Macroeconomy Amid Trade War III

Clashes of the titans in trade May prolong the struggling state.

Private sector credit plays a vital role in the growth of economy. Private sector makes good use of money. This year govt intends to borrow Taka 1.37 trillion from the banking sector. It will definitely shrink the flow of credit to the private sector. At the end of March 2024,private sector credit was Taka 1517.21 billion,registering a 10.49% growth. Whereas at the end of March last year, it was Taka 1553.69 billion,registering a growth of 12.03%(Source: Bangladesh Bank). Clearly, private sector credit in terms of absolute and relative size declined in one year. Less credit to private sector means less domestic investment, slash in domestic production. This piece sketches how the trade tensions between the US and China influence the macroeconomy by adding the private sector credit factor.

The first piece was written while keeping in mind the private sector credit was Taka 1517.21 billion. Let's see how the scenarios will look like when private sector credit is more than Taka 1517.21 billion and when it is less than Taka 1517.21 billion.

Private sector credit: More than Taka 1517.21 billion

Fed funds rate:5.33%
Chinese loan prime rate: 3.45%
It will depend on how the private sector credit will behave. If the money is laundered abroad then it will do harm. On the other hand, if it is invested back in the economy or is used to pay old debt then some vibrancy in the economy may be observed. More LCs will be opened, more capital machinery will be imported. Revenue earnings will be increased. NBR's revenue shortfall will be narrowed. Amid trade war, private sectors' access to domestic credit will grow. More Chinese credit will be on the table at affordable rate. Government may have to depend less on the banks in this situation. It may improve inflationary situation. No large depreciation is needed. However, private sector external debt may rise. And we may have to stick to contractionary policy for a long time.

Fed funds rate: More than 5.33%
Chinese loan prime rate: Less than 3.45%
In this scenario, chances of laundering of private credit are higher than before. Depreciation of the local currency is needed. Depreciation will be less than the default scenario. Because private sector will have access to more credit. More Chinese credit both for the govt and private corporations. Inflationary pressure will be there but it will be less than the default scenario since private sector credit will accelerate economic activities. However, rising policy rate in the West may slash consumption,affecting export growth of Bangladesh. If private sector credit is used in purchasing govt treasury bills ,then there is no productive use of private sector credit.

Fed funds rate: Less than 5.33%
Chinese loan prime rate: Less than 3.45%
This is an ideal situation for economic recovery. Inflationary pressure will be less. Policy rate hike does not need to be prolonged. Economic recovery will be earlier than any other scenarios. Both the Western and Chinese credit will be available. Western consumption will increase,boosting Bangladeshi export. FDIs will rise.

Private sector credit: Less than Taka 1517.21 billion

Fed funds rate:5.33%
Chinese loan prime rate: 3.45%
If private sector credit drops ,then economic activities will be slower. More depreciation is needed. More interest rate hike over a long period of time is needed to tackle the inflationary pressure. Private sector has to borrow more from abroad especially Chinese credit ,which will be in plenty. It will increase our external debt.

Fed funds rate: More than 5.33%
Chinese loan prime rate: Less than 3.45%
Large depreciation is needed to compensate the exporters. Trade deficit may grow. Long period of contractionary policy is needed to contain inflation. Private sector's dependence on foreign credit ,mostly Chinese,will be higher than other scenarios. Country's external debt position may worsen.

Fed funds rate: Less than 5.33%
Chinese loan prime rate: Less than 3.45%
Inflationary pressure will be less but more than the scenario under more private credit. Economic recovery will be earlier but take longer than the the scenario under more private credit. More foreign credit will be needed for the private sector.