a wise idea to implement a project when interest rate is likely to rise further. Because net present value of cash inflow decreases as interest rate increases. Moreover,cost of capital goes up further,raising the cost of doing business in the country. For FDI project or investors investing in economic zones,this may not be a big issue as they have access to cheap foreign credit/financing. But interest rate could become a factor when their local vendors try to purchase things from local market. Not only the interest rate, the rigid exchange rate may also increase their cost of doing business.

While inflation may continue to dominate interest rate, interest rate may vary in future. In such case, internal rate of return (IRR) based decision becomes untenable as interest rate varies in short period.

Tribal nature of our politics plays a conducive role in mingling business with politics. In such case, investment projects associated with ruling regime with payback period longer than 5 years will go abroad. Investment with higher cash inflows and payback period less than 5 years may see the light. Now guess what businesses will offer you high cash inflows in the face of overwhelming odds! Meanwhile, investment projects associated with opposition creed may go abroad as they may find it difficult to operate here.

Failure of MPS to contain inflation casts shadow over the economy. Interest rate policy chases the inflation at slow pace, sending wrong signal to investors. Political impasse and US Visa restrictions complicated the matter. Amid high inflation we need investment projects to create jobs and generate optimism in the economy. Yet the current policy shelves those projects at a later date or pushes them abroad.

La Semaine Dernière A Mes Yeux

(18 novembre --- 24 novembre)

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Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
18	Pain tchapati,Chou-fleur	Riz,Radis,Poisson chat à queue jaune	Riz,Radis,Poisson chat à queue jaune	---
19	Pain tchapati,Omelette	Riz,Feuilles de tête d'éléphant amarante, Soupe aux lentilles,Poisson chat à queue jaune,Radis	Pain tchapati,Chou	---
20	Pain,Omelette	Riz,Soupe aux lentilles,Ruhi, Chou-fleur	Riz,Omelette, Ruhi	---
21	Pain,Chou-fleur, Papaye	Riz,Soupe aux lentilles,Feuilles de radis,Ruhi	Riz,Ruhi,Soupe aux lentilles	---
22	Pain,Omelette	Riz,Soupe aux lentilles,Poisson chat à queue jaune	Pain, Omelette	Vermicelles locale
23	Pain,Omelette	Riz,Poisson chat à queue jaune,Soupe aux lentilles,Radis,Chou-fleur	Riz,Poisson chat à queue jaune	---
24	Paratha,Omelette	Riz,Ruhi avec pomme de terre,Radis,Soupe aux lentilles	Riz,Frittures des lentilles et de l'ail,Ruhi avec pomme de terre, Radis	Goyave

Exchange Rate Volatility: Policy Debacle Should Be Blamed

Stockpiling of taka by Foreign exchange houses, A mean to gain more from interest rate rises.

Recently,a news report divulged that many public and specialized banks purchased dollars at higher rate than the exchange rate set by the Bangladesh Bank. Since there is unusual demand for dollars, some banks offered more than the set exchange rate to meet their dollar procurement goal.

The news report citing a public bank official reported that an exchange house based in the Middle East offered the bank to sell USD at taka 123.50/USD,which it denied. But another specialized bank accepted the offer¹. Earlier US based exchange houses and app offered higher rate for dollars.

Now government policies might play a role in deepening the dollar crisis. Earlier central bank bailed out many specialized banks that fell victims of fraudulent activities. Central bank lent them huge sum of money through promissory demand notes. The money is now being used to swell the taka reserve of foreign exchange houses. Central bank is following a contractionary monetary policy,which so far fails to contain inflation. It is likely to raise interest rate further before and after the next Monetary Policy Statement.

Another thing is that Bangladeshi credit/debit card holders can afford buying dollars at Bangladesh Bank determined rate. I think $12,000 may be the limit for individual card holder. Importers also avail the dollar at subsidized rate.Now this subsidized dollar is being spent/laundered abroad!

There is little hope that things might improve after the election and interest rate may rise significantly. If this happens then Bangladeshi taka may appreciate further. Say taka appreciates to taka 100/USD. Then these foreign exchange houses may gain taka 23.50 against 1 USD by purchasing USD with their taka reserve.

Now the things emerged out of all this debacle are:

1. Subsidized (official rate) dollar is going abroad and foreign exchange houses buy it. Some of these houses sell the dollar to local banks at higher rate and increases their taka holdings.

2. Government cash incentives to some extent play a role in foreign exchange houses’ stockpiling of taka. Many Bangladeshis purchased property in the Middle East and many of the Middle Eastern investors have/had stakes in these specialized Bangladeshi banks.

3. Future appreciation of taka as a result of significant interest rate hike may open door for these foreign houses to gain from such stockpiling.

Clearly, government’s own policy causes the trouble here. Unitary exchange rate of taka has not yet been implemented! Wide gap between multiple rates only accelerates profiteering activities. Significant rise in policy rate at frequent interval could improve the situation. Bangladesh itself is an example that higher interest rate does not work as impediment to new initiative. Micro borrowers pay more than 20% interest rate and SMEs in general pay around 20% interest rate! They keep the economy moving forward. In addition, high interest rate screens out any fraudulent initiative that flourishes under low interest rate economy. Investment will take place if return is lucrative and no matter what the interest rate is. In a country where undocumented wealth casts shadow over the mainstream economy, it is absurd to be afraid of recession or loss of employment or low investment. Rather,high interest rate will discipline the business environment by bringing money into trouble-ridden banking system and creating investment-worthy fund! Most important of all, listen to what the standard economics text book says.

Notes And References

1. “Dollar Er Dam Nie Osthirota Cholchhey(Volatility Prevails In Dollar Rate)”,Daily Prothom Alo,P-11,November 14,2023.

La Semaine Dernière A Mes Yeux

(11 novembre --- 17 novembre)

Cliquez pour voir/cacher

Ma Semaine Gastronomique

Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
11	Pain tchapati,Chou-fleur	Riz,Poisson chat à queue jaune,Chou-fleur, Pomme de terre	Riz,Pury ,Pain tchapati,Chou	Singara
12	Pain tchapati,Riz,Soupe aux lentilles,Œuf dur,Chou	Riz,Soupe aux lentilles,Tête de Poisson chat à queue jaune	---	Pakora(Pomme de terre,Oignon,Ail)
13	Pain tchapati,Omelette	Riz,Feuilles de tête d'éléphant amarante, Radis,Poisson chat avec queue jaune,Soupe aux lentilles	Fritture de pomme de terre	---
14	Pain tchapati,Omelette	Riz,Poisson chat avec queue jaune,Soupe aux lentilles	Riz,Chou-fleur, Fritures des oignons	---
15	Pain tchapati,Chou-fleur	Riz,Poulet	Riz,Poulet,Fritures de l'oignon et l'ail	---
16	Pain tchapati,Poulet	Riz,Soupe aux lentilles, Chou-fleur	Pain tchapati,Chou-fleur	---
17	Pain tchapati,Omelette	Riz,Soupe aux lentilles, Épinard malabar	Riz,Chou-fleur	---

Inflation And Exchange Rate Worsen Further

Fall of taka continues unabated, Frequent interest hike is what we needed.

Bureau of Statistics own estimation reveals that food inflation rose to 12.56% in October. General inflation also increased to 9.93% during this time.Purchasing power of the mass people takes a nosedive while prices of kitchen items skyrocket. Earlier Bangladesh Bank raised the repo rate by 75 basis points to tackle the inflation. More frequent raises are needed.

Meanwhile, taka continues to lose its value against USD. Foreign remittance houses charge taka 123 for 1 USD.Official exchange rate is taka 111/USD. In an earlier post, I wrote how USD was being traded on the streets in Motijheel like cinema ticket.

Government however decided to fix the exchange rate instead of market mechanism of fixing the rate and announced taka 5 incentives for remitters. In October, Bangladeshis working abroad sent $1.97 billion , a record in the last 4 months. Government boasts it as a success for its ongoing policy.

If we take a look at the top 10 countries for the remittances, then we will see UAE,UK,USA top the list. These countries are the places where many of our opaque capital found sanctuary. The cash incentive is only propelling the profiteering activities. One businessman in a TV interview disclosed that many apartments in posh areas of Dhaka are being bought and sold in these countries. Transaction of this kind hinges on dollars purchased from migrant Bangladeshi workers. In addition, interest rate was also hiked in these countries, prompting some quarters to invest in dollar deposits / interest bearing assets in these countries. Apart from that, organized criminal groups also procure dollar earned by migrant workers through various channels. Recently ,I have come across a news report that says Russian/Chinese billionaires want to hold and swell their dollars¹*. These factors along with others could come into play for high exchange rate for taka in foreign remittance houses.

Bangladesh Bank has to focus on its monetary policy to address the challenges of inflation and falling taka against USD. As I advocated earlier, frequent small increase in interest rate could at least check the inflation. As inflation is higher ,taka continues to depreciate against USD. Until real interest rate becomes positive, things are not going to improve much. Moreover,the incentives, subsidized exchange rate may risk in falling wrong hands. This money may later be used for profiteering activities. In Bangladesh,we witness how commodities which are not supposed to register high prices see unusual hike. Online gambling and ponzi scheme invade the society. Earlier I hinted how trouble ridden banks could easily exploit the cash incentives for the remitters. Similarly, individuals with short selling knowledge and prior information about decision making in the power corridor may exploit the situation to make a fortune. To prevent a Black Wednesday like situation, credible interest rate hike in future is a must. Promising inflow of remittances ushers hope Bangladesh may get second part of IMF credit by meeting reserve target of $18 billion by December. Further increase in rates and abolishing incentives could further aid the policy of economic recovery.

Notes And References

1. "China's Economy Is So Uncertain That The Wealthy Are Turning To Underground Network To Secretly Move Cash Out Of The Country", Phil Rosen,October 10,2023.Market Insider.Here is the link: https://markets.businessinsider.com/news/currencies/china-economy-wealthy-investors-markets-rich-cash-banks-secret-transfer-2023-10

[*Update: This piece has been updated by me on November 12,2023 at 11:03 AM.Update includes references.]