Liquidity pressure: Premonition of economic downturn in our Orwellian society

The term, Butterfly Effect, in the Chaos theory school of thought explains a significant change of a state due to a minuscule change in another state of the non-linear deterministic system. The term penned by Edward Lorenz is an allegorical example stating that a hurricane maybe influenced by a distant butterfly's wings flapping at an earlier time. From end of last year until now the upheaval in economic and market conditions can be attributed to numerous policy and political decisions taken earlier, as in the Butterfly Effect, influencing the near future economic hurricane.

The instabilities in Bangladesh's capital market, monetary environment, political situation, etc., should be quantified and linked into properties of respective dynamic systems. A country of 160 million represents several continuous nonlinear dynamics and deterministic chaos and without a practical measure of control the accumulated entropy will lead to an eventual collapse of the system. Bangladesh will not be a failed state but as an economic and political system it will be a failed one. We have been observing for decades the political system cementing its permanence of failure and now we are observing the economic system slowly doing the same.

Based on last few months' regulatory and political events, the ongoing liquidity crisis is not a surprise. Rather all the dominos continued to fell to make a liquidity pressure into a liquidity crisis. Consequently, the banking sector has increased their lending rates while some banks have failed to honour large cheques and are stalling issuing instruments such as letter of credits (LCs). The liquidity crisis is currently felt by the industries, non-bank financial institutions (NBFs) and the capital market. This will negatively impact the economic growth and investment environment making the overall situation direr, specially in an election year.

In this write-up, several factors and events will be identified to show that for Bangladesh and other comparative cases, market adjustment due to socio-economic dynamics can be forecast based on both unpredictable and predictable events. These events and their correlation to market movements, as well as socio-economic indicators do fall within the general framework of strategic forecasting. However, for Bangladesh the framework needs to consider several unusual factors as well. Inefficiency, corruption, nepotism and monopolistic policies favouring interest groups are considered in a traditional analytical framework as factors increasing uncertainty, risk and making it difficult to design forecasting model. However, these factors, rather than being ostracised, should be embraced as explanatory variables to build better decision-making model that is appropriate for respective cases such as that of Bangladesh.

The institutional weakness in Bangladesh's governance, financial sector, and regulatory agencies is an "ideal" situation for opportunist investors to hedge and profit from event-driven investment strategy. The zero-sum mindset of our political decision-makers and sycophantic regulatory decisions can be used to model a "Political Event-Driven Investment Strategy" for Bangladesh. It does not even require deep analytical expertise. Rather patience is called for, in order to have faith in the following key variables that drive the behavioural economic process of Bangladesh's economy. They are - people's distrust in the system, no punitive measures, increased uncertainty and general people holding liquidity on hand rather than in institutions.

Traditional event-driven investing focuses on corporate, regulatory and political events such as unemployment number, merger, acquisition, tax-reforms, election results, etc., to take advantage of pricing adjustments. Last few years environment of Bangladesh's capital market and macro-economy can be best described as a controlled chaos. There are signs confirming that if the current trends continue, then the control part of the chaos would be lost. Since last quarter of 2017, the systemic exhaustion is the result from a decade of inefficiencies, politicisation, corruption and plain foolhardy decisions without any punitive measures. (See Table)

Domestically, the revenue shortfall is an annual occurrence but this year the postponement of the value added tax (VAT) act increased the shortfall. The flood in 2017 added additional cost for grain import and food inflation gradually increased. Now with the uncertainty of political stability in an election year, investments are on pause and with the new monetary policy of higher lending rate, the liquidity pressure will continue to build up.

Internationally, the Organisation of Petroleum Exporting Countries (OPEC) and Russia's combined decision to not only to continue the reduced oil production but also reduce it more until September, 2018 increased crude oil price significantly in last 12 months. Currently Bangladesh Petroleum Corporation (BPC) has been losing BDT 100 million per day to meet the increased price margin. This has the precedence in past and we have to look at historical price margin and loss incurred for BPC to truly understand that last four years' profits are preceded by 12 years of steady loss. On the global liquidity scene, the US economy started showing better growth rate and lower unemployment number. This increases the probability that Federal Reserve will increase its lending rates. As the cost of borrowing increases so does the currency exchange pressure for Bangladesh Taka (BDT) against US dollar.

These factors collectively are laying the foundation for an economic downturn as there are no effective plans in place to address such economic shocks. Even if government and institutions state that they have planned resilience, the past experience shows that they do not have the expertise and will to implement such plans. How else, can we explain the passing of the new Bank Company Bill in the midst of all the proven cases of corruption, fraud and misappropriation of loans in the banking sector? Resilience planning depends on use of evidence-based forecasting to address different variations of current problems. The banking sector crisis in the near future might become hedging options for international and local speculators and that will hurt the general population in the long-term.

Predictability is inherently limited as randomness of Nature and human actions are difficult to quantify with definite certainty. Hence, we judiciously rely on the term probability. Probability-wise it can be said that the political chaos can be controlled by force. However, probability also points out that economic chaos cannot be solved with force. The 1/11 Caretaker Government, backed by the armed forces, shows how a political crisis can be addressed using force. If Bangladesh faces systemic economic crisis, then it cannot be solved using force and that is the scenario we might face in the near future.

In the past, even during the colonial era and afterwards the government and policymakers were viewed by the populace as the parent of the country and its citizenry. Resolving chaos, conflict, economic shock and political unrest was considered the responsibility of the government and policymakers. In recent years the free-for-all attitude by the government and policymakers proved their indifference to people's sentiment.

Moreover, the free-for-all mindset about holding political beliefs and certain values seems to be the only regulatory issue of concern for the government. The proposed Digital Security Act 2018 (DSA) has a distinct Orwellian nature and if that is to continue, then the population will practise the free-for-all mindset about how they perceive the government, the ruling party and the cultural identity they portray. This will not bode well for Bangladesh's future - economy and politics aside.

The writer is Archer Fellow, Lee Kuan Yew Scholar. [email protected]