During Covid-19, the central bank was found busy with the implementation of different stimulus packages. No tensed situation was faced with regard to the external sector since imports were at manageable level with export proceeds and wage remittances. Wage remittances were on surge with record jump by around 36 per cent in fiscal year 2020-2021 (FY21). There were many reasons behind this. One of the reasons was use of official channel to send money home by remittance service providers since informal market was in inoperative stage.
With the new normal at the end of Covid-19, shocks were experienced at supply side due to disruption of global production. The present situation shows global price level at an abruptly new height. Bangladeshi exports are experiencing upward growth but changes at unit price are not so high as observed in global commodity prices. Bangladesh is reported to have not faced Asian financial crisis in 1990s of last century. No negative impact is found in 2008 and onward global financial crisis. The underlying reason is that Bangladesh external sector is still at a regulated state. In many cases, permission from the central bank is required for external transactions even under current payments beyond threshold limits. Outward remittances on account of investment abroad are subject to approval from a high powered committee as per the Rule issued recently by the government.
During the current period, external sector is in pressure due to huge outward remittances on account of import payments compared to inward receipts from exports and wage remittances. As per economic data available in central bank's website, difference between export receipts and import payments is recorded at negative amount exceeding US$22 billion up to February 2022 of the current fiscal year. As Bangladesh imports more than exports, the difference is supported by wage and other services income. The net trade position during the same period of last fiscal year was negative, recorded at more than US$12 billion. Considering other items including wage remittances, current account balance stands close to US$ 13 billion (negative) up to February of the current fiscal year which was close to US$ 1.0 billion (positive) during the same period of last fiscal year. Whatever the position, forex reserve is more than $44 billion, indicating a sound strength of the economy.
The situation warrants prudent management of foreign exchange. Very recently, the central bank has issued an instruction to banks to take cash margin of 25 per cent against issuance of import letters of credit. However, the requirement is not applicable for import of baby foods, essential food items including fuel, lifesaving drugs, domestic and export oriented industries, and ago sectors.
There are many alternatives to manage external sectors for which experiences are needed. As stated earlier, Bangladesh is in a regulated state with regard to foreign exchange transactions. This helps to avoid risks. But global supply shocks require attention with prudence. The recent instructions will definitely support foreign exchange market with ease in import payments. It does not mean that importers will not be able to import luxurious goods. These can be imported with cash money by importers; banks will not support importers to import without cash collateral. This will rationalise credit management by banks also, including discouraging unnecessary imports.
What could be the other alternatives to the central bank is a question. In this context, exchange rate management can be cited. Since 2003, banks can set selling and buying rates of foreign currencies. The rate needs to be determined with interaction between demand and supply. But it is quite difficult to make exchange rate free floating for countries like ours since we need import of essentials. As such, foreign exchange market is intervened by the central bank, including dictating rates of foreign exchange.
There is a tug of war with regard to exchange rate. Foreign exchange earners are benefitted by depreciation of exchange rate. But outward payments for different purposes including import payments are hard hit. As stated earlier, Bangladesh needs imports of essentials. Depreciation of Taka will lead to increasing price levels of essentials. On the other hand, appreciation of Taka encourages excess imports which hit import substitution industries also. But currency depreciation supports export trade including huge flow of wage remittances.
Economic development models are basically of two kinds -- import substitution industries and export led industries. The later is always vulnerable, requiring continued support for its sustainability. As a result, import substitution industries gain favour from all corners. But there is also a paradox, high tariff walls are needed to protect substitute imports of same products. In both models, imports are essential. Settlement of payments by exporters against their imports is made out of export income. But such payments by importers for local industries or essential imports for local consumption bear incremental cost in case of depreciation of local currency.
Tariff walls and maintaining persistent stable local currency are anti-export bias phenomena. There are different histories depending on the suitability fit for the economies. Economic development history of East Asian countries shows export-led model works well. For an economy with dependence on imports to a moderate extent, import substitution is hardly workable. Despite this, focus is given on industrialisation for import substitution due to different popular conceptual angles. THe recent decision of the central bank on margin requirement for establishing import letters of credit indicates that Bangladesh is on the path of import substitution. It may ease import for some items, with stability of local currency value. But global price level change will cause local price hike, upward pressure on inflation. The pressure will be eased in case inflows and outflows of foreign currency are well matched. As an alternative to making import suppression, exchange rate movement based on market trend can ease the situation. But it has a cost. It will hit fixed income group of people.
The initiative by the central bank to impose margin for opening letters of credit can ease foreign exchange market. But the approach is inward looking, suppressing the real demand to retain price of imports at affordable level. Definitely, stable price of local currency in terms of foreign currency can protect price level of imported goods. Another paradox is that Taka cannot buy foreign goods, international currency is needed. Income from external sources can generate import purchasing capacity. Policy support to external income earners by exchange rate benefits can increase income from abroad. Considering the overall perspectives, the only measure to restrict imports is a one way traffic which cannot bring desired results. In addition to measures on imports, attention needs to be given to other aspects. As part of the programme, Taka can be reasonably depreciated from its overvalued position. In addition to increased income from external sources, it can work as automatic stabilisation of imports, decreasing unnecessary imports. One sided policy support facilitates only one side. This deprives other side -- foreign currency earners. They cannot be ignored considering their immense contribution in monetary support by earning foreign currency. In this very context, let Taka not be led to its optimal price?