Long-term credit outlook is in decline
Hints that economy is not doing fine.
Recently credit rating agency Standard and Poor Global Ratings has lowered Bangladesh’s long-term outlook to negative in the wake of government’s inability to clear dollar payments to international clients1. Earlier, Moody’s had downgraded Bangladesh’s credit rating. Back then, government labelled the move as geopolitical one. But Dubai and Singapore based private banks made strict loan conditions following the rating.
Earlier a news report divulged that Petrobangla, a public corporation for extracting and procurement of fuel and energy, is facing difficulty in clearing dues of foreign energy companies. A Singapore based company and Total Energies owe a total of $110 million to Petrobangla. In addition, Chevron owes $280 million2. They threatened to stop furnishing gas if the dues are not cleared soon.
Bangladesh has not increased its capacity to extract more gas and oil and to refine crude oil. Even former Chinese envoy to Bangladesh in a press conference wondered why Bangladesh wanted to buy oil from China when it is a net importer of oil. Saudi government on several occasions proposed the government to set up a new refinery. Only recently BPC installed oil pipeline and storing facilities for crude oil in Moheshkhali , a tiny island off the coast of Chattogram.It will save the govt Taka 8 billion annually.
Prior to this latest incident of payment debacle in energy sector, government had earlier intervened to clear dues of $293 million to Chinese government for smooth operation of Payra thermal power plant. Rampal power plant had also gone through similar intervention.
Back in April, a news report said that Facebook’s Bangladeshi public relation firm decided to limit its operation of collecting ads for Facebook. In a letter addressed to its clients, the firm put the blame on acute dollar crisis and obstacles in repatriating the ad revenue to the USA.
It was not the first incident of dollar crisis faced by private firm. Earlier, news report also surfaced claiming private companies who had borrowed from foreign institutions face uphill task to pay back instalment and interest as most banks refused to sell dollar crossing some limit. At the end of December 2022,commercial borrowing stood at around $8 billion and total credit stood at around $92.7 billion.3
In the first two weeks of current fiscal year,government borrowed Taka 10 billion from the central bank by purchasing treasury bonds and bills,which is literally printing money and injecting into economy4.
Back in April, in a piece titled “Food Security Under Scanner”,I wrote:
“Another thing I have recently noticed that this year alone govt has to pay Taka 1 trillion as interest payments. This means it has to compromise spending on other sectors or to print money to meet the debt obligation. As this is an election year,govt may also embark upon politically motivated development projects to unite the loyalists. Often the money may stem from printing more money. This will push up the price level further, depreciating Taka further and increasing the woes of consumers.”
5
There is no surprise in S&P's pessimistic rating. Telenor Asia's head in an interview to a local daily has made it clear winding down of their investment in Bangladesh hinges on political situation6. Beximco Group,which earlier took over the operations of Glaxosmithkline here,has offered Telenor to purchase all its shares if it departs from Bangladesh. According to a report by UNCTAD, investment on relocating factories from Occidental countries to Bangladesh was declined by 59% in 2022.
Fed's policy rate hike, rising inflation, tensed political atmosphere, huge debt obligation offer dismal picture in investment. In general, investors' confidence reflected in these recent ratings. More quickly we resolve our political differences ,earlier will be our economic recovery.
Notes And References
“S&P Lowers Bangladesh’s Outlook To Negative,Credit Rating Unchanged “,Jebun Nesa Alo,The Business Standard, July 25,2023. For more read at
https://www.tbsnews.net/economy/sp-lowers-bangladeshs-outlook-negative-credit-rating-unchanged-671570
”Dollar Er Obhabe Gaser Daam Bokeya,Ditey Hocchey Jorimana(Gas Bill Due Because Of Dollar Crisis,Fines Keep Rising)”,Daily Prothom Alo,July 25,2023.
“Rising Debt Says It All”,Rezaul Hoque,April 22,2023.https://hoquestake.blogspot.com
https://hoquestake.blogspot.com/2023/04/rising-debt-says-it-all.html?m=1
“Record Poriman Taka Chhapiye Sorkar Ke Dichhey Kendriyo Bank(Central Bank Printed Record Money And Handed To Government) “,Rakib Hasnat,BBCBangla,July 23,2023.
For more read at
https://www.bbc.com/bengali/articles/c4nr8j9vjn4o
“Food Security Under Scanner “,Rezaul Hoque,April 07,2023.https://hoquestake.blogspot.com. For more read at
https://hoquestake.blogspot.com/2023/04/food-security-under-scanner.html?m=1
“Rajnoitik Poristhitir Upor Nirvar Korchhey Bangladesh e Telenor Er Babshyaik Bhobishot(Telenor's Business Future Hinges On Political Situation) “,Bonikbarta, July 27,2023.
For more read at
https://tinyurl.com/2kymfpse
Economic zone policies need complete overhaul
To improve business and attain fiscal goal.
This year govt presented a budget with a size of taka 6.06 trillion. Government is going to face a revenue shortfall of taka 2 trillion. In addition, govt has to achieve 0.50% increase in revenue collection as part of the IMF's conditions for $4.7 billion credit.It will definitely put huge pressure on the govt,which is facing receding economic activity ahead of next general election.
While govt has been drastically searching alleys to augment its revenue earnings, policy loopholes created by it earlier still remain unaddressed. For instance, income tax act(2023) allows clandestine capital investment in economic zones and hi-tech parks with only 10% tax.Nothing else! Authority will not ask how investors earned those money.This scheme will last till July 30 of 2024. Such provision neither brings adequate investment nor opens up new opportunities. Worst, it is keeping at bay good investors who are careful about their reputation. These zones and parks have special tax holidays and other lucrative benefits. Yet they failed conspicuously to attract high-profile tech intensive investment. Furthermore, we have noticed recently misuse of export incentive and increasing incident of corruption. A Chinese company in Chattogram was caught red-handed for intentionally tagging “Made In Bangladesh “ tag to clothes manufactured in China.Subsequent probe revealed it swallowed export incentive reserved for exporters and evaded tax.In the incident of BM Container Depot blast, residential address of Dutch investor /partner was not found at the Board of Investment.BM depot days after days stored hazardous chemicals,putting lives of the surrounding villagers at stake.More recently, hack incident of Krishi Bank website and exposed information of 5 million Bangladeshis in dark web reminds us that we have not taken any lesson from Bangladesh Bank heist,now a major documentary in Hollywood, and allowing clandestine capital in ICT did not improve internet security and business environment. In fact ,it made it worst! I have seen report that divulged how Equity And Entrepreneurship Fund of Bangladesh Bank was misappropriated ,forging documents.
Why do we need FDI?Adding new technology,tech transfer,job creation, value addition and boosting economy.
For the sake of new technology and tech transfer,we could tolerate investment of black money in EEZs.However, it is absurd to continue it if that does not happen or costs the economy by introduction of new alleys of corruption.
Time has come to revamp our tax policies in EEZs and hi-tech park. Full stop on export incentive for bleaching black money in the name of investment. Different tax structures for investors who disclose their source of income and those who prefer not to disclose.
The weight of tax collection is so heavy on the govt that it cannot do business as usual in dealing with incentives and investment in EEZs. It should chalk out new strategies to improve business environment in ICT and EEZs and augment the revenue in general.
Rupee credit in favorable rate
Boost revenue, chance and trade.
Bangladesh and India formally inked deal to settle part of their bilateral trade in rupee. The agreement will ease dollar demand to some extent. In addition, Bangladesh Bank governor said that dual currency card for the tourists of both the countries will be launched in September1.
In the face of growing dollar demand, rupee and yuan emerged out as international currencies to settle part of the bilateral trade. Despite having huge trade deficit, limited trade in these two currencies will give some sort of comfort to the govt. A Chinese company had earlier agreed to receive part of the credit repayment in taka to clear the wages of local employees.
Our export to India was $866 millions in 2019-20,$1 billion in 2020-21 and $1.5 billions in 2021-22 respectively2. The trend shows export to India grows an impressive rate. Our import is also growing. Now it stands at $14 billions. Since import exceeds export, Bangladesh decided to confine the settlement of bilateral trade in rupee into $2 billions[*]3.
There are arguments to borrow rupee from India to finance the import and later payback the amount along with interest.However, some argued against it as dollar may be used in such deal and it may not be favorable to Bangladesh. I think instead of saying no to such proposal if it is favorable enough we should opt for it.
India is willing to pitch rupee as an IMF SDR currency.More countries trade in rupee,more stronger the idea will become. Bangladesh is a potential manufacturing hub that will cater to the need of growing Indian consumers. Bilateral trade will eventually grow. To narrow the trade deficit, we also need Indian investment.
Trade in rupee paves the path in this regard. If borrowing rupee from Reserve Bank of India or any state or private bank is lucrative then we should think about it.On the other hand,volume of trade done in rupee is a factor that influences rupee’s bid to IMF SDR currency. What does such favorable exchange rate mean?Taka-rupee exchange rate is fairly stable over the years. But dollar-taka and dollar-rupee registered unusual volatility in recent months. Now any credit deal in rupee with Bangladesh has to be done in light of exchange rate higher than the market rate at the time the deal is signed. And by the time when repayment takes place, exchange rate has to be lower than the market rate prevailed at that time. For instance, say $1 dollar fetches 82.90 rupees. Bangladesh would like to borrow $1 dollar worth of rupees for three months. Three months later suppose the market rate will be 85 rupees for $1 . Making sure that credit deal will take off,Bangladesh will be offered 83 rupees for one US dollar during the agreement and will have to repay 84.50 rupees for $1 dollar.Creditor bank will gain 1.50 rupees (interest plus other costs ).And Bangladesh will save 0.50 rupee from $1 trade. For every $1 billion worth of trade Bangladesh will save 50 crores of rupee or $6.03 millions. For a total of $14 billions of trade,it could save $84.42 millions or Taka 920.178 crores every year.Bangladesh could later use the saved money in developing export infrastructure or modernization and automation of trade facility. For India,the advantage is that $14 billion worth of bilateral trade could be done in rupees and this example could be offered to other countries. Large part of unofficial trade will come under official channel as such trade will require documentation. Both the governments will earn revenue from the increase in trade.
Devising a favorable exchange rate could allow such credit deal to take off. Many private companies are familiar with such deal. In fact, part of the reserve ($7 billions) Bangladesh lent to private banks might be used in currency swap abroad as cost of buying dollar was kept artificially low by not raising the interest rate and by not depreciating the taka for far too long. If credit in rupee at favorable exchange rate is on the table, we should grab it without ado.
Notes And References
“Dual Currency Taka-Rupee Card From September”, Daily Star,July 11,2023.For more read at
https://www.thedailystar.net/business/news/dual-currency-taka-rupee-card-september-3366251
Bangladesh Bank
“Currency Swap To Ease Dollar Demand”, Rezaul Hoque.May 18,2023.https://hoquestake.blogspot.com/.For more read at
https://hoquestake.blogspot.com/2023/05/currency-swap-to-ease-dollar-demand.html?m=1
[Update: This piece has been updated at 14:00 Bangladesh Standard Time on July 18,2023.Update includes insertion of " settlement of bilateral trade in rupee" instead of "bilateral trade".
------Rezaul Hoque]
Recent price overshoot in kitchen item,
Sign that black money enters the system.
World Bank in one of its report "Atlas Of Sustainable Development Goals 2023" observes that two-thirds of Bangladeshis cannot afford healthy foods. This lays bare the fall in purchasing power of the Bangladeshis. I have also read a report of a local daily that says Bangladeshis in general lags behind other countries in the ranking of countries based on meat consumption1. India is at the bottom segment of that ranking and in South Asia Bangladesh is ahead of India. Belief/choice is a factor that puts India in that position. But for Bangladesh it is obviously the falling purchasing power.
This bakri eid is another testament of this dwindling purchasing power. Many households abstained from observing the ritual of sacrificing an animal. Meanwhile, bovine market registered a decline in prices in recent years. Many bovine dealers preferred to withdraw their animals from the market as they did not get the anticipated price. This tells how households are coping with the rising inflation.
Few days before bakri eid chili price soared to an unprecedented level,leaving everyone flabbergasted. Earlier onion, soybean oil, broiler, egg had also shown unprecedented volatility. Now as the chili price is being normalized, potato price tends to show unusual hike. During the festival season like bakri eid when more and more people eat meat,a little bit of price increase is justified. However, chili was sold over Taka 700/kg for several days2. Reason put forward was the lack of supply. However, other essential items(i.e, cinnamon, clove,black pepper, cumin,zinger, garlic) that are quintessential in cooking meat did not register such unusual hike.Chili is harvested here and even grown in pots. Excess demand is being met by importing from neighboring countries. But one thing that keeps chili, onion separate from others is that these things shrink in volume over times and one cannot store them long. Onion can be stored by making chips. Potato can be stored in cold storage. Even temperature variation could ruin the whole stock. Low quality fetches low prices. Moreover, these items have elastic demand unlike rice and wheat. People can prepare their meal without chili or onion. People will stop buying potato if it shows unusual price hike. They will rot if people stop buying them. This is not true for rice or wheat. People have to fill their stomach.
What is interesting no sooner had the trucks reached Indo-Bangladesh border chili prices dropped to normal level. Speculative role played some part here. Earlier, broiler meat and egg market showed this tendency. Consumer rights' body even fined few wholesalers for not furnishing any receipt/ for selling at prices above the set price. Long before that soybean oil market registered unusual hike and wholesalers denied outright to give any receipt to the retailers. Even before that in the name of e-commerce motorcycles, soybean oil were being sold at discounted price and many people lost their money in this fraudulent multilevel marketing scheme. Recently, we see how metro fare is inflated above the bus fare to give favor to the transport businessmen. According to a report by a local daily, metro fare is cheap compared to bus fare and varies during weekdays and the weekends in neighboring countries3. This is not the case here. In our metro there is a concept of peak and off peak hour but there is no change in fare. More recently, during the last one year as government followed multiple exchange rates while certain quarter laundered money abroad and delayed bringing export proceeds in time to gain later from further depreciation of Taka.
This is all happening ahead of next election when clandestine cash will come into play. Since less paperwork is needed, cost of legalizing black money is pretty low in the kitchen market. One can introduce huge sum of money into the mainstream through price variation in kitchen items.
Bangladesh has slipped into such a situation where regulatory grip is weak and privileged quarter indulges in swelling their wealth through profiteering.
Notes And References
"Bangladesh Soho Bisher Dosh Desh Jekhaney Sobchey Kom Mangsho Khawa Hoi(Bangladesh And Ten Other Countries Where Meat Is Consumed Less)",The Business Standard,June 30,2023. For more read at
https://www.tbsnews.net/bangla/%E0%A6%AB%E0%A6%BF%E0%A6%9A%E0%A6%BE%E0%A6%B0/news-details-154686
"Ekta Kancha Moricher Daam Ektaka,Daam Barar Karon Ki?(One Chili Costs One Taka,What Is The Reason Behind Price Increase?",Sanjana Chowdhury,BBC Bangla,July 02,2023. For more read at
https://www.bbc.com/bengali/articles/cw4vzd21e2do
"Metro Rail:Passengers' Welfare Association Demands 50% Reduction In Fare",Dhaka Tribune,December 17,2022.
For more read at
https://www.dhakatribune.com/bangladesh/2022/12/17/passengers-welfare-association-demands-reducing-50-fare-rate-of-metro-rail
[Update: This piece has been updated on July 09,2023 at 12:20 Bangladesh Standard Time(BST).Update includes insertion of references. ---Rezaul Hoque]
