Dollars and sense

Bangladesh has had a marginal surplus in the current account balance since 2001-2002, which meant that the dollar supply and demand in the local market was almost equal. During the June-July 2004 period, the country saw a rapid increase in import payment for scrap vessels and essential commodities. Though the import volume of scrap vessels and commodities increased marginally, the major increase in the dollar value came from the rise in scrap vessel and commodity prices in the international market. This meant that the demand for the dollar increased while the supply remained roughly the same. The situation further worsened at a later stage (November-December 2004) due to the surge in the oil price in the global market. Since oil is a major import item, oil price increase meant the county had to pay more dollars for purchasing oil. The country was also hit by floods in 2004, which caused an increase of import of food grain. Our import during the last nine months of the fiscal increased by more than 20 percent, while export growth was around 14 percent, with similar growth in remittances. All these combined, caused a current account deficit in the first quarter of FY 2004-2005 of $351 million. During the first quarter of FY 2003-2004, the current account balance was $10 millon surplus.

The above scenarios lead to a situation in the inter-bank market where the demand for the US dollar suddenly picked up. Naturally, everyone had to pay more takas to purchase US dollars following the supply-demand principle of economics.

To calm the situation, Bangladesh Bank intervened in the market in various ways. Bangladesh Bank at one stage sold dollars to Sonali and Agrani Bank from its foreign currency reserves for onward sale to the market. $150 million was sold, but the market needed more to satisfy the pending demand. While the market had a view that Bangladesh Bank would increase the amount, all of a sudden this selling stopped. It is rumoured that Bangladesh Bank is not in a position to sell more dollars as it is committed to a minimum level of foreign currency reserves through its Poverty Reduction and Growth Facility (PRGF) agreement. It is also rumoured that through this agreement it is restricted in its ability to borrow beyond a certain amount of foreign currency at non-concessional rates.

Through various monetary measures, Bangladesh Bank also increased the interest rate of the taka to reduce the price of the dollar. If the banks were holding dollars, it would entice/force the banks to sell their dollars and generate takas to invest at higher interest rate. Bangladesh Bank increased the rate (Repo Rate) at which banks can borrow funds from the central bank by keeping their treasury bills as collateral. Secondly, Bangladesh Bank increased the cash reserve ratio (CRR) of the Banks, which is kept as idle cash in the central bank's current account (as statutory reserve requirement), which resulted in higher short-term fund requirement for the commercial banks. These two actions by Bangladesh Bank caused the overnight borrowing rates (known as the call rate) among the banks to rise close to 80 percent at one stage, where the average call rate for the last few months was around 20-25 percent. But this also did not bring down the USD/BDT rate, as the key issue is not the price, but rather the availability or "liquidity."

When all of the above measures did not work, Bangladesh Bank intervened by persuading/advising the private and foreign banks to contain their USD/BDT selling rates within 63.70 in the inter-bank market. Though this took care of the price, the dollar was still scarce in the market as the export and import gap did not thin out. Dollars were not available for the banks to make import payments. Failure in sourcing dollars led to significant delay in international settlements by many banks for imports that even led to suppliers' worries and queries about the state of Bangladesh's foreign exchange position.

In a recent bankers' meeting, Bangladesh Bank advised the banks to raise their lending rates and deposit rates to curb credit growth and import volumes. Bangladesh Bank is also gradually increasing the government treasury bills rate, which also provides a direction to the interest rate in the market. All these events indicates a shift of expansionary economic policy to a contractionary strategy. While the availability of dollars remains a big question, the economy now moves towards soaring interest rate paradigm which usually restricts growth and employment possibility.

While we understand from the above the basic reasons for the unavailability of dollars, the question still remains how should we tackle this challenge. The basic dilemma is whether we should restrict credit expansion, thereby limiting import growth to reduce ever-increasing demand for the dollar, or whether we need to inject some amount of foreign currency in the inter-bank market to calm down the foreign exchange rate and improve liquidity. As a short-term or interim strategy, this is possibly right. However, if we carefully examine our import data in detail, we would find that a substantial portion of these imports is for capital machinery and industrial raw materials. A lot of these are for investments in infrastructure sector, which would generate incremental economic activities. Though we need to reduce import of luxury goods, it is also vital that we continue to facilitate these investments in capital machineries to establish a strong platform for our desired economic growth.

In view of the above, what we are witnessing is that incremental investments in capital machinery are creating additional demand for dollars, for which we at the moment do not have sufficient supply. However, once these investments start generating returns, the economy will come down to a structural equilibrium again. Therefore, the crisis is basically about how do we finance our investments. The strategy to restrict credit expansion would probably be a short-term solution, but may hamper our efforts to increase economic growth. Every time we would want to give our economy a push for higher growth, this financing question would haunt us.

For a long-term solution, we need to focus on the supply side. We need to apply our minds where we can facilitate higher investments in sectors like infrastructure through creative ways of financing. We need to look at the experiences of similar countries and take lessons. Pakistan borrowed $600 million by issuing Islamic bonds. Sri Lanka is also issuing foreign currency bonds to finance its long-term projects. We can also think about raising fund by issuing off-shore bonds. We can think about securitisation of nonresident Bangladeshi (NRB) remittances and other foreign currency receivables. We can think about arranging bilateral credit agreements for import support in the manufacturing sector. Here we see a role to be played by our important trade partners like China and India.

All of us must realise that the Bangladesh economy is now at a critical juncture. To increase the economic growth rate and eradicate poverty, we must not think within our narrow interest, but bring all the stakeholders of the economy together. We must learn to share our responsibilities and contribute effectively in managing our foreign trade or external sector. We must learn from the neighboring or similar countries. Success in short-term problem solving at times may create barriers to long-term solution building. For a long-term solution, we have to look outside the box and find out a possible solution for continuous financing of growth.

The writer is a banker.