Having sufficient reserves, strong social security needed to be safe in bad time

One immediate lesson for the future is having a sufficient foreign exchange reserve to have more fiscal space to be able to stimulate the economy and strengthen social security measures at difficult times when the government may have to resort to deficit financing on a large scale, which Bangladesh has done to some extent.

In this respect, among the South Asian countries, Bangladesh and Sri Lanka both have a problem with a revenue-GDP ratio of around only 10% or even less.

A safe amount of foreign reserves has to be considered in light of specific contract situations like the nature of the traded items and the prospective volatility of global markets in those items.

Foreign reserves should not be treated as budgetary reserves, but only as a cushion for unforeseeable external shocks. 

Even if the current debt-GDP ratio may not have crossed the race, a debt repayment crisis nevertheless may be in the offing if there are too many mega infrastructure projects being taken up through foreign funding without an understanding of whether such projects will attract enough private investment, especially in export-oriented industries.

At the same time, we should remember that megaprojects, once started, needed to be completed in time since a delay in implementation is hugely costly to the economy.

It may not be that a coordinated policy approach needs more in-depth analysis and expert advice. IMF prescriptions often work as a default mode to lean back to, forgetting that those prescriptions may not be informed by country-specific situations, which is a very pretty example, take the case of fuel prices.

The sudden hikes in international fuel prices have been the trick for the current global economic crisis. The usual IMF prescription of aligning domestic prices to global prices is generally a good idea because subsidies on fuel can be very burdensome for the government's budget and can be justified only if targeted to very specific groups and for specific purposes.

The problem is exacerbated if the government has to rely heavily on fuel taxes for revenue purposes, as is the case in Bangladesh where VAT on fuel is an important source of revenue. 

The necessary policy adjustment method is for the temptation for macroeconomic populism or pressure from vested interests or sheer business-as-usual type inertia.

Now, faced with a huge current account deficit, we have a dilemma of either letting the exchange rate take a huge plunge, which will exacerbate domestic inflating the poor, or take the extraordinary of rationing in the opening of LC for imports, which is bound to be rather chaotic, and it's clearly in violation of the policy of current account convertibility of taka, a policy which was accepted in the early 2000s. 

The problem in a weak banking system, with wilful loan default repayment, which is ignored by international agencies, is that the interest rates may be driven up too high by unscrupulous borrowers.

For relaxing the interest rate caps, relaxing caps is a good idea but one should be cautious and it could be done step by step. Another important lesson is that a weak financial system is always a problem of economic management, but much more so at times of economic shocks. 

Even more serious problem is that a weakly governed financial system is unable to prevent illegal capital flights abroad that are likely to take place at times of economic uncertainty.

The overall lesson here is that there is a need for active, capable and pragmatic governance, with sufficient institutional capability so you do not damage the institutional capacity that is really important to absorb shocks and ensure their soft landing. 

The coping policies have to be clever and nimble and informed by adequate analysis and information. Even in a general environment of deficient governance, which our countries have, there must be at least some key government agencies that are well-resourced and professionally competent and able to identify problems and work out solutions and act promptly.