|
Clashes of the titans in trade |
Bangladesh Bank in a surprising move revealed that exports figure was erroneously inflated by $10 billion in July-March period of the current fiscal year. So it corrected the export earnings for the above duration, shrinking the total exports to $30.8 billion. The origin of the error was attributed to National Board of Revenue, which made "multiple entries" into the database of each shipment. This disclosure was made at a moment when the IMF cleared third tranche of $1.15 billion and Bangladeshi Prime Minister is going to visit China for a 7 billion yuan credit package. Before the error correction, both the trade and current account balances were surplus. Now ,trade deficit is $18.69 billion while current account deficit is $5.73 billion(Source: Bangladesh Bank). This will clearly put huge pressure on the exchange rate. Earlier, in my piece titled "BB's Twin Actions" in May this year,I argued how the depreciation of taka augmented the govt revenue when government was scratching head how to meet revenue target. This time I think the central bank is setting the context for such move. In this fiscal year, NBR collected a revenue of Taka 3.24 trillion against an IMF target of Taka 3.94 trillion. There is already a deficit. For 2025, the revenue target is Taka 4.8 trillion. Despite the tremendous growth in revenue generation, NBR may not achieve this target with its current capacity. The easy solution is to go for the depreciation. Moody's projection of 2% depreciation of Taka by the end of December will make the exchange rate Taka 119.34 against 1 USD. But current reality calls for larger depreciation. If the 7 billion yuan credit package plus the rupee swap unfolds before November 5 ,then we may avoid further pressure on foreign reserves. This somehow partly offsets the need for large depreciation.Anyway, depreciation is good for the economy when govt is pursuing contractionary monetary policy. When the trade war will be intensified, yuan will be further weakened to make Chinese goods more competitive in the global market. Because China has no obligation to comply US suggestion to appreciate its currency amid war. This means we are going to see more depreciation for sure. Now let's see what the macroeconomy will look like taking into account the exchange rate of Taka amid the trade war.
Exchange rate of Taka: More than Taka 117 /USDChinese policy rate: 3.45%
It will improve the forex reserves by improving both the trade and current account balances. However, it has the potential to deteriorate the inflationary situation. But previously we saw that trade tensions shrank global growth,which lowered demand of major goods. So trade war may translate into lowering of prices of major commodities including crude oil. So this reduction in prices of major commodities in the international market may offset the inflationary situation stemming from pass-through effect. At the same time, interest rate hikes are likely to deal with the inflationary pressure. Government's revenue target will be met through the increased revenue generation resulting from depreciation. More remittances will come from abroad. Export orders will be higher due to trade war and depreciation. Less borrowing from abroad as depreciation works as export incentives.
Fed funds rate: More than 5.33%Chinese policy rate: Less than 3.45%
Remittances and export earnings will come in abundance but less in volume compared to the previous scenario as return on dollar deposits is high. Trade balance and current account balance will improve but not as much as the one depicted in previous scenario. Inflationary pressure will be higher than previous scenario. Government's revenue generation from depreciation will be lower than the previous scenario. Foreign borrowing will be lesser than previous scenario. Export orders will be lesser than previous scenario.
Fed funds rate: Less than 5.33%Chinese policy rate: Less than 3.45%
Rapid improvement in forex reserves,trade and current account balance. Inflationary pressure will not matter as foreign goods will be cheaper due to low interest rate abroad. Government's revenue generation will be higher than previous scenarios. Export orders will be higher than any other scenarios.
Chinese policy rate: 3.45%
When Taka appreciates, trade and current account balance deteriorate. But inflationary pressure will be low and consumers at home will enjoy the benefit of low prices of commodities stemming from trade war. Less remittances and export earnings will come to the country. Government revenue target will not be met. So govt may opt for costly borrowing from abroad and domestic sources. Debt burden may worsen. Domestic borrowing may worsen future inflationary situation. Domestic goods will be less competitive as export orders will be lesser than earlier scenarios. As Chinese/Vietnamese goods will be cheaper ,Bangladesh may loose market share in nontraditional markets.
Fed funds rate: More than 5.33%Chinese policy rate: Less than 3.45%
There may be current account and trade deficits. More reliance on Chinese credit. Inflationary pressure will be lower but a bit higher than previous scenario. Government and private sectors may go for costly borrowing. Loss of nontraditional market share to Chinese/Vietnamese goods will be higher than previous scenario due to appreciation of Taka and high interest on dollar borrowing. Export orders will be lesser than previous scenario. Government revenue generation may not meet the target. Low remittances inflow and export earnings repatriation due to high return on dollar deposits.
Fed funds rate: Less than 5.33%Chinese policy rate: Less than 3.45%
Impact on trade and current account balance is not known. But it will be worse than the scenarios depicted when Taka depreciates. Government revenue generation will not be met. But cheaper borrowing options will be available both for the private and public sectors. Cheaper export credit will help exporters to deal with the appreciation challenges. Loss of market share to competitors will be less than previous scenarios.
No comments:
Post a Comment