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Revisiting rule books for external transactions

| Updated: February 13, 2023 22:36:10


Revisiting rule books for external transactions

Bangladesh is very much dependent on external sector. Such dependency indicates economic openness calculated in consideration of gross domestic product. As always, Bangladesh faces deficit with external transactions since we buy more compared to our sales abroad. This is a simple equation in the perspective of economic emancipation. As an example, excess of expenses over income needs to be supported from other sources. Bangladesh is moving fast, resulting in huge investment from private and public sectors. Investment is made both by own money and borrowed money. Investing own money cannot lead economic initiatives in full swing for which deficits may occur. In deficit situation, external supports are needed. As such, growing economies face deficit in private and public sectors. Such deficit leads trade balance to the same negative direction.

Till the end of late eighties of the last century, external transactions of the country are executed under controlled framework. It is said that foreign currency was rationed under budget allocation. External buying was subject to permission from competent authorities.

Private sector-led development model requires policy supports; permissions or licensing requirements cannot promote economic activities. Regulatory framework without the requirement of permissions or licensing leads economy to grow. Bangladesh is a resourceful country in respect of human resources, but it has no sufficient natural resources which can bring money from external sector. The journey of development started with the growing trend of export trade in late eighties of the last century. History says Bangladesh was chosen as an offshore location for garment manufacturing by a Korean company. They arranged training for few people during that time. The sector started developing with the support extended by the government under the fiscal policy -- duty free imports of raw materials and cash incentive. In addition, back to back letters of letter of credit facilitated in procurement of raw materials against export orders without collaterals as required for traditional banking system.

Selling goods abroad generates cash inflows in foreign currency which can support to make payments for buying from external sources. Export, mainly readymade garments, supported external sector to be resilient. With the export of goods, manpower export became an incremental avenue to earn foreign currency.

The overall inflows became better on account of wage remittances, along with export proceeds. These two windows led current account transactions to be balanced. Controlled regime ended with declaration of Taka convertiblity on current account transactions. It means that payment for imports and different other service payments like travel, education, treatment, etc., can be remittable abroad without permission. This was the first initiative to open up rge external sector, and economic development was set in motion.

At the initial stage of development, manufacturing sector plays a vital role in any economy. Unless this sector is developed, service sector cannot flourish. Besides export sector, manufacturing industries mean import substitution which needs inputs to produce outputs. Balance from export earnings left after meeting back to back payments and wage remittances support manufacturing industries to cater to the import needs.

There are opinions that relaxation in tariff promotes development. Maybe it is true in a particular point of time. Infant industries need protection to keep them free from facing external competition. All the points noted herein considering the opening up of external sector can be cited as a historical perspective in the development of Bangladesh economy.

There is a positive correlation between policy supports and development. After a decade from declaration of Taka convertiblity on current account transactions, banks were given liberty to determine exchange rate between Taka and foreign currency based on market forces. Taka would face depreciation to make external income competitive, but depreciation even in fiscal year of 2022 was slow because of insignificant gap between inflows and outflows.

Due to the invasion of Ukraine by Russia, supply chain faced disruption leading global price hike. This led economies like us to face mismatch: huge outflows compared to inflows. This situation created problems in liquidity. No policy tools can solve the problem unless appropriate liquidity is injected. During such a situation, external credit line becomes narrower. At this point, nothing but reserve can support. There is a dilemma to use reserve, its reduced position will lose country's external image. Despite this support from the reserve is necessary for essential imports, particularly strategic goods like fuel, fertiliser etc.

To contain the challenges, the authorities concerned applied different tools. As said earlier, liquidity problem is solvable by liquidity only. The policy tools focus mainly to contain imports for which margin is imposed. Import is brought under close monitoring network to identify execution of the transactions at appropriate prices. Banks' associations set exchange rate to protect adverse move of Taka.

In the last fiscal year (FY22), the economy faced abnormal situation in import transactions due to supply chain disruptions leading to import price hike. During the first half of the current fiscal year (FY23), import is lower only by 2.15 percent compared to last fiscal year as per balance of payments statement published by the central bank. Figure in value does not indicate increase or decrease in quantities of goods imported. It is learned from media reports that banks are reluctant to execute import transactions. Such reluctance is found in balance of payments statement. Short term loan and trade credit are recorded at around 3 billion US dollar in negative territory which indicates settlement of payments. Import trade is executed on credit and on cash. Continuing import trade increases short term loan and trade credit. But huge settlement in this account compared to last fiscal shows import under credit terms is not on increasing tread. Trade balance during six months of current fiscal shows improvement compared to the last fiscal year but outflows on account of financial accounts result in overall balance in negative territory as per half yearly balance of payments statement. It is a clear-cut indication that inflows are lower compared to outflows.

As noted earlier, import is executed under two windows -- credit and cash. Import under buyer's credit is costly due to increased interest rate for trade loan in foreign currency. Liquidity problem can be eased by trade credit in respect of industrial imports. But reluctance by banks to execute cross border permissible transactions seems to create panic in the market. It is a question whether close monitoring results in such a situation. Whatever the issue, this should be done away with. Banks should be encouraged to execute import transactions on trade credit. Low cost credit, if available in different currencies, should be sourced for settlement of import payments by converting into import currency. Short term trade credit will defer payments which can create space in liquidity for outright payments against non-trade transactions.

Considering the situation, banks should be properly guided in respect of invoice value of import goods for determination of competitive pricing. Proper guidance with regard to transfer price needs to be set in place for service payments. This may facilitate to ease panic situation. On the other hand, exchange rate determined by banks' associations should be set free with a monitoring device.

 

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