Deficit shows no sign to lower |
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.