Trade Deal Favors Depreciation

Trade deal between two leading economies Creates depreciation pressure with less worries.

Both the USA and China successfully concluded a trade deal, clearing the ambiguities amid tariff war. As part of the agreement the USA will impose 55% tariff on Chinese goods while the China will levy 10% tariff on American goods. In addition, China will resume export of rare earth minerals vital for electronics industry and continue sending students to the USA.

Though the deal appears to give a sigh of relief, global trade still remains volatile amid US declared policy on easing the pressure on US dollar demand or weakening the USD.

The deal has implications for Bangladesh as well. Now we exactly know how much the China has to depreciate its currency to stay competitive in the US market. A 55% depreciation of Yuan will make the exchange rate 11.11 Yuan/USD. If the Chinese govt really allows this depreciation, then Chinese products in the US market will not witness increase in prices. So inflation in the USA will not be worse as disseminated by some quarter.

Meanwhile, Bangladesh is still in negotiations with the USA. It is facing a 37% tariff, which is likely to get lowered after successful negotiations. Current budget has proposed to remove VAT on LNG,soybeans and animal feed. It appears that LNG and soybeans may be on the list of Bangladeshi negotiating team. Bangladesh spends billions of dollars importing these two important items. In any eventuality, Bangladesh has to depreciate its currency between Tk 134.20/USD(for 10% depreciation) and Tk 167.52/USD (for 37% depreciation).

Luckily, Bangladesh govt removed tariffs from major agricultural inputs ,leading to lower the food inflation. If fuel prices stay stable, then Bangladesh has a good chance to depreciate its currency further without incurring serious inflationary pressure. The World Bank projection shows growth cut for the global economy, meaning less demand for goods in 2026. This will put downward pressure on major commodities.

The trade deal also put forward a new issue. The USA wants a weakened dollar in the years to come. The China with the resumption of trade will acquire USD and start buying treasury bonds , increasing the demand for USD. The US states passed laws that bar Chinese investment in agricultural land and purchasing property deemed near to sensitive area. Given the dwindling state of Chinese housing and capital market, a large part of the money will end up buying US treasury bonds , further complicating the US steps to weaken USD. It means there will be depreciation pressure on other currencies including Taka unless the USA comes up with a contingency plan.

The recent trade deal between the USA and China will bring pace to other bilateral trade negotiations. Hoping this will lead the trade talks between Bangladesh and the USA to see a successful end. Since there is no appreciation pressure on Taka for now, govt may consider to depreciate Taka further to make Bangladeshi goods more competitive.

Budget Aims Inflation

Budget aims at lowering inflation, Trust restored after announcement of election.

Govt announced that the next election will be held on the first week of April next year. The announcement will clear further ambiguities surrounding election. Uncertainties will be further reduced by this announcement. Though the decision will send a positive signal, it has disappointed some parties which demand early election by December this year.

Law and order condition has not improved dramatically yet. But inflationary pressure is less compared to three months ago. Lowering fuel prices will have positive impact in coming months. Governor himself reiterated that the central bank would lower the policy rate when the inflation rate would fall below 7%.

Since the revenue target has not been achieved yet, it is still uncertain whether Bangladesh will be able to grab the next IMF loan. But govt lowered import duties on LNG and refined sugar. LNG has been increasingly used in power generation and fertilizer production. It will help bringing down the cost of power generation and fertilizer production. There is a tradeoff between revenue collection and bringing down the cost of agricultural inputs. Only time will tell whether it is a good move.

Govt also raised the taxes on land purchase and apartment sale. In addition, VAT was also raised for scrap metal, real estate agencies, imported lifts etc. This will contribute to raise the price of apartments many folds. High-end apartments nowadays become liquid assets. Since tax laws allow clandestine capital in this market, many intensively used the sector to document the undocumented wealth. With some paperworks apartments can be turned into cash. This practice drove the prices of apartments higher and deprived the govt of vital revenue as taxes were lower all these years. Govt intended to stop this practice by raising VAT and other duties on land purchase and apartment sale. However, govt lowered the registration fees and claimed other VATs surpassed the lowering of registration fees.

Now time will tell how effective it will become. I think there should be two or more public companies in partnership with private companies who will build cheap apartments for lower income group across the cities in Bangladesh. Pension fund will also get a secured investment in these companies. Property prices go up year by year, so return on investment will not fall.

Lowering taxes on packed liquid milk, animal feed, neutralized soybean oil, will have positive impact in containing the inflation. The proposed budget aims at lowering inflation, a priority task for the govt. If the IMF credit is missed,there will be further tightening of belt through spending cut. I do not think govt has the capacity to grab Tk 5.6 trillion as revenue from the market next year. It has to make further spending cut to make the deficit slim. The specific election date will help to gain investors' confidence and that of overseas credit institutions, which the economy badly needs.

The Cost Of Domestic Turbulence

Protests cast shadow over revenue target, Lost market share, credit may become the reason for regret.

Protests by the public servants at the Secretariat and at the National Board of Revenue (NBR) crippled the functioning of govt. Govt was compelled to introduce "The Public Service (Amendment) Ordinance 2025" that permits the govt to fire a public servant within 8 days. The ordinance created further grievance and rift. Earlier govt had announced to provide allowance, which was earlier cancelled, to public servants. It now would cost the govt Tk 70 billion.

The NBR staffs are protesting the separation between policy department and implementation department. No one is losing their jobs or benefits here, but govt did not consult with the staffs prior to taking the decision. Many felt deceived and started the protest. The cost is huge: govt may miss the revenue target of Tk 4.35 trillion set by the IMF. The revenue shortfall already crossed Tk 1 trillion and it is impossible to meet the target in the next one and half months. Now if the IMF does not dramatically change its position on the revenue target ,Bangladesh may fail to get the next installments , making it harder for deficit financing. Worst is that the IMF may suspend the program, signalling others to withhold their budget support. If that happens, we may see deterioration of macroeconomic conditions, leading to [rise] in market risk through currency volatility, inflation and prolonging the contractionary monetary policy.

We still have no clue where the tariff debate will lead us. Now this domestic turbulence at the heart of administration and the revenue department will undermine the economy. Since August 5 of last year, value addition to domestic tyre manufacturing industry was hampered, local market share in the tyre market declined. Indian restrictions on import of Bangladeshi goods through land ports will lower export of our agro-processed products to the country. China's decision to import mango, jackfruit from the country may further lower value addition and hamper employment in the agro-processing industry. Furthermore, the tariff debate also casts shadow [over] leather export. Since Bangladesh is delaying [implementation] of waste treatment plant as per the guidelines set by the Leather Working Group(LWG), wet blue leather export to the West was halted. The China filled the void by buying the rawhide and reexporting them to the West over the years. But the tariff debate [interrupted] the reexporting program of leather, resulting in delays of shipments and piling up of rawhide in tanneries.

Both domestic and external factors affected our manufacturing sector. Further domestic turbulence will raise the systematic risk, casting shadow over our manufacturing sector. Instead of exporting agricultural raw materials, we could encourage export of processed and value-added agro-based products. Joint ventures in leather and agro-based products could be considered to boost our export. Similarly, seeking soft grant or spending Tk 70 billion in setting up LWG prescribed treatment plant could easily open new potential [for] leather export. We can ill afford losing the next IMF credit package and losing export share of our leather and agro-based items. In this regard, wider political consensus is needed to address grievances at home.

A Bird In Hand ...

The goal is to retain the market, Local optimum is the choice perfect.

Bangladesh enters trade negotiations with two major trading partners. Finance advisor in a talk to the press stressed on for more time in the ongoing negotiations with the USA. Trade deficit reduction is the focus of this ongoing discussion as Bangladesh enjoys a surplus of $6 billion. Meanwhile, a Chinese delegation led by the Chinese minister is scheduled to arrive in May in a bid to start negotiation on investment. The Chinese stressed on signing two MOUs by June in this regard. Trade between the two countries is heavily [in favor of]China,[Bangladesh incurring] a deficit of more than $27.28 billion.

Bangladesh's export to the USA crossed $8 billion while Bangladesh's export to the China reaches $715 million. Among the major import sources, India gave Bangladesh more access to its market and Bangladesh's exports crossed $1 billion mark long ago. Most notable thing is trade deficits with India declined markedly in recent years( it increased slightly last year) than those of with the China.

Moreover, our export to the US market is growing gradually. The tariff debate paves the path for more export. Lowering the $6 billion deficits is at the heart of this negotiations. Since we do not have an alternative to lose this market, we have to retain this market. $8 billion + market is more worthy to us. By retaining it we will focus on other discussion. There is no other market yet ready for us to pay more than $8 billion every year. The optimum solution for Bangladesh in this negotiations is to retain this market. For that,we need to depreciate the currency even more.

And this kind of strategy will be adopted by other countries too. India in the wake of tariff debate significantly lowered its tariff on US items. Pakistan also did so. Vietnam promised to bring it down to zero. What we are seeing is local optimum solution (retaining the market is leading to global optimum) is leading to global optimum if both the negotiating parties agree.

Chinese market is equally important for us. If barriers to entry are removed and local exporters increased their export, we have a fair chance to capture a market in that country. China already expressed interest importing mango,jackfruit from Bangladesh. It is indeed a good move. If we add value to our agricultural products and export them or use them locally ,it will contribute more to our economy. Potato is a great source of making ethanol,biofuel. Instead of exporting potato and mango, if we export potato flakes,mango pulps it will earn more forex. In addition, beer can also be made from potato. We can use the biofuel locally and export the beer abroad. The use of biofuel could significantly lower the transport cost. I do not think others import mango,potato for consumption purposes only. Moreover, the move has potential to increase the price of local mango, casting a shadow over agro processing industry that is doing remarkably well.

Retaining the existing market, expanding to new market and protecting the domestic producers/ companies should be objective of Bangladesh's trade negotiation team. A bird in hand is worth two in the bush.

Troubles With BBS CPI

Flaws in CPI calculation May prolong the bad situation.

February inflation data is out. Overall inflation declined to 9.32% from 9.94% in January. Food inflation for the first time reached to a single digit, shrinking to 9.27% from 10.72% in January. Prices of winter vegetables and import declaration of rices contributed greatly to the decline of overall prices. Govt has started procuring rice from various sources apart from the traditional importing countries. However, non-food inflation registered a slight increase in February, rose to 9.38% from 9.32% in January.

Many economists remain sceptics about the sustainability of drop in inflation in the coming months. They have valid reasons to remain so. What we are seeing now is the result of collective effort taken 3 months earlier in a bid to contain the inflation during the fasting month of Ramzan. Yet soybean oil, meat prices remain high. After Eid ,if this collective effort may dry up,a different scenario will prevail at the market. But I think the much hyped narrative of winter vegetables prices contributing to bringing down the price levels may turn out to be flawed perception upon closer scrutiny. Here comes the crucial question again: Are we calculating the CPI the correct way? Consumer Price Index computation assigns weights to individual items in case of calculation for multiple items. Here comes million dollar question: how do we assign the weight to individual items? Bangladesh Bureau of Statistics can answer that question to clarify lots of things. One simple approach may be based on importance. Now think of an individual consumer's monthly consumption basket. In this basket , carbs,cooking oil and proteins will get priority over vegetables. Goods that households have to buy (price inelastic demand) irrespective of price changes every month will not get the same priority as the winter vegetables enjoy. A consumer's spending behavior over months determines the priority. Now when vegetables prices drop, households definitely increase their consumption of vegetables but not to a great extent. A kilo of potato cost Tk 70 three months ago. With that price, one can now buy a kilo of potato as well as other vegetables in varied amounts. Without altering greatly one's monthly spendings on vegetables, one can increase his/ her consumption of vegetables. So vegetables' share in monthly spendings decides the importance consumer attaches to it. Then comes the question of spending behavior of different income groups and spendings in different regions. When BBS assigned the weight ,did it take into account these factors? I hope they did not randomly increase the weight of winter vegetables just to show the drop in inflation. If BBS did not randomly increase the weight of winter vegetables, then how did we construe that prices of winter vegetables bring down inflation when it occupies the lower rung in the consumption basket? This whole narrative of winter vegetables bringing down inflation is highly misleading. Just look at the formula of the CPI for multiple items:

CPI = (∑ _i=1ⁿ CPI_i x weight_i)/(∑_i=1ⁿweight_i)

Now think of just two items in the market: winter vegetables and rest of the items. Now looking at the sudden drop in prices of winter vegetables ,if you assign more weights to winter vegetables' CPI ,you will get higher drop in overall inflation. It is simple arithmetic. In this case , assignment of the weight is based on purely biased consideration. I just wanted to see winter vegetables is playing a role in overall inflation ,so I just raised the weights! Voilà! It is pretty similar to the incident of including laptop prices( a typical household here buys a computer/laptop once in every 10/12 years!) in consumer basket. BBS should come up with explanation how this weight on vegetables is determined. This whole thing also captures seasonal variation in the CPI. Now another crucial question arises: should seasonal variation in CPI be deemed important for long term trend? Three and half months later we are going to have Bakri Eid. Usually, meat prices remain low for two weeks after Bakri Eid. Based on this information ,if CPI registers a lower trend in inflation ,should we conclude lower meat prices bring down inflation?

BBS in the past involved in data engineering. Though this is an apolitical govt, some economic policies at the beginning indicated that it is following foot steps of its predecessor in some cases. So I am taking the inflation data produced by BBS with a dollop of salt. I hope and believe BBS has discarded past habit of data engineering. Only correct CPI calculation yields correct inflation data. And the right inflation data helps us setting the right interest rate. With flawed inflation data and interest rate, our economic recovery will only be delayed.

Where Is The Change?

No bold economic reform is on the horizon, Post election future may be the reason.

In less than 3 weeks, the interim govt is going to complete 6 months in the office. Though the whole home ministry is in complete disarray,as reflected in growing number of crimes, the govt did its best to restore law & order. All the reform commissions have submitted their reports. But it is the economy that needs more urgent care and reforms than anything else. I strongly believe this govt was brought to power to fix the economy, which is battered by systematic corruption of the civil-military bureaucracy and blessed cronies. The political reform is just a smokescreen.

Yet that much needed economic reform is no where on the horizon. The govt has enough people to carry out bold and radical economic reforms ,but the govt has not treaded on that path yet. Two incidents laid it bare. Governor of the central bank is a powerful position and a very competent man is in charge. Like the previous regime, we witnessed governor was invited to a meeting headed by a businessman who also happened to be chairman of a trouble ridden bank. Later, the central bank provided liquidity support of Tk 220 billion to 6 trouble-ridden banks. Few months later, governor was invited to a branch opening event of a specialized bank in Tangail. Later, we saw Bangladesh Bank provided Tk 125 billion to another 6 trouble ridden banks including the specialized bank in question. During the previous government, we saw how governor and judges went to event/ party organized by powerful client or accused before making crucial policy decision or verdict. This is happening again! Where is the qualitative change?

The IMF in its loan package made it clear that tax should be imposed on every income earning source. When this regime took power, it revived an old law,amended by the previous regime, that gives tax rebate on the earnings of microcredit institutions for five years. It could have been rationalized for two years , giving the govt vital revenue. In January this year, govt made another change into an ordinance regarding a leading microcredit institution. It is about lowering the number of govt appointed director in the NGO. It is indeed a laudable move. If govt reciprocates it in other public offices,then it will be a good move. In Pakistan reform package includes closure of 100000 posts in public offices. Similar thing here will at least save taxpayers' money.

Govt's economic management is also messy. In my earlier pieces, I repeatedly said that govt's decision to lift off duties on sugar and edible oil was an unwise move. The decision would cost the govt Tk 3156.5 crore in this time of austerity(Read "Review Decision On Tariff And Vandalism" published here on October 29,2024). Recently, govt decided to impose 15% VAT in all goods and services. This would raise prices of food at restaurant and internet packages, but would generate Tk 120 billion to state coffer. Had the duties been on sugar and edible oil and govt raised the corporate tax, more than Tk 120 billion might have been generated as revenue.

Crucial and bold reforms have not been done. A reformist govt could easily follow the contractionary monetary policy. Yet what it has done so far is just monetary and fiscal expansion. A political govt very rarely would embark on reform programs and this govt behaves like political govt . So our recovery may be prolonged as this govt is reluctant to initiate bold reforms like strengthening regulatory grip, fiscal restructuring and tightening and monetary tightening.

Reform policies taken so far indicate govt is keen to protect its own interest and wants to tread on a safer path. It does not want to antagonize major parties except the ousted one. At the same time, govt is concerned about the future of the institutions headed by key people in the govt after the election. This somehow explains govt's reluctance to start bold reforms.

So far we have not seen yet any attempt to reform the security establishment. In the last 15 years, we saw how corrupt groups and individuals in connivance with the Army ruined election and the economy. Just a week ago , few students staged sit-in before the Secretariat to demand Army involvement in construction of key facilities of a public university. This practice is a continuation of the past regime. We could at least see the news of corruption report if a private contractor is involved. Can we expect the same in case of an army contractor? Proper ordinance should be introduced to make accountable the defense establishment.

In brief, 6 months after the regime change, we have not seen yet any qualitative transformation. Interim govt is busy with their own interests and is not keen to start bold reforms, prolonging the economic crisis.

[Update: this piece has been updated on January 18,2024 atat 10:05 AM Bangladesh Standard Time. Updates include reference to sugar duty loss and some clarifications.]

Stick To Adjustment

Pursue crawling peg and fuel price adjustment, For early economic settlement.

According to a news report, exchange rate of Taka against USD in settling LCs reached Tk125/USD. Bankers fear it may increase inflation slightly(See "LC Settlement Dollar Rate Reaches Taka 125", Tonmoy Modok, The Business Standard,December 13,2024.Link: https://www.tbsnews.net/economy/lc-settlement-dollar-rate-reaches-tk125-demand-rises-1017321). Earlier, the visiting IMF team expressed dismay over not pursuing the crawling peg diligently as the exchange rate pegged at the official rate for more than 3 months and the gap between official rate and unofficial reached more than Taka 2.

I do not know why the govt is bothering about the pass through effect so much when the policy rate is on the rise,holding back unnecessary imports and domestic spending. Seasonal vegetables keep entering the market,registering a downward pressure on price levels. Moreover, remittances are keep coming as confidence on govt is back. Law enforcement is still weak but gradually comes into some kind of shape.

Not only the crawling peg, govt is not following the monthly fuel price adjustment. The two practices are good for monitoring the cost of living.

Even if crawling peg depreciates Taka by 2%, it will have no major impact. Why? Currencies of our trading partners are weak. Both the Rupee and Yuan witness significant depreciation. That means import from these countries will be cheaper.And Chinese policy rate is set to be lowers ahead of a potential trade war. This is also helping Bangladeshi importers to import from China in Chinese currency. In addition, Trump administration is in no mood to raise the Fed policy rate to make the domestic investors content. The US consumer spending will go up and investment will flow to Saudi mega projects that will recruit more foreign workers,further boosting remittances. If much needed trade war will come into effect, it will be a good news for global consumers as major kitchen commodities' prices will see large decline.

The OPEC+ coalition decided to up the oil production from April next year. It will further lower fuel prices. So the remaining months of this fiscal year sets the context for containing the inflation. In this backdrop, I do not think depreciation of Taka to Tk 125/USD would cause a lot of trouble. Rather it will boost the remittances and bring more export orders from abroad.

Growing Unease: Revenue & Inflation

Less foreign loan and assistance for next year Put the load on internal revenue to bear.

Inflation soared to 11.38% in November. Food inflation increased to 14% , indicating central bank has to do lot more to contain inflation. Most surprise came from soybean oil market where govt-subsidized-unbottled oil priced higher than bottled oil,distributed by private companies. Only 5-litre bottled soybean oil is available in the market in the face of overwhelming demand for bottled soybean oil. Private companies stopped supply of bottled soybean oil, urging immediate talks with govt to settle the price debacle. Anarchy in the soybean oil market is pretty old. Distributors are reluctant to furnish any transaction document to the retailer. I wrote a piece about it earlier. On the other hand, an Army subsidiary set up an edible oil plant promising to provide soybean oil in time of crisis. A public bank owes Tk 11 billion to the subsidiary, which even approached the govt to write off the loan. The truth is the soybean oil market remains the most unregulated, undocumented and unsupervised market.

In the IMF's second review report, inflation was forecast to be 9% in 2024 and 7.2% in 2025. But the headline inflation is still in double digit and it is highly unlikely that inflation will decline to 7.2% next year. Since policy rate is still below the inflation rate and as we do not know when the next policy rate hike will come, the contractionary policy will be prolonged.

In the second review, the IMF stresses on "tighter fiscal policy stance,through revenue consolidation," ¹to mitigate the inflationary pressure from exchange rate reform. The job of revenue consolidation is not being done properly. The IMF already held talks with the NBR to know the progress on finalizing the medium and long term strategies on revenue generation, a benchmark scheduled to be completed by December 2024. I still think the decision to lower VAT and tax from sugar and edible oil is an unwise move; it has no reflection in the market but costing the govt lots of revenue (at least Tk 150 billion). Similarly, religious charities and NGOs that have ample fund but engage in political activities should be taxed. Some scheduled banks see large inflow of funds from abroad during the month of Ramzan. Donation tax may be imposed on them. Point is their end use cannot be ensured. So taxing them may at least prevent misappropriation or abuse of this fund. Similarly, microcredit agencies' extra fund generated from 2 years of operation could be taxed instead of not taxing at all. In case of any force majeure, they may get the desired tax relief. Point is both the religious charity and microcredit money have some kind of use in politics. This is creating debate at home and abroad. So it is better to tax them. NBR could at least get Tk 50 billion from this initiative.

On the monetary side, it is a good news that Taka remains stable for more than 4 months. If it remains so for another 4 months, foreign investors' confidence will be back. It is anticipated that Trump administration will not raise the fed policy rate as he will cut the spending abroad. It means that non-food inflation may come down in Bangladesh and lowering the external pressure on monetary policy.Bangladesh Bank is in process of recruiting chief economist. A trained and practicing foreign economist (black/white) will help strengthening forecasting and policy analysis team and Monetary Policy Committee(MPC). I think industry insiders should be included into monetary policy committee. I hope MPC will conduct regular survey across Bangladesh before publishing the Monetary Policy Statement (MPS).

The governor in a press conference apprehended that NPL may reach 25% or 30% of total loans by June next year.Target is to lower it to the benchmark of 8%. But now the NPLs of state commercial banks stood at 22% of total loans. So it is quite an impossible task to bring them to 8% by 2026. Most interestingly, merger and takeover of banks do not bring back confidence on the merged banks. Still many depositors prefer to withdraw their money from the trouble ridden banks.

Increasing dependence on electronic fund transfer in public procurement will reduce corruption in the public sector². Good news is govt is ready to implement the project.

If Bangladesh Bank can introduce extended credit program for farmers and SMEs hit by natural disasters ,it will help them get back on track quickly. Similarly, more tax on tobacco, tax on multiple ACs, AC vehicle will improve our carbon footprint. Increasing tax on tobacco has other benefits too. Since air quality drops in winter, public smoking on the streets create a suffocating atmosphere for nonsmokers, COPD patients,senior citizens and children. Moreover it raises the risk of stroke and brain hemorrhage. Doubling the tax on tobacco could at least lower the incidence of public smoking.

One good news is that Bangladesh met the net international reserve target of $15 billion by December '24. But I cannot figure out how a positive financial account balance will be met next year. There will be less commitment on international aid under Trump presidency. China has already made less loan commitment for next year due to the worsening public debt at home. Moreover, downgrading of credit rating of Bangladesh will make foreign credit hard for private sector. So an optimistic scenario for next year in terms of FDI and foreign assistance is still bleak.

I think as the govt is facing revenue shortage, it may mull introducing universal Tk 1000 tax for every TIN holder. It will at least generate Tk 10 billion. Social spending should be based on "doers should be getters". Lower income bracket of private sector job holders,workers and farmers should get inflation allowance/ long term consumer credit from the govt. It will be appropriate for the govt to focus more on internal revenue generation than to expect more foreign assistance.

References:

1. Staff Report,IMF Second Review Under ECF,EFF And RSF,IMF,June 2024.
2. "IMF's Second Review On Credit Program", Rezaul Hoque, June 27,2024,https://hoquestake.blogspot.com.Link: https://hoquestake.blogspot.com/2024/06/imfs-second-review-on-credit-program.html?m=1

Growing Unease: Revenue Shortfall & High Inflation

Revenue shortfall and rising inflation Should be taken seriously as note of caution.

National Board of Revenue (NBR) has resumed operations of online tax return system since the second week of September. Earlier 526,487 taxpayers , more than double from 2022-23,had submitted their tax statements through the eReturn system for 2023-24. For the last fiscal year, there was a revenue shortfall of Taka 381.57 billion against the revised target of Taka 4.1 trillion. This year too NBR faces an uphill task to meet a colossal target of Taka 5.41 trillion. While govt is tightening the monetary policy, it will be difficult for NBR to double the growth of revenue collection. ADB downgrades Bangladesh's growth forecast to 5.1 % and increases the inflation forecast from 7% to 10%¹. These are worrying developments. In this backdrop, NBR's revenue challenge has also gone up. Sensing the inflationary pressure, governor announced to hike the policy rate by 50 basis points and another one is likely in the coming weeks.

Though income tax is the second highest source of revenue after VAT, only Taka 50/70 billion is generated from online tax return. Last fiscal year, NBR collected Taka 1.31 trillion from income tax. I personally think a user friendly, easy and Bengali online return system would fetch more tax return and revenue for the NBR. If people can submit tax return through button phones/ e-mail, then the number of return submission may go up by manyfolds. NBR' s inability to attract a large number of NRBs to pay taxes plays a role not augmenting the revenue. We inked deal with other countries to avoid double taxation in FDI ,but we did not do so on the income of binationals. If we sign accord with the USA,UK,UAE,Saudi Arabia,Malaysia, Singapore and other countries, a large number of binationals and NRBs will feel encouraged to submit tax. Now NRBs do not show their wealth generated in one country to other country's tax file. Double taxation is reported to be the main reason. This issue needs to be addressed. Special benefits like transfer of funds abroad should be aimed at those who disclose their foreign wealth in the tax files of their country of origin. It will prevent money laundering and bring many NRBs under local tax net. Currently, Bangladesh is running a special campaign similar to Pakistan that allows citizens living home and abroad to deposit their US dollar at the interest bearing accounts of some designated banks. The step is a desperate measure to swell the forex reserve. If Bangladesh Bank takes special measures like financing small and medium business ventures of NRBs abroad on the condition that they provide details of their wealth abroad, then many will feel encouraged to comply the new regulation.

Similarly, many shop owners at home who feel shy to submit their tax return will pay taxes if govt offers some special benefits. For instance, if govt declares people with TIN and BIN get special treatment like reserved places ahead of others in availing govt services,paying utility bills, discounted credit facility etc then many will come forward to pay taxes.

If many of the digital centers set up at the post offices during the time of previous regime are used to train personnel to prepare and submit tax returns for others ,then NBR may get new taxpayers from the upazilas and villages.

I noticed that during tax calculation business income deducts depreciation of equipment, furniture. Right now 10% depreciation cost is allowed to deduct from business income. If it is lowered to 8% or 5% ,taxes from business income as well as revenue earnings from direct taxes will increase. I already share some ideas to increase revenue and number of tax payers in my piece titled "New Tax Act and eReturn System II" ,written in January this year.²

At the same time, if corporate tax is raised by 1%,from 27.5% to 28.5% for non-listed and from 22.5% to 23.5% for listed companies, then govt's revenue will augment by manifold. Unfortunately, the previous govt planned to lower it to 25% and 20% respectively. I think govt should undo the decision given the uncomfortable situation it faces now. ³

To increase tax to GDP ratio every year by 0.5% is really a tough job for the NBR given its current capacity. The ongoing worker's agitation slashed 15% order. Waterlogging still a problem in the flash-flood hit areas. In this backdrop, business as usual will not help the govt to attain its goal. Quick review of revenue policies, drastic cut in public expenditures and radical steps in revenue collection may yield in good outcome.

References:

1. Asian Development Outlook,September 2024. Link: https://www.adb.org/where-we-work/bangladesh/economy
2. "New Tax Act And eReturn System II",Rezaul Hoque,https://hoquestake.blogspot.com, January 27,2024. Link: https://hoquestake.blogspot.com/2024/01/new-tax-act-and-ereturn-sytem-ii.html?m=1
3. "Corporate Tax Cut To 25%", The Daily Star,June 06,2024.Link: https://www.thedailystar.net/business/bangladesh-national-budget-fy2024-25/news/corporate-tax-cut-25-3628386

Pessimism Deepens

Growth in major sectors stalls As trust in the economy falls.

Three months have passed since the new government resumed power. Many policy makers and administrators anticipated that economy would bounce back and show positivism after the election. Because many uncertainties will disappear and economic indicators will show some positive trends including the inflation.

As for the inflation,there is no good news. February inflation rate surpassed the January rate. March data has not seen the light yet. BBS may divulge the data after Eid perhaps. But coarse rice prices in general registered an increase of Taka 4/5 per kilo. Poultry meat,beef still remain out of reach to many households. Prices of water melon,date,lemon,brinjal and potato---which are quintessential items in iftar---did not give any sigh of relief to the fast-observing people. Press is abuzz with reports that potato traders pay Taka 33/kilo for the potatoes in the field, indicating higher prices for potatoes in future. In this backdrop,it is highly unlikely that inflationary situation will improve in the coming months.

World Bank in its economic updates for South Asian countries observes that persistent high inflation coupled with delay in market adjustment of exchange rate poses serious challenges to Bangladesh economy. It lowers GDP growth forecast to 5.6% for current fiscal year. It stresses on monetary and fiscal tightening and reliance on consumption and income taxes to improve the ongoing situation.

Gap between actual export earnings repatriated at the end of the year and export earnings reported during the time of order became wider. Last year, it stood at $ 9 billion! Last month ,a fraudulent app laundered Taka 4 billion to UAE, where many wealthy Bangladeshis applied for second home program. This indicates that trust deficit on the economy is growing and money laundering continues unabated.

Government's outstanding energy bill stood at Taka 200 billion. And government already issued bonds to pay energy subsidies. Key sectors like real estate,IT and stock market where investment of undocumented money is not questioned/probed have not seen any growth in these three months. Rather, stock market witnessed record fall,ruining many small individual investors. Flat and apartment sale data is not available. Rising interest rates along with rising cost of living makes it untenable to undertake new housing project. Growth in used apartment sale also stalls. NBR's revenue target forces it to review its policy of tax exemptions towards ICT sector. E-commerce platforms have not witnessed any major FDI. Rather, like PaperFly ,many are planning for closure or merger. Trouble-ridden ones are yet to settle their dues to the merchants and face overwhelming counts of lawsuits.

IMF has made it clear if Bangladesh Bank fails to meet the reserve target for March,then it may stall the third tranche of its $4.7 billion credit package. The need to finance the budget has become so acute that NBR quite rightly decided to tax Metro fare,unreasonably put high by the authority, but met unprecedented criticism from the power corridor. Meanwhile, development projects face peculiar fate over mismanagement and willful delay. Chinese financial institutions like Export-Import Bank of China have stopped funding Elevated Highway authority after it failed to project a clear deadline to end the construction work. Financing by local institutions also becomes difficult. To deal with the Non Performing Loans, authorities encourage merger between banks. Some see it positively,but others remain skeptic about the intended result. This is not sending positive signals to the market and economy. This is clear indication that pessimism is gripping the economy. And it may prolong the recovery.

Sloppy Management May Cost The Progress

Sloppy management and resources into wrong hand May cause the progress to hit a dead end.

Current account balance became positive in July-November period of this fiscal year since Bangladesh adopted contractionary monetary policy. In 2022,Bangladesh experienced a current account deficit of $5 billion. Meanwhile, in the said period Bangladesh registered $579 million current account surplus. And the balance is improving week by week. In January this year, RMG export registered 11.45% growth compared to January 2023. This is a great news as RMG export registered negative growth for the last three months.

Gradually, govt’s reform programs become visible: central bank has already lowered cash incentives to exporters by 1%; last week, Bangladesh Energy Regulatory Commission (BERC) increased LPG prices by Taka 41,costing an LPG cylinder Taka 1474. I think more utility price hikes are on the way.

Government has not published yet the January inflation data. But egg prices marked a Taka 5 increase. Rice prices remain stable after frequent surveillance operation by the consumer rights. Liquid milk and flour/atta prices lowered. A month ago unpacked flour/atta cost more. Now in some cases unpacked flour is being sold at Taka 45 /kilo. Liquid milk registered Taka 5 decrease. Potato price has also registered Taka 10 decrease after news broke out that govt allowed import from India. However, prices of onion and winter vegetables are unreasonably high. So are the meat prices.

If pass-through effect--inflation worsened by depreciation-- reigns hard on any item, then it will be wheat followed by milk. Why? Because we import them and domestic production is not sufficient to meet the domestic need. But here we see the complete opposite: seasonal crops and perishable commodities, which are hard to store, are competing with each other in terms of increase in prices.

Amid the improvement of current account balance, Bangladesh announced to adopt “crawling peg”,an exchange rate mechanism that sets lowest and highest exchange rate of the local currency against USD before moving to fully floating exchange rate mechanism. I have come across a book written by Paul Krugman. Krugman cites example of Argentina that once adopted crawling peg and improved current account balance significantly. But it could not hold that healthy position. Capital and money came from abroad as a result of better macroeconomic situation fell into crooked management of financial institutions and groups. They misused the money and ruined the economy again. We have to capitalize the improvement from ongoing monetary policy. Letting sloppy management to reap the benefit of the better situation is equivalent to doing the same mistake again!

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.

Could Bangladesh Get The Second Credit Pack?

Forex reserve falling short of target Next credit pack may be hard to get. Inflation dominates over interest rate, Delaying investment’s starting date.

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.]

Tight Credit And Inflation Cast Shadow Over Economy

Huge pressure of debt obligation, Govt is in a precarious position.

Downgrading of Bangladesh's credit rating by Moody’s and S&P cast shadow over economy. In addition, Fed's policy rate hike also contributed to raise the international lending rate. Many Bangladeshi companies borrowed heavily from international banks at market rate.

Several news reports indicate that Bangladesh has to pay $12 billion this year alone to respect its debt obligation. Govt has to pay $3 billion and the rest will be paid by the private sector. Dwindling reserves, now stand somewhere around $20 billion, gives little room for optimism that Bangladesh will overcome the debt hurdle¹.

Meanwhile, govt keeps raising the fuel price but it is unlikely to get the next tranche of IMF credit package.

Earlier Bangladesh’s repeated failures to clear energy dues had drawn media attention. Govt intervened to settle the matter. This ultimately led to downgrading of credit rating.

Bangladesh Bank removed all kinds of cap on lending and deposit rates in the midst of soaring inflation, aggravated by macroeconomic mismanagement. Consequently, SME credit rate has also increased. Being one of the crucial sectors for creating jobs and economic activities, SME sector also witnessed slow down in growth.

More recently, a series of scam in Islami Bank,one of the biggest provider of SME credit,cast shadow over SME business. One little known Nabil Group swallowed taka 9.5 billion.Apart from that upstart companies and employees took loan in the name of other people who do not know nothing about the loan. In addition, directors of the bank are also accused of corruption and money laundering.So the management board decided to curb the power of branch manger and made it mandatory to take board's prior approval in taking loan excess of taka 5 million. This will evidently lower the pace of credit to SME sector, which is getting less credit as govt and public institutions borrow heavily from the banks.

Meanwhile, harsh climatic conditions augur ill for food security. India banned export of all kinds of rice except basmati. It may also stop exporting sugar as heavy downpour cast a bad spell for sugarcane cultivation. Thailand refused to make early commitment as it anticipates further rise in price of rice.

Despite this upward pressure on price levels, many countries managed to contain the inflationary pressure. In Bangladesh ,inflation shows no sign to abate.

Since govt has huge debt obligation, there is no other option to print money. Loan gets costlier due to credit rating downgrade. So inflation may soar further,which may be ensued by further rise in interest rate. One silver lining is that a participatory election may improve the situation. But if no drastic reform program is taken, economic situation may further deteriorate. Big depreciation of taka may also happen.

Limited access to foreign credit and rising inflation may put further hurdle in economic recovery. Tougher economic policies lie ahead whatever political creed will form the govt.

Notes And References

1. ”Agami Char Mashey Baro Billion Dollar Shodh Korte Parbe Bangladesh?(Can Bangladesh Pay $12 billion In The Next Four Months?)”,BBC Bangla,August 2023. https://www.bbc.com/bengali/articles/ck7v03wz00vo

Revamp EEZ Policy

Economic zone policies need complete overhaul To improve business and attain fiscal goal. This year govt presented a budget with a size of taka 6.06 trillion. Government is going to face a revenue shortfall of taka 2 trillion. In addition, govt has to achieve 0.50% increase in revenue collection as part of the IMF's conditions for $4.7 billion credit.It will definitely put huge pressure on the govt,which is facing receding economic activity ahead of next general election. While govt has been drastically searching alleys to augment its revenue earnings, policy loopholes created by it earlier still remain unaddressed. For instance, income tax act(2023) allows clandestine capital investment in economic zones and hi-tech parks with only 10% tax.Nothing else! Authority will not ask how investors earned those money.This scheme will last till July 30 of 2024. Such provision neither brings adequate investment nor opens up new opportunities. Worst, it is keeping at bay good investors who are careful about their reputation. These zones and parks have special tax holidays and other lucrative benefits. Yet they failed conspicuously to attract high-profile tech intensive investment. Furthermore, we have noticed recently misuse of export incentive and increasing incident of corruption. A Chinese company in Chattogram was caught red-handed for intentionally tagging “Made In Bangladesh “ tag to clothes manufactured in China.Subsequent probe revealed it swallowed export incentive reserved for exporters and evaded tax.In the incident of BM Container Depot blast, residential address of Dutch investor /partner was not found at the Board of Investment.BM depot days after days stored hazardous chemicals,putting lives of the surrounding villagers at stake.More recently, hack incident of Krishi Bank website and exposed information of 5 million Bangladeshis in dark web reminds us that we have not taken any lesson from Bangladesh Bank heist,now a major documentary in Hollywood, and allowing clandestine capital in ICT did not improve internet security and business environment. In fact ,it made it worst! I have seen report that divulged how Equity And Entrepreneurship Fund of Bangladesh Bank was misappropriated ,forging documents. Why do we need FDI?Adding new technology,tech transfer,job creation, value addition and boosting economy. For the sake of new technology and tech transfer,we could tolerate investment of black money in EEZs.However, it is absurd to continue it if that does not happen or costs the economy by introduction of new alleys of corruption. Time has come to revamp our tax policies in EEZs and hi-tech park. Full stop on export incentive for bleaching black money in the name of investment. Different tax structures for investors who disclose their source of income and those who prefer not to disclose. The weight of tax collection is so heavy on the govt that it cannot do business as usual in dealing with incentives and investment in EEZs. It should chalk out new strategies to improve business environment in ICT and EEZs and augment the revenue in general. Subscribe to: Posts (Atom) About Me Rezaul Hoque Hi, this is Rezaul from Bangladesh. Single,Male.Born in 1981.This website is created as an alternative to, and complements,https://rezaulhoque.wordpress.com. Here I share my analyses on various issues including economics and governance. In addition, I also share my weekly news review on the incidents that took place in past one week. I do not make money out of my content. I do not receive any govt social security benefit or any kind of perks. I do not belong to any political group or university or foreign cultural institute.I do not work for any media outlet. Nor do I represent any security agency or private organization. Praises or blame for the contents of this website should be attributed to me and not to my former employers. ©Rezaul Hoque All the contents(including claimed web programs of individual content) are copyright protected. Without prior consent, reproduction of any of the contents,be in part or full, in any format or platform is not allowed. 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