Rezaul Hoque's Take: Macroeconomy

Showing posts with label Macroeconomy. Show all posts

Sunday, July 6, 2025

Remittances: Bane Or Boon?

Remittances fill the gap in balance,
Desirable is an economy with less influence.

Remittances have become rescuer of Bangladesh's macroeconomic stability. Riding on remittances, Bangladesh managed to narrow down the current account deficits. In 2023-24(Jul-Apr) , current account deficit was $6 billion, it became $1.4 billion in 2024-25(Jul-Apr).During the same period ,overall deficit came down to $656 million from $5.5 billion. Meanwhile, in 2023-24(Jul-Apr), remittance was $19.12 billion and it became $24.53 billion in 2024-25(Jul-Apr).(Source: Bangladesh Bank)

We have never been a trade surplus economy. Foreign aid and remittances pop up the current account balance for so long. Macroeconomic mismanagement deteriorated the current account balance, starting the free fall of forex reserve. Forex reserve starts to grow following the latest receipt of the IMF credit pack and WB' s budget support. Import has been tightly controlled since the govt introduced the monetary tightening policy.In addition, govt freely floated Taka,sustaining no fall in its value. Rather, Taka is appreciated in recent times.

The improvement in current account deficits is due to remittances, controlled import and nonintervention in central bank's decision making process. There is widespread fear that both exchange rate of Taka and current account balance may plunge when the restrictions on import are relaxed. There are some other factors need to be taken into account like [increased] oversight on external trade in recent years and depreciation of USD. USD has depreciated 1.77% in last one month and 7.52% in the last one year (source: www.tradingeconomics.com). The long-term desire of the US to weaken it further in future so that the economic policy makers use the USD as an instrument to get more foreign market share for American goods and services.

Bangladesh heavily [relies] on USD to settle international transactions. So depreciation of USD also played a role in appreciating Taka in the midst of free floating of Taka. In this backdrop, it will be difficult to depreciate Taka in the future. Depreciated Taka will be key to augment export and bring more remittances.

Too much dependence on remittances exposes weakness of our economy. If you look at the sources of remittances, you clearly see the USA, Saudi Arabia,UAE,Uk and Malaysia top the list [of major sources of remittances].

And most of these remittances reached Bangladeshis through Islami Bank, Agrani Bank,Janata Bank,BRAC Bank and Trust Bank. Amid trouble, Islami Bank is still the bank that brings most remittances from abroad every year. The bank is also responsible for opening most LCs for import of food grain and fertilizer. Back in 2023, a group swindled billions of Taka from the bank in the name of importing food grains, jeopardizing the banking of it and other specialized banks.

Not only that amid negotiations with the IMF, Jeddah and Dubai based exchange houses tried to manipulate the exchange rate of Taka.

So this Middle Eastern based remittances give the countries of that region leverage over our economy.

We have to either diversify our remittance sources or focus on trade surplus through bringing more exportable item, market diversification and innovation. Any shock to our remittance sources will definitely put our macroeconomy at stake, worsening our future debt burden and prolonging the economic recovery.

Tuesday, September 17, 2024

Macro Optism,Micro Unease

Forex swells and taka heads to stability,
Amid debate referendum clears ambiguity.

There is no short of loan pledges since the interim govt assumed power. World Bank pledged to provide $1 billion as part of carrying out some crucial reforms in the banking sector. Islamic Development Bank pledges to provide $5 billion in the next 3 years. ADB will provide $400 million as budget assistance by December 2024 and another $500 million by March next year. The USAID is going to provide $200 million as development assistance. Meanwhile, inflow of remittances breaking record after record. August witnessed a record inflow of remittances, $2.2 billion. Previous year's August fetched $1.6 billion. In July, $1.9 billion worth remittances ended up in government coffer. Forex reserve is around $20 billion,which is likely to rise in the coming months. Riding on remittances and foreign loan commitment, exchange rate of Taka against the US dollar remains stable: the difference between the unofficial and official rates is less than 1%. If this trend continues for 6 months ,taka may become a stable currency and foreign investors' confidence on Bangladesh will be restored.

However, there are some dark clouds in the distant horizon. Though official data show that inflation eased to 10.49% in August from 11.66% in July, essential kitchen commodities have yet to reflect the official figure. Government eased import restrictions on egg,potato,onions and other items ,yet prices of these items soar. Record torrential rainfalls in the southeast and across the country worsen the waterlogging problem. Rice cultivation and pisciculture sustained severe damages due to this unusual precipitation. Post flood rehabilitation has yet to be started. Export sector shows some signs of unease. This year Bangladesh's RMG exports to the US dropped by 10% compared to previous year. In addition, workers' unrest in the industrial belt on the outskirts of Dhaka continues,resulting in forced closure of many factories. Authority is optimistic to restore the situation. However, rising food prices coupled with worker's agitation and incessant demand from political parties to hold reform under elected govt unveils a path strewn with new challenges before the interim govt. Since the issue may recur again, I think it is better to go for a referendum on duration of the govt along with draft reform policies it will undertake. Once this happens it will throw cold water into such debate and the govt will earn confidence and loyalty of bureaucracy that remains shy in the wake of peculiar state of the constitution. The attitude that politicians are sources of all the problems should be discarded. At the same time,reform should be initiated in all the key institutions of public and private sector. As people have right to know about their public representatives( through RPO and other reports) ,they also have right to know details about those heading key institutions. Similarly, institutions that do not have any accountability cannot steer any kind of special drive until a major reform about their accountability is introduced. A kleptomaniac organization that sustained corrupt regime cannot go after other kleptomaniacs. Else it will add another chapter of human rights violation. Instead of binationals, if we recruit more foreign black/white individuals as advisors or consultants, our economic recovery will be faster. If economy and the country are in good state, then recruitment of these binationals has not become an issue. That is not the case. From bureaucrats to utility company boss, they are subject of debate and a genuine source of corruption.Comment like "America e to shokal / bikal bank khole / bondho hoe( In USA, everyday a bank gets opened/ closed)" came out of their mouth and banking act was amended to make directors from the same family, proved catastrophic in the context of Bangladesh. Dual nationality is a problem to try them in the local court when an issue surfaced. Do you think other countries will accommodate them in key policy making positions? Then why should we be an exception? I think interim govt should refrain from taking major policy decision like setting up quick rental power plants in 2007(see reference 1).That decision was taken during the time of caretaker govt. It did more harm than good,wasting millions of dollars of taxpayer's money. Major policy decisions should be shelved for elected govt who has people's mandate.

Macroeconomic optimism is more pronounced under this govt. But the micro reality is still biting the grassroot people. Witch hunting and banality about reforms may create confusion and political uncertainty ,which is not good for this govt. Specifics of reforms and referendum about their duration clear any ambiguity.

References:

"2007 E Tottabodhayok Sorkarer Somoy Quickrental Er Jatra Shuru(Quick rental Starts Its Journey In 2007)",Abu Taher,Daily Bonikbarta, September 02,2024.Link: https://bonikbarta.net/home/news_description/397522/%E0%A7%A8%E0%A7%A6%E0%A7%A6%E0%A7%AD-%E0%A6%B8%E0%A6%BE%E0%A6%B2%E0%A7%87-%E0%A6%A4%E0%A6%A4%E0%A7%8D%E0%A6%A4%E0%A7%8D%E0%A6%AC%E0%A6%BE%E0%A6%AC%E0%A6%A7%E0%A6%BE%E0%A7%9F%E0%A6%95-%E0%A6%B8%E0%A6%B0%E0%A6%95%E0%A6%BE%E0%A6%B0%E0%A7%87%E0%A6%B0-%E0%A6%B8%E0%A6%AE%E0%A7%9F-%E0%A6%B0%E0%A7%87%E0%A6%A8%E0%A7%8D%E0%A6%9F%E0%A6%BE%E0%A6%B2-%E0%A6%AC%E0%A6%BF%E0%A6%A6%E0%A7%8D%E0%A6%AF%E0%A7%81%E0%A7%8E-%E0%A6%95%E0%A7%87%E0%A6%A8%E0%A7%8D%E0%A6%A6%E0%A7%8D%E0%A6%B0%E0%A7%87%E0%A6%B0-%E0%A6%AF%E0%A6%BE%E0%A6%A4%E0%A7%8D%E0%A6%B0%E0%A6%BE-%E0%A6%B6%E0%A7%81%E0%A6%B0%E0%A7%81

[update: this piece has been updated at 7:04 am BST on September 02,2024; update includes insertion of reference to starting of quick rental powerplant.]

Monday, June 10, 2024

Macroeconomy Amid Trade War II

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

In the previous piece ,I depicted a rough sketch on the macroeconomic situation amid a trade war between the US and China. Let's add few other factors to make the sketch a bit clearer. Here I start with adding the crude oil price. The previous piece is based on the assumption that crude oil price is $70/barrel. Now let's see what the scenarios will look like when the crude oil price is more than $70/barrel and when it is less than $70/barrel.

Crude oil price: More than $70/barrel

Fed funds rate:5.33%
Chinese policy rate: 3.45%

It will put pressure on existing import. It has the potential to worsen inflationary pressure. Continuation of policy rate hike for a long period. But tax revenue from oil import will rise. Depreciation is needed to make contend exporters. But depreciation of taka will also raise the revenue. Remittances from the Middle Eastern countries may rise.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
It will worsen the strain of import expenditure. As foreign credits will be hard to get, financing existing import expenditure will see an uphill task. Exporters' cost of manufacturing goods will also rise. More depreciation is needed than the previous case. Inflationary pressure will be higher than the previous scenario. Interest rate hike will be higher and continuation of this policy will be longer than the previous scenario. Revenue earnings from depreciation will be higher but import bill of oil and food grain and other necessary items will cast shadow over it. Remittances may be lower than the previous scenario. Part of the oil revenue may be invested abroad and the the rest will be invested in local domestic infrastructure project. Chinese credit/FDI bound to US may enter Middle East amid trade war. China financed infrastructure project in the Middle East may see less participation of South Asian work force.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
Less stress on import spending. No depreciation is needed. It will put pressure on revenue earning if NBR fails to meet its target. Remittances will rise. Most of the oil revenue from high oil prices will be invested back in the Middle East. More Bangladeshi workers may find jobs in these countries. Part of the money may be invested in Bangladesh, giving a sigh of relief to Bangladeshi private sector that heavily depends on Dubai and Singapore based banks for foreign credit.

Crude oil price: Less than $70/barrel

Fed funds rate:5.33%
Chinese policy rate: 3.45%
Less pressure on import spending on oil. It will help easing the inflationary pressure. Economic recovery will be early. However, less Bangladeshi workers may find jobs in the Middle East. No bigger depreciation is needed. Chinese investment in Bangladesh may rise.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
Depreciation is needed but less than the default scenario ($70/barrel). Inflationary situation will be better than the default scenario. China will be in a much more comfortable position to grab large share of EU market with weakened Yuan and low oil price. More Chinese credit and FDI for the Middle Eastern infrastructure projects may shrink the opportunity of Bangladesh workers. Less remittance flow than other scenarios. Money supplying measures by Bangladesh Bank will be less than the $70/barrel scenario. Chinese investment in Bangladesh will rise.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
More foreign credit and FDI will come to Bangladesh. Inflationary situation will be better than all scenarios described so far.Ongoing contractionary monetary policy will not last long. Economic recovery will be earlier than any other scenarios.

Friday, October 28, 2022

Macro Woes

Some concerns about macro stability
Raise doubts about reserve's ability.
Ties overlooking national woes
Like guiding a ship without crews.
Let people know a deal’s nitty-gritty.

As Bangladesh faces serious concerns about growing budget deficit and the figure about forex reserve, government has started a negotiation with IMF team for a credit of $4.5 billion. Though balance of payment has been negative for two years,forex reserve is enough to meet the need of the country for 5 months.

But debate raged over government’s boasting of $35 billion reserve. Many keep saying reserve is much lower than the official claim. Government already used the reserve by lending some to commercial banks and Sri Lanka,financing the dredging work of Payra port,creating a new industrial fund. A total of $8 billion was used. Government keeps showing the spent part in the forex reserve. IMF insists that government discard the figure from reserve and portray the true reserve.

However, government’s gradualist policy has started to yield dividend. 50 basis points increase of policy rate and stern caution from the central bank about opening of LCs of goods deemed not urgent significantly reduced import.Meanwhile, depreciation of taka in the open market also played a role.But food inflation shows no sign to abate. Rather, a report says food import was lowest in 7 years(Source:"Rice,Wheat and Lentils:Food Grain Imports Lowest in Years",MasudMilad,Daily Prothom Alo,October 26,2022)¹. But many here are optimistic that pledged delivery of food will happen in time and winter crop production will be good.

Strong dollar and depreciation of taka also get blame for rising food prices.But exporters and others criticized govt for managing the rate of taka which is lower than the market rate.

Following the discussion with IMF and the gradualist policy, another policy rate increase is likely. When policy rate rises there is a curb in money supply.It means Taka will appreciate in future. Rise in interest rate and appreciation of taka will block unnecessary spending.At the same time,it will give government a sigh of relief before import of food grain.

However,Pakistan's removal from FATF's grey list,depreciation of both Indian and Pakistani rupees,Russian support for Myanmar's apparel industry, and decision of Benin(third largest cotton exporter to Bangladesh) to set up export zone for RMG and textile factories augur ill for Bangladesh apparel industry(source:"Tular Bikolpo Bazaar Khujte Hobey Bangladeshke(Bangladesh Has To Find Alternative Cotton Market)",Nujhat Kamal,Ekhon,October 28,2022)²,which witnesses fall in exports in two consecutive months this year alone. Before any further policy rate hike,Bangladesh Bank should let Taka depreciate so that any later appreciation could at least ensure the Taka-Rupee exchange rate prevailed prior to the Ukraine war.

Bangladesh’s closeness with oil-richer countries and upcoming high profile visits of royals of gulf countries herald that macroeconomic stability may not be a concern. Bangladesh signed a military agreement with Qatar to send troops in the kingdom. Saudi Arabia is in talks with Bangladesh for similar agreement. In recent years,when Pakistan in crisis Saudis perked billions of dollars in Pak central bank on condition that Pakistan would send the money back in a notice of 72 hours and Pakistan would not use it elsewhere (Source:"Saudi Conditions ",Editorial,Dawn,November 30,2021)³.The artificially swollen reserve sent a positive signal about Pakistani rupee and prevented its wild fall.Qatar back in 2013/14,when Bangladesh sought first ECF to IMF,approached Bangladesh about perking some of its forex reserve in the central bank.If somewhat flexible arrangement is made this time coupled with more workers to gulf countries and concessional oil-gas , then balance of payment will be healthy again.

Difficult times lie ahead.High oil price is partly to blame. It is useless to make commitment if Bangladesh fails to gain something to address its macroeconomic concerns.

Notes and References:

For more read https://en.prothomalo.com/business/local/qlftfspdcb
For more see https://m.youtube.com/watch?v=9034w1ByVgo
For more read at https://www.dawn.com/news/1661100

[Update:This piece has been updated on November 01,2022 at 10:50 am and at 16:05 pm Bangladesh Standard Time. Updates include inclusion of key references.]