Acknowledging Defeat?

Tax cut and relaxing duties on oil May worsen the economic turmoil. Ensuing debt and high tax in future New government has less for expenditure.

Last week Bangladesh Bank held press conference to convince clients that there is no liquidity crisis. In fact, there is a liquidity of TK 169 trillions in Bangladeshi banks. The announcement came in the wake of many banks' inability to open LCs as per govts' instruction to curb import(Source: “Bank e Takar Sonkot Holey Debe Kendriyo Bank(In Case Of Liquidity Crisis Central Bank Will Pay)”, Daily Prothom Alo,November 15,2022,p-1).

Meanwhile, import is still higher than export,which witnessed fall in the two consecutive months. Traditional sources of remittances like UAE,Saudi Arabia also witnessed negative growth.Current account balance and overall balance is still negative (till September). Taka is hovering around Tk 102/USD as per official figure. But market rate is a bit higher. Government is however optimistic that by the end of January there will be no dearth of US dollar.

But we have to acknowledge that before and after election years big depreciation/fall of Taka against US dollar was observed in the past.In 1990-91,rate of taka was Tk 35.67/USD . In 1991-92,it was Tk 38.14/USD.In 1996-97, it was Tk 42.70/USD. In 1997-98,it was Tk 45.46/USD. In 2000-2001,it became Tk 53.95/USD. In 2001-02,it was Tk 57.43/USD. In 2005-06, it was Tk 67.07/USD. In 2007-08,it became Tk 68.60/USD.Biggest depreciation came this year. Now in the open market Taka is being sold at Tk 106/USD.

Year	Exch.Rate(TK/$)
1990-91	35.67
1991-92	38.15
1995-96	40.84
1996-97	42.70
2000-01	53.96
2001-02	57.44
2008-09	68.80
2009-10	69.18

Source:Bangladesh Economic Review 2019

To finance the budget deficit and prop up the forex reserve, govt is heavily relying on borrowing. Govt is inclining more and more towards banks for domestic borrowing as sales of national savings certificates hit the nadir this year. This year only Tk 7.32 billions worth of NSD certificates have been sold after govt made tax return mandatory for purchase of NSD certificates worth more than Tk 500,000(Source: “Sanchaypatra Bikri Komechhey,Sudo Komtey Parry(NSD Sale Lowers,Interest Rate May Follow Suits)”,Daily Prothom Alo,November 13,20222,p-11).

Pledged budget support from multinational donor may assuage the problem temporarily but raises the total debt stock. It is highly unlikely there will be 180 degree change in the governance,which led to this situation,during the rest of the tenure.

Meanwhile, govt did little to raise the revenue. Surprisingly,it reduced corporate tax from 22% to 21%. And special duty on diesel and gas was also lifted. Yet Non Performing Loan (NPL) keeps rising. A tax cut in the present means more taxes in the future as argued by Olivier Blanchard.

I put forward some observations that hint some important change in the future:

1. A managed floating exchange rate discouraging exporters to bring exports and encouraging importers.
2. Corporate tax cut, removing duties from oil and gas,relieving bureaucrats from submitting tax returns.
3. Releasing forex reserve money to stabilize dollar market.
4. Holding back data on balance of payment, inflation,NPL that is costly for the govt.

This growing budget deficit and revenue fall also curb future govt's ability to spend more. Guido Tabellini and Alberto Alesina in an article titled “Voting On The Budget Deficit “,published on American Economic Review (1990) argue that how one group of policy makers' belief about future govt and its policy leads to inefficient outcome like high debt. More generally, if the current govt thinks future govt may be run by the opposition then it causes the current govt to borrow more now so that future govt may not spend more in the wake of high debt.In that light govt itself is acknowledging its defeat in the next election scheduled to be held by the end of 2023! It is indeed interesting how the govt responds to the reform works it pledged to the creditors.

CAB Worries Remain

Deficit shows no sign to lower As defense ties get stronger. Upcoming visits high profile Yet to bring the needed smile.

Bangladesh and IMF have concluded first round of talks for a credit of $4.5 billion in the wake of record current account deficit.Govt claims it is a successful talk.However, many fear govt may not avail full credit it sought as some reforms deemed politically costly for the govt. In February, govt may get $432 million as part of the credit package if IMF board approves the credit.

Another round of hike in utility price is likely as subsidy in energy is strongly discouraged. Government is now claiming its net reserve is $26 billion and gross reserve is $34 billion,which govt was reluctant to disclose and remained a bone of contention between govt and IMF.

Govt has however kept maintaining the managed floating exchange rate: one rate for the remittance-earners and another for the exporters. This somewhat fixed exchange rate has already cost the govt part of the forex reserve.Open market rate is much higher. Falling remittances,negative growth in export earnings hint current account deficit may widen. Even IMF team in the press conference underscored that balance of payment may further deteriorate. Depleting reserve and deteriorating current account deficit may lead people to anticipate that Taka may depreciate further and further increase in policy rate is coming. The belief is already strengthened by Monetary Policy Statement (MPS).IMF also insists on quarterly MPS instead of semiannual MPS.

Finance minister in the press conference took credit for pegging the lending rate at 9% for a long time. But sluggish domestic investment and regulated LC openings show investors have little confidence on him. Importers request letting them open LCs for raw-materials.Even the 2.5% incentive on remittances is criticized right and left.

Market determined exchange rate would curb import spending and increase the remittances through official channels. Moreover, some exporters would also feel encouraged to bring the earnings back home. And govt may not need to use the reserve.

Govt is also trying to get $1 billion from World Bank. Senior World Bank officials are on a visit to Bangladesh. Even if govt somehow manages to get $5.5 billion things may not improve. Government may increase spending in the election year,further widening the budget deficit.

Luckily oil prices slump as covid infection in China lowers demand for oil. Meanwhile, container operators see decline in demand. This hints that aggregate demand in the world may further fall,bad news for export items.

However, Bangladesh is eying the bilateral relations. Two high profile visits from Middle East and PMs upcoming visit to Japan to mark the 50th anniversary of establishing bilateral ties expect to bring good news for the economy.

Prior to arrival of IMF team,Qatar inked defense pact with Bangladesh.Bangladesh has already signed similar agreement with Saudi Arabia. As tension in the Middle East escalates ,these countries need foot soldiers to secure their borders. Shia-factor in the Pakistani armed forces makes it reluctant to play an active role there.Sunni-majority Bangladesh may easily fill the void.In exchange, lucrative defense deals,concessional oil, investment deals are on the table.Pakistan, which have huge presence in the armed forces of these countries,managed to convince these countries to approach IMF for redirecting their drawing rights to cash-strapped Pakistan.IMF member countries have such rights to draw loan. Oil rich countries seldom use the rights,which remain unutilized. It is likely that Bangladesh may follow such foot step. In addition, these countries may deposit part of their forex reserve at Bangladesh Bank to prevent wild fall of Taka.

PM's Japan visit expects to bring new funding commitment for development projects.Meanwhile, JICA is keen to finance defense project.ADB's budget finance may also widen.

However, if govt fails to show any improvement in macroeconomic management, the countries may withdraw their support.The visits may benefit the govt but current account deficit may grow further.

La Semaine Dernière A Mes Yeux

(29 octobre --- 04 novembre)

Ma Semaine Gastronomique

Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
29	Pain tchapati,Omelette	Riz,Purée de haricot,Ruhi,Courge amère	Pain tchapati(fait par moi),Ruhi,Lait	Lait
30	Pain tchapati,Papaye-haricot	Riz,Ruhi,Radis,Pois chiches,Soupe aux haricots mungo	Lait	Riz gonflé avec oignon,huile de moutarde,poivre,pois chiches
31	Pain tchapati,Papaye,Lait	Riz,Ruhi,Louffa,Purée de haricot,Soupe aux lentilles	Pain tchapati(fait par moi),Ruhi	Riz gonflé
01	Pain tchapati,Omelette	Riz,Bombili,Citrouilles	Riz gonflé avec pois chiches	Riz gonflé
02	Pain tchapati,omelette	Riz,Ritha poisson,Tête de Ruhi dans soupe aux haricots mungo,Épinard d'eau	Pain tchapati,Soupe concentrée aux haricots mungo	Lait
03	Pain tchapati,Œuf poché, Soupe concentrée aux haricots mungo	Riz,Ritha poisson,Papaye-Pomme de terre	Paratha,Riz,Soupe concentrée aux haricots mungo,Ritha poisson	Lait
04	Pain tchapati,Papaye-Haricot vert-Pomme de terre,Lait	Riz,Ruhi,Feuilles de gourde calebasse,Papaye-Pomme de terre,Soupe aux lentilles	Pain tchapati,Pois chiches	Riz gonflé avec pois chiches

Could There Be A Recovery?

Tax cut and high govt spending
Will do little in situation improving.

Taka depreciated to TK 102 against US dollar last week. The record depreciation took everyone off guard. As government is pursuing a managed floating exchange rate, it pegged the rate at TK 87.50. Now at the exchange rate market US dollar is sold at TK 95. Net difference, TK 8,remains same as before. There will be some appreciation when Bangladesh will receive $250 million budgetary support from ADB.

Meanwhile, balance of payments causes lots of worries. There is widening deficit in current account balance. It stands at $14 billion right now.

Remittances keep falling. Though export earnings have increased and show signs of achieving this years target, growth forecast about key export markets throw a wrench into similar growth expectations in the future.International Monetary Fund revised down its growth forecast for 2023 to 3.6%¹.Bloomberg Market recently conducted a survey where a little less than half of the investors apprehended a recession in US economy for 2023. Deutch Bank echoed similar concern. According to a news report, UK inflation reached 9% and 25% of the British find it difficult to get 3-meal per day^2&3.

If we take a look at the country wise export,then we will notice USA,UK,Germany and France constitute our key export destinations. We remember that in 2008-09 Housing Bubble led to recession in the USA. The following year, Bangladesh’s export to USA,Germany,France and Belgium declined ⁵.But Bangladesh got back on track in the subsequent years.Reasons will be explained few para later.

With the rising price level and uncertainty, demand for Bangladeshi goods will be lower in these countries. Though import will be costlier, import of raw-materials and other essential items like oil,foodgrains may lead us to another current account deficit next year.

However, it is not clear what impact the inflation will make on oil revenue even if there is an output contraction in the developed economies. If there is indeed an oil revenue boom in the Middle East,key source of Bangladeshi remittances, then growth in remittances may end up in a current account surplus. However, inflation may cast a shadow over remittances coming from USA and UK. In 2009-10,year after the beginning of the financial crisis,remittances from USA declined to $1.4 billion. Another bout of geopolitical tension will hurt the remittances flow surely.

It is highly likely that government will increase spending as election will be held by the end of 2023. It has to make happy thr grassroot workforce. In addition,govt mulls corporate tax cut from 22% to 21% in the next budget⁴. Such fiscal policy may increase the output but will do little in the end. Why?

• First,such tax cut will do little in bringing new investment. Existing groups close to ruling party will take full benefits of such tax cut
.
• Second, investment spending in a corruption-stricken country hardly translates into new job creation or an increase in output. Rather,in the name of investment spending we may witness opening up of LCs to import capital machinery,raw-materials etc ,making alley of laundering money abroad
.
• Third,for the foreign investors there are already various kinds of tax incentives, so tax cut will do little to bring new FDI
.
• Fourth, in a country where tax-GDP ratio is still below two-digits such fiscal expansion is not a wise move especially when government is taking assistance from others as budgetary support
.
• Fifth, such fiscal expansion will raise the interest rate and Taka will appreciate, making our goods less competitive in the future. Look at the level of depreciation in Pakistan and Cambodia
.
• Sixth, when exchange rate is pegged at some value, now it is at TK 87.50, such fiscal expansion may contract our output more than it is under a free floating exchange rate.

It is indeed interesting to see how the government manages the challenges of inflation and current account deficit in an election year when populist government generally spends more and is shy to reduce interest rate.

I am optimistic about the current account balance. Because our export items to the West are mostly lower-end items. Consumers will purchase trousers, sweat shirt,T-shirts,undergarments, sweaters no matter what their income is.Their demand is inelastic.Despite the long bad spell in the US and Europe,Bangladeshi export took a little hit and did remarkably well. I anticipate the same thing this time. Moreover, we have to make liability into opportunity. As from the next year,we have to start paying an annual obligation of $565 for Rooppur nuclear power plant⁶[*]. However, if we could manage to convince Russia, we could pay it partly as RMG items/ship and partly as agricultural items. Moreover, we have to urge Russia to export wheat and oil to Bangladesh as part of its moral obligation for starting a war.In such case, burden to our US dollar stock will be significantly reduced.

Another thing the government should do is to let Taka lose its value. Now at the open market, exchange rate for a US dollar is TK 95. Government rate should reflect it. If the Taka depreciates further (to TK 120 or somewhere there), then our exportable item will be more competitive and output contraction will not be severe in the wake of a growth cut.

Like the populist regime,government embarked upon taking expansionary fiscal policy ahead of election year. No course correction is in sight. But further depreciation and reduction in interest rate would be more welcoming.

Notes And References:

1. “IMF Cuts Global Growth Outlook, Here Are The Warning Signs”, Reshma Kapadia,Barrons,April 19,2022. For more read at https://www.google.com/amp/s/www.barrons.com/amp/articles/imf-global-growth-outlook-warning-signs-51650326199
2. “Investors Predict US Recession 2023-Here Are The Facts”,Felix Richter,Statista,April 12,2022.For more read at https://www.weforum.org/agenda/2022/04/recession-investor-bank-pandemic-united-states/
3. “Teen Bela Khabar Pacchey Na 25% British;Mullosphitete Navishash(25% British Do Not Get 3-meal A Day; Awful Inflation)”,Jamuna Television, April 19,2022. For more watch https://m.youtube.com/watch?v=dNkAqd3C-4w
4. “Corporate Kor Abar Komchhey”,Daily Prothom Alo(p-12),May 21,2022.
5. Bangladesh Economic Review 2019,2020.
6. "Rooppur Ki Shethosti?(Is Rooppur A White Elephant?)", Bangladesh Military News,Facebook,May 13,2022. For more read at https://bit.ly/3LBCVOULBCVOU

[*Note:This piece has been updated at 21:15 PM BST on May 22,2022.The update includes link to annual repayment of Rooppur Nuclear Power Plant.]

Could The Sunny Spell Last?

Fallen income of household
Does not reflect in real estate market.
Onion price crosses the threshold,
Though some time later onion perishes in perfect.
Riding on fallen import and remittances
Current account registered a surplus.
Despite the sunny spell of some indices,
Slashed growth forecast makes some nervous.

The scars of corona virus for the last six months are gradually surfacing. Despite government's confidence in economy, multilateral institutions heavily downsized their growth forecast for Bangladesh. Drastic measures of lockdown, appeared unsuccessful, pushed further a good chunk of the population down to abject poverty. Even some government statistical institution acknowledged deterioration of poverty rate in its latest estimation. A 10% increase in poverty rate has made the task of poverty alleviation a grueling one as more resources have to be mobilized in order to meet the expenses of wider safety net.

Price of the main staple is rising, adding further woes to the have-not communities. Unusual rain, frequent flooding cast shadow over paddy yield. Other grains' prices are somewhat showing similar upward trend. What is puzzling was the sudden rise of the price of onion. Much of the spike in onion price was attributable to Indian ban ahead of an important state election. But onion is not a quintessential ingredient and it cannot be stored for indefinite period. In fact, many of the specially arranged consignments that made their way into Bangladesh were full of rotten onions. Though onion price is stable now, it hovered around Tk 100/ kilo for several weeks. This same incident happened a year ago. Again an important Indian state election provoked a ban on onion export. I am a bit puzzled why one has to spend Tk100 or more to buy a kilo of onion.

In computer accessories market, the higher prices of hardware and gadgets prevail throughout the lockdown and postlockdown months. Prices of imported gadgets and laptop show no sign to stabilize. Unlike the computer gadget market, smart phone and feature phone market experienced a drastic cut in prices, responding in alignment with falling income of the consumers. Unlike computer market, value addition in mobile phone market reached 60-70%.

Real estate sector is another sector where flat price remains as it was before the pandemic. A report published in a popular daily divulged that small flat like 800-square-foot registered an increase in price over the years. I have not checked the price of small flat right now. Another point is that real estate sector is the sector where undocumented money is melted. No one from the government asks the owner about the source of the money.

So falling income and rising price mismatch tells the presence of unexplained things in our economy. Perhaps that is reasons why some are more optimistic about achieving six percent GDP growth rate next year.

Online shopping platforms also did well during the lockdown. However, meteoric rise of an upstart platform and its failure to deliver goods in time prompted central bank's investigation and freezing of its accounts. Unusual monthly sales arouse suspicion as the paid-up capital is so little and the owners maintained silence about company's promotion and true status. Though High Court granted bail to the company owners, many allege that it is another edition of Ponzi scheme and is meant to legalize undocumented money.

Current account balance registered surplus.But it is mostly due to fallen import payments and increased remittances. Fallen import payments indicate demand for Bangladeshi goods has fallen in overseas markets. And remittances channeled through banks are mostly savings and dues transferred by migrant workers who are returning permanently as claimed by migration experts and analysts. In addition, most of the remittances come through a bank where Middle-East based owners have stakes. In the past, specially when disaster strikes, we witnessed benevolent donors donated huge some of money to government so that macroeconomic stability maintains and forex market gets a positive signal. This is too a disaster-like situation. However, it is not know whether any wealthy donor remitted huge money this time.

Part of the workers' protest before the Sonargaon Hotel for a ticket to Saudi Arabia is a reminder that relations between the two countries turned sour in recent weeks. And if it is not thawed we may see more workers coming back to Bangladesh.

Invisible part of the economy and remittances herald a sunny spell. But it is not clear whether this spell is temporary or long.

Oil Price And Current Account Balance

Could drop in oil price augur good for economy?
Searched the answer spending hours many,
Data on current account and crude oil price
Revealed an unpleasant surprise.
Contrary to belief, current account sustained deficit
Slide from $70 may also hurt forex receipt.
IRF says oil price shock has lasting effect,
This time, positive outcome is what I expect.

In international market, crude oil price hit a nadir after two leading producers had failed to reach agreement on production level.

A local news report says it augurs good for Bangladesh Petroleum Corporation, Bangladesh’s biggest corporation with annual turnover of Tk 250 billion, since government will no longer have to subsidize its operations and it will again walk along the profit-making path.

Lower oil price also means cost of import and cost of production will be much lower. This is happening when aggregate demand in the world market is falling. Investment and infrastructure projects are being postponed. However, export orders are also being called off.

I was keen to look at what it means for current account balance (CAB), which registered negative for the last couple of years. I gathered the old crude oil price data from my earlier analysis on BPC profit/loss, delving macrotrend and updated it for $33 / barrel in 2020. I gleaned the data on CAB from Bangladesh Bank website. Data for 2020 were only available for July-December period.

Since crude oil price influences import and export item prices, it is assumed that current account balance depends on crude oil price.

A quick look at the data revealed that between 2010 and 2020, economy witnessed current account deficit when the crude oil price was well below the $70/barrel, a much talked about price to sustain the economies of Middle East. It is contrary to the belief that a fall in crude oil price improves current account balance. I am still in that group of believers. It is also important to note that Bangladesh embarked upon big infrastructure and investment projects in the given period. Maybe that is the reason for big current account deficit. As I was interested to see the impact of crude oil price on CAB, I needed to fit a model.

Source: Bangladesh Bank & Macrotrend

First, I carried out some diagnostic Check. Time series data called for autocorrelation check. Durbin-Watson statistic (d=1.22 for 11 observations and 1 explanatory variable) fell into indecisive zone. So I went for modified Durbin-Watson check. It reported positive autocorrelation( d=1.22 < d_u = 1.324).

However, I did not transform the regression to make it generalized difference equation. I worked on the serially correlated data and checked for stationarity. To check for stationarity, following regressions were constructed:

🔺 CAB_t = a + b CAB_t-1 + ct + d 🔺 CAB_t-1
🔺 Crude_t = a + b Crude_t-1 + ct + d 🔺 Crude_t-1
Where 🔺 CAB_t= Differences at current account balances at t,
CAB_t-1 = current account balances at t-1,
🔺 Crude_t= Differences at crude oil prices at t,
Crude_t-1= crude oil price at t-1,
🔺 Crude_t-1= Differences at crude oil prices at t-1,
t = a time trend variable, here year.

Tau statistics of slope coefficients of lagged CAB and Crude, -2.33 & -2.3 , in absolute terms were smaller than ADF critical tau statistics at 5% level, -3.4620, and at 1% level , -4.067. So I did not reject the null hypothesis that b=0 or CAB and Crude show an unit root or they are nonstationary.

Please note that first differences of CAB and Crude did not turn out to be stationary. I did not have patience to difference further and to see at what level they became stationary. So both CAB and Crude, for the sake of simplicity, were integrated of order d, I(d).

To check for cointegration, I first regressed CAB on Crude and got the residuals. Then I ran the following regression:

🔺 resid_t = b resid_t-1 + c 🔺 resid_t-1

At 5% level, critical value , reported in J Hamilton’s Time Series Analysis was -3.37. Since computed -2.79 was greater than -3.37, I did not reject the null hypothesis of no cointegration or residuals are nonstationary.

In this case, CAB and Crude were I(d) series and were not cointegrated. So, I went for a VAR model :

🔺 CAB_t = b₁ 🔺 CAB_t-1 + b₂ 🔺 CAB_t-2+ b₃ 🔺 Crude_t-1 + b₄ 🔺 Crude_t-2+ v_t^🔺CAB

🔺 Crude_t = c₁ 🔺CAB_t-1 + c₂ 🔺 CAB_t-2+ c₃ 🔺 Crude_t-1 + c₄ 🔺 Crude_t-2+ v_t^{🔺 Crude}

VAR model did not fit well as reported by F( for 🔺CAB F= 0.8960, p= 0.54 and for 🔺Crude F= 0.048 , p= 0.99). However I was keen to see the Impulse Response Function(IRF), which shows the effect of a shock to an endogenous variable on itself and on other endogenous variables.

An orthogonalized shock to Crude was reciprocated once or twice by CAB and it died out seven or eight periods later, as shown in the graph. The effect of Crude oil price shock on CAB did not wither away instantly and lasted for quite some time.

Analyzing the data for the last 10 years, it was noticed that Bangladesh sustained current account deficit for the last couple of years when the oil price was well below $70/barrel. However, current account deficit deteriorated when the crude oil price increased. Check the price rise when $86/barrel became $107/barrel in 2011, $53.72/barrel rose to $55.71/barrel in 2017 and $55.71/barrel increased to $66.87/ barrel in 2018. Two things became clear: first, increase in crude oil price evidently hurt current account balance; second, price below $70/barrel did not always generate a current account surplus.

My understanding of the situation is that prices lower than $70/barrel stall many investment and construction projects in the Middle Eastern countries where many Bangladeshis work. As construction work halts , they may be laid off. Remittances, rescuer of current account balance , may also get affected. In addition, higher oil prices generate revenue for investment in many of the occidental countries, contributing to increase in household income. That means more spending on apparel items , leading more orders for Bangladeshi garment factories. This may not last as that high oil price driven revenue may dry up , hurting investment and household income in those countries. So our apparel export may also take a hit because of this. By the way, this is considered without taking into account the Corona effect.

And from the graph it was seen that any rise or fall in Crude oil price had a lasting effect on the current account balance. Could it be different for this time?