Draining of dollar is biggest headache

Due to multi-pronged problems plaguing the economy today, dollar crunch has turned the economy on its head. The depletion of foreign reserves has put Bangladesh and International Monetary Fund (IMF) at odds about how much money we precisely have. Regardless, given the inevitable tightening of monetary policy by the centra bank (BB) that has taken place to meet the US$24 (or so) billion threshold demanded by the IMF, this has put supply chains of imported commodities and raw materials needed by economy in a bind.

But does that mean import has stopped? Of course, not. While visible imports of certain items have slowed down, the import of many essential items (beyond edibles) is continuing. For instance, the import of spare parts for motor vehicles has continued. Because without spares, millions of vehicles will simply stop functioning and the transport sector will grind to a halt. As most banks are unable to entertain letters of credit (LCs) to a large extent, traders have had to resort to 'hundi' to make payments in local currency in Bangladesh, which get translated into dollars or some other foreign currency in the country of export. Transactional cost for using the 'hundi' system is more than LCs. The added costs are inevitably passed on to consumers who have no choice but to pay. It hurts at the individual level and for businesses it means higher operational costs.

There are thousands of students who are living and studying abroad. Student files have been curtailed in Bangladeshi banks. Then how are parents to send money to their children? Not to worry, hundi to their rescue! Thousands of families across Bangladesh have been forced to make use of this informal means of payment. Developed countries turn a blind eye to this so-called 'illicit' trade in currencies because as long as the money comes in, their education business may continue unabated. Hundi prospers in times of trouble. Bangladesh is in big trouble right now.

As pointed out by energy experts in recent times, the State has failed to pay bills amounting to billions of Taka to producers of energy like independent power plants (IPPs). It has defaulted on payments to gas produced by international oil companies (IOCs) operating in Bangladesh and is also asking for delayed payments to international suppliers of liquefied natural gas (LNG). Sadly enough, the hundi system which operates on the premise of 'pay in local currency domestically - get paid in foreign currency internationally' works in cases of individuals and business entities, but not in formal international trade.

While there is a movement internationally to de-dollarise trade between nations, what will Bangladesh do? Ninety per cent of its readymade apparel (RMG) exports are to two destinations - the United States and the European Union (EU). Again, the RMG sector constitutes about 85 per cent of total exports. For years, experts had been stressing on two issues. First export diversification, i.e., exploring new markets for its products, and second, the need for government to explore free trade agreements with foreign nations for cheaper entry of Bangladeshi products. Neither was given priority, and today Bangladesh finds itself at the heart of geopolitics with threats of sanctions issued if certain electoral conditions are not met. Since the economy remains tied to the dollar, and dollar payments are made against exports, policymakers are in a serious bind. Whereas China and Russia have started moving away from the greenback and trading in local currencies, India hasn't lagged far behind. The latter is also in talks whereby some trade will take place in Indian rupees.

The problem with Bangladesh of course is that the majority of its elite class have heavily invested in the West, in terms of both property / cash investments and their children's education there. With so much western-leaning mentality, how Bangladesh is going to extricate itself from the global dollar standard remains the million-dollar question. In the midst of all this gloom-and-doom, the suicidal policy of import-based fossil fuel from abroad continues. On the one hand import of capital machinery is restricted, but on the other, dwindling precious foreign exchange is thrown away to import only one type of primary energy while disregarding both furnace oil (for IPPs) and coal for megawatt-sized power plants. LNG remains the apple-of-the-eye and its promotion within the fuel-mix is hammering the foreign exchange reserve. One wonders if the desired foreign investment will come to Bangladesh if we cannot ensure energy supplies. If the decision is taken to starve the rest of the country to serve a few special economic / industrial zones, what will be the cost of fermenting angst of a struggling general populace? These are valid questions, and explanations by policymakers for the power situation are not having the desired effect it once did. People are suffering, industry is suffering and the prospect of large-scale unemployment cannot be written off like non-performing loans in banks. There is still time to salvage the situation. But that is a decision to be made today and not six months down the lane.

mansur.thefinancialexpress@gmail.com