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.]

FDI In SME Could Be The Savior

Reports emerged on the press insinuate that government plans to finance huge budget deficit by borrowing more than Tk 470 billion from banks. The ailing banks are facing liquidity crisis. Many private investment projects stalled due to cash crisis. The decision will put the banks further into trouble by diverting funds from investment towards budget financing. In addition, job creation will also be affected as funds for investment and SME opportunities will dry out.

In the wake of withering number of large and medium enterprises, as indicated by another news report, SMEs remain a beacon of hope for employment creation and revenue generation, relieving the worries of cash-strapped government and financial institutions. Perhaps no other sector  like the SME adds so much value to the  economy. Its small size and dependence on local markets for ingredients and final products make it special. But its glorious journey may come into a halt if government decision comes into effect.

This sector is already a victim of government's biased policy. When it comes to industrial credit, we see that there is discrimination in its disbursement. Moreover, much of the blames for accumulation of bad loans should be attributed to large and medium industries.

Bangladesh Bank SME statistics say that during the July-December in 2017-18 , our  banks disbursed Tk 1693.4 billion of  industrial credit. Of which Tk 1313.6 billion went to large industrial units, Tk 221.5 billion went to medium units and Tk 158.3 billion went to small industrial units. In 2018-19(Jul-Dec), industrial credits for larger and smaller enterprises increased to Tk 1569.77 billion and Tk 179.62 billion respectively. Whereas medium enterprises’ industrial credit decreased to 203.06 billion.

(Data source: Bangladesh Bank)

Now if one takes a look at the default loans, he will be puzzled. In 2017-18 (Jul-Dec), default loan for large industries was Tk 325.09 billion, it was Tk 117.3 billion for medium industries. For small industries , it was Tk 55.18 billion. Within a year, default loans registered an increase. In 2018-29(Jul-Dec), default loans for large, medium and small industries were TK 370.61 billion, Tk 149.09 billion and Tk 76.43 billion respectively. Please note on both occasions default loans for small enterprises were relatively small.

(Data Source: Bangladesh Bank)

Many of this diverted funds will again be pumped into trouble-ridden banks to keep them operational. And we just see all they did in the past to increase the volume of default loans. Since government is cash strapped and wants to create jobs, it behooves the government to allow FDI in SMEs. There are many unseen benefits.

Recently India allowed FDI in retail sectors. Its impact reached beyond borders. As global supermarket brands are opening their outlets across India, RMG factories witness a jump in orders emanating from India.Bangladesh's recent RMG export growth in India is largely ascribed to this factor. Indians are getting top-notch woven items and Bangladesh gets a chance to diversify its RMG export market.Now more orders mean more jobs and reduction in trade deficits.But the biggest advantage of FDI in SME is superior management, supply-chain network and introduction of new services and technology, which will change the whole industry to the core by bringing professionalism and alleviating worries from market uncertainties.

I have been arguing for FDI on SMEs for quite some time. Government seems busy fetching huge amount of FDI in sectors where value addition to the economy is little and and worsening of government expenditure is on the rise. A recent report says Bangladesh's entrance to LNG market also augments subsidy to Bangladesh Petroleum Corporation as LNG price oscillates between  low and high prices in international market. Furthermore, this kind of huge investment only fills the coffers of crony capitalists, who have deep ties with politicians , bureaucrats and defense establishment.

FDI in SME will not be astronomical amount like that in the power or infrastructure sector. But the value they will generate will be enormous. Take for instance the example of our agro-processing and food processing industry. Idea that simple bakery items could be produced using automation never crossed our minds. Quality, price, hygiene and value addition were ensured. Mango pulp and pickle  factories or tomato sauce production units in the muffossil towns introduced contract farming model and saved the marginalized farmers from volatility in the market.

I think government should welcome with open arms if a Philippino wants to set up a boutique shop in Dhaka, a Thai wants to launch a food processing business or a Tamil desires to open a restaurant in Dhaka. One may argue Bangladeshis know how to run this kind of business so we do not want any FDI here. Wrong. Better management, introduction of new ideas and technologies, better worker-employer environment are lacking here. Many years ago I read a report on BBC Bangla about a Pakistani RMG exporter based in Adamzee Export Processing Zone. His factory offered salaries more than his Bangladeshi counterparts do in addition to benefits. Plus he is very kind to his Bangladeshi workers and set up a grievance redressed system that took attention to workers' woes.None of his workers descended to street even when unrest broke out in that industrial zone. This kind of management services and good practices will spread to whole industry when others will take notice of them.

But the biggest advantage will be a great leap forward to an intervention free market. Our country is infested with cadre-based political ideologies and unwanted intervention of  men-in-uniform and men-in-plain clothes. Businesses incur costs to entertain their demands and the parasite-infested business environment drives the good ones out of the market. FDI in SMEs, it is expected, will significantly improve that climate by acting like a scarecrow. Reason for optimism lies in the examples set by donor-funded projects. Since these projects require a certain degree of accountability and transparency, many government officials are not interested to siphon off money from these projects. On the other hand, quality of solely government funded projects has recently been called into question.

It is regrettable that government plans to draw money from banks to finance projects that bear no fruit while neglecting vital sectors like SME. FDI in SME will create the aseptic conditions in our economy, gradually destroying the favorable breeding ground for parasites. At first glance it may appear eccentric. Given the deteriorating business climate, no other solution seems pragmatic and more appropriate beside it.