Policy Rate Perks And Taxing Export

Policy rate has many solutions to offer, Tax export to fill govt coffer.

Latest inflation data reveals that inflation rose to 8.55% from 8.48% in July. Constant increase in rice prices,caused food inflation to rise to 9.56% in June , and rise in nonfood inflation from 9.37% to 9.38% maybe the reason for this hike. Rice price in particular increased by Tk 8/ kilo, prompting govt to allow private importers to import rice.

Meanwhile, keeping the policy rate at double digit is still being criticized though it brought down inflation from 11% to current level. The govt is apolitical and it has courage to do this thing before election. Otherwise, popular govt may have difficulties maintaining this kind of contractionary policy amid pressure from various groups. Before election, investors are reluctant to go for new investment and poor private sector credit growth tells all of it. So the timing is good and central bank is doing the right thing though many thought it was wrong.

As I highlighted before, keeping the policy rate high thwarted would-be launderers from taking loans and keeps Taka's value stable. Lowering the policy rate may make central bank's intervention in the foreign exchange market ineffective. With the high policy rate, depreciation pressure on Taka is low, so central bank's intervention in forex market will lead Taka keep a desired value. With low policy rate, depreciation pressure on Taka will be higher as the NPL keeps growing, so forex market intervention may not yield the desired result and wild fall of Taka maybe observed, worsening the passthrough effects of inflation and farther raising the cost of goods and services. Another thing I mentioned in one of my earlier posts is that higher policy rate is helping many ailing private and public institutions and it helps provident fund to grow,addressing the inflation. Otherwise, govt would have to intervene and provide cash to them through printing money or using the bloc grants. The balance sheets of many institutions say ,as the news reports revealed, they made profit through investment in treasury bonds. Again market mechanism addressing the prevailing maladies, when investment prospect and law & order situation is doomed at grassroot level. Recently, I encountered a news report on a public sugar mill[,located in Jhenidah,] bogged down with unsold sugar worth of TK 360 million as market price is lower than the govt set price. The mill is waiting with the sugar stock amid undue payments for the workers. If the provident fund's money is invested into treasury bonds, then by this time workers would take loan from provident fund and may not face financial hardship. They might sell the sugar in favorable time and clear the loans. Govt intervention would not need at all. Moreover, situation like workers [descending] on streets could be avoided.

The 20% tariff is not something to remain complacent. Back in February, no one would imagine such a situation might pop up. But it happened and seriously jolted the macroeconomic situation. We have to accept that WTO is dead and we live in post WTO world. We exactly do not know what will happen in the next two quarters. So there is no reason for being content with the 20% tariff. Rather, we should chalk out contingency plan how to avoid situation like this again.

It is indeed interesting that other countries are imposing [tax] on our exports and remittances while we are charging nothing. I argued several times if we would tax remittances and export(*see "Tax On Remittance: Good Or Bad?", published here on May 20,2025), govt coffer might fill with ample money to provide more private sector credit. 1% tax on remittances and export will bring Tk 4/5 billion revenue , discarding the need for imposing minimum tax on all the TIN holders. Revenue will be used to intervene in the forex market to depreciate Taka in a bid to give incentives and provide private sector credit to banks. There should be two way traffic of receiving incentives and giving tax.

It is indeed a good move to keep the policy rate same as it screens out would-be launderers, improves balance sheet of companies amid stagnant business, keeps the depreciation pressure low, checks cost of production and [reduces] need for govt intervention. 20% tariff does not herald a new dawn rather exposes challenges in a post WTO world where black swan events will be more frequent. We should start imposing tax on remittances and exports to cover the incentives. Preparing and bracing ourselves against the black swan event will prevent the need for Middle Eastern intervention for saving the day.

[*Update: this piece is updated on August 12,2025. The update includes reference to tax on remittance argument.]

Macroeconomy Amid Trade War VI

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

Export is another area that is highly likely to be influenced by the trade tensions between the USA and China. Bangladeshi RMG export to the USA witnessed negative growth in the last quarter of 2023. Fed's ongoing policy rate hike played a role to a great extent in this negative growth apart from other factors like monetary tightening in Bangladesh. RMG,jute,leather, fish and home textiles are top export performers for Bangladesh. Already trade tensions between the titans eroded market share of RMG export to the US market. Bangladesh's competitors like Vietnam has managed to increase its share in the US market in recent years. As part of monetary and fiscal tightening policies, govt slashed various subsidies, raised taxes including source tax and made import policies stricter. In addition, downgrade of Bangladesh's credit ratings by credit rating agencies has made it difficult for Bangladesh to avail trade credit from foreign countries. Only good news for the export sector is that it is going to see more depreciation of Taka. The trade tensions may bring opportunities.Back in the first round of trade tensions under Trump presidency,ADB forecast that Bangladesh would bag extra $400 million.(source:"ADB:Trade War To Generate Additional $400 Exports For Bangladesh",Dhaka Tribune,March 06,2019.Link: https://www.dhakatribune.com/business/170512/adb-trade-war-to-generate-additional-400m) If trade tensions are intensified again, we may see Bangladesh may join new regional blocs and form FTA. Joining RCEP and free trade agreement with China may increase both FDI and our exports. This kind of arrangement narrows the gap in competitiveness between us and our competitors. In 2022-23,our total export was $43.57 billion. Now let's see what the macroeconomy will look like adding the export sector under different scenarios.

Exports: More than $43.57 billion

Fed funds rate: 5.33%
Chinese policy rate: 3.45%
More exports will ease the pressure on dollar demand. As the contractionary monetary policy is in place, import is subdued. So both the trade balance and current account balance will be positive and both will increase overtime. Despite the export growth, timely repatriation of export earnings is not guaranteed. It is because dollar returns are higher abroad. Depreciation of taka will be lower or no depreciation if growth of current account surplus continues for over a year. Inflationary pressure will be lower. However, whatever dollar will come to the country will be spent to pay foreign debt. Less private sector credit and subsidies for the exporters. Exporters have to rely on foreign credit if available. Credit in yuan,yen and rupee will be available for exporters. Forex reserve will improve. Contractionary policy may not be prolonged.

Fed funds rate:More than 5.33%
Chinese policy rate: Less than 3.45%
Pressure on dollar demand will be eased but significant amount of export earnings will remain abroad due to high returns on dollar deposits. It is not certain whether there will be a trade and current account surplus. Government may hinge on domestic borrowing to meet the revenue shortfall. Depreciation is needed. Policy rate hike is needed to ease the inflationary situation. Forex reserve improvement will be relatively lower. Contractionary policy will be longer than previous scenario. Private sector credit to exporters will be lower than previous scenario. More dependence on foreign credit for export expansion.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
Ideal situation for economic recovery. Chances of repatriation of export earnings are higher, reaping the benefits of high exports. Depreciation is not needed. Trade surplus and current account surplus will improve the forex reserve situation. Both dollar and other currency credit will be available at affordable terms.

Exports: Less than $43.57 billion

Fed funds rate: 5.33%
Chinese policy rate: 3.45%
We may witness both trade and current account deficit. Large depreciation is needed. More policy rate hikes are likely to happen. Government and private sectors may have to borrow from abroad at stricter terms. Budget deficit may widen. External debt position may worsen. Contractionary policy will be long compared to previous scenarios.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
Trade and current account deficit will be larger than previous scenario. Forex reserve situation may deteriorate. More policy rate hike and depreciation are needed to tackle the situation. More borrowings from abroad. Contractionary policy will be relatively longer compared to previous scenarios.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
There may be trade and current account deficits. This scenario may not guarantee recovery. Nor does it guarantee improvement in forex reserve. However, deterioration of forex reserve may not be worse than previous scenario. Good news is foreign credit will be available at affordable rate.Contractionary policy will be relatively longer than the scenario of export more than $43.57 billion .

Decoding Our External Sector

 This week I tried to take a deeper look into the composition of our import expenditure and export earnings.Import always dominates over export in our external trade. I am more interested in what constitutes the import and export items. In addition I tried to find link between illicit financial flow and our external sector.

I delved into the sententious stat given in the appendices of Bangladesh Bank annual report. I leafed through several annual reports starting from 2013-2014. I was befuddled when I had found that data were not easily tractable in subsequent reports. Data of many of the import items lack coherence in subsequent reports. For instance, I checked the data for food, edible oil, textiles, capital machinery and other import items for Fy2011, FY 2012 and FY 2013. To my dismay, I found that what was  reported in the annual report of 2013-2014 was different from subsequent annual reports. If this is the case for immediate past year, then the data maybe provisional or revised, as often indicated by Bangladesh Bank. But for the report of 2013-14 this is not the case. And I remind you I am talking about here about three consecutive fiscal years: 2011,2012 and 2013. For the above mentioned items in 2013-14 report ,reported data are not identical in subsequent annual reports. By the way, data in the annual reports for 2014-15, 2015-16 and 2017-18 are similar.  I got the PDF format of the reports from Bangladesh Bank website.

While decoding our investment for an earlier post, I also faced ordeal in gleaning information. To my horror I noticed that proposed investment figure in Tk  published on Bangladesh Investment Authority website was deliberately swollen. Someone tempered the figure by putting an extra zero at the end of the figure. Luckily I had checked the data with the one reported in Bangladesh Economic Survey. I also endured similar problems while I collected data  from Police websites. I think webmasters and persons responsible for running the government websites should be more scrupulous.

Now get back to the import data. To obviate the troubles in analysis, I depended on the most recent annual report and for data on earlier fiscal years (i.e.FY2008, FY 2009) I trusted the annual report for 2013-14.

Our import is composed of many items. Among them food grains, edible oil, POL,chemicals, fertilizer, plastic, raw cotton, yarn, textiles, iron & steel, capital machinery and other items constitute the biggest part of  import spending. Others( other items) alone turns out to be the the biggest contributor to import spending, followed by textiles, capital machinery, iron and steel, POL and raw cotton. For instance, provisional estimates of 2018 shows that we spent $6.8 billions on textiles, $5.46 billion on capital machinery, $4.83 billion on iron,$3.65 billion on POL, $3.25 billion on raw cotton and $ 15.88 billion on other items.And our import spending on textiles, capital machinery, iron and steel , yarn and raw cotton has been increasing for many years. Many of these items are used as ingredients of manufactured goods and used in setting factories or implementing development and investment projects.

On the other hand , decomposition of our export items reveals that woven garments, knitwear, home textile , footwear and jute goods fetch more foreign currency for our economy. For instance in 2018, woven garments brought $15.43, knitwear, fetched $15.19, home textile earned $878.68 million , footwear accounted for $809.69 million and jute goods brought $869.87 million. Woven garments, knitwear and footwear registered consistent growth over the years. It is highly compatible with our growing external sector. Projection made by Bangladesh Bank shows that both export and import will continue to grow in the coming years.

(Data Source: Bangladesh Bank , GFI)

Global Financial Integrity in its report on illicit financial flows claimed that between 2004 and 2013, a total of $55 billion was laundered abroad from Bangladesh. In January this year, in its new report GIF claimed that in 2014 $9 billion was drained out of Bangladesh. Moreover, in 2015 at least $5.9 billion was laundered abroad. Now many of the illicit transactions had taken place through trade misinvoicing, as reported by GFI. In export bill, export earnings are reported less than the true amount. In import bill, import spending is reported more than what it actually is. In addition, fake documents are created to do import and export by trading nothing or trading goods that value less or more than the true reported goods.

So the more our external sector grows, the more our hard earned currency launders abroad. According to GFI, gross trade misinvoicing in the period between 2004-2013 was $92.02 billion, of which $49.13 billion was trade misinvoicing outflows and $42.89 billion was trade misinvoicing inflows that means Bangladesh also witnessed illicit inflows of capital in the above mentioned period. If we break trade misinvoicing  outflows further, we will see over invoicing of import bills accounts for $18.21 billion of the total outflows and under invoicing of export bills accounts for $30.92 billion of the total outflows. To be more precise, in the given period we loss on average $1.8 billion due to over invoicing import bills and $3 billion due to under invoicing export bills every year. In light of this  we can say export sector is more responsible for illicit financial outflows than the import sector.

This thing is happening when we are having a current account deficit. We need to export more, import less and get more remittances in order to improve the current account situation. Government put forward lots of cash incentive packages to increase remittances and augment the export. Many economists opposed the move and pressed for depreciation of Tk. To them, it will augment the export, remittances and at the same time it will restraint the import.

Just bring  the illicit financial flow into play. In this case any initiative to boost export has a caveat: chances of illegal capital flight have also gone up as per our earlier discussions. But the idea of depreciation of Taka instead of cash incentive appears to be reasonable here. By slowing down import for some period it will curb the clandestine capital flight associated with over invoicing of import bill. At the same time it will increase the risk of capital outflow through under invoicing of export bill. If the former outweighs the latter then we can say that this depreciation measure will be boon for the external sector. Another note of caution is that slow import  will also stall the clandestine capital inflow through under invoicing of import bill, which was $42.9 in the given period. So curbing the money laundering and improvement of current account deficit put our policy makers in quandary.

Money laundering has been taking place for a long period of time. In a corrupt country these bad practices are deeply rooted in our society.We would  stem the trade misinvoicing if we were able to device the means. Since we do not have that mechanism, depreciation of Taka appears to be an acceptable solution right now to improve the current account situation.