We can talk about growth in better times. It’s time to stabilise

Russia has formally backed out of the UN-brokered Black Sea Grain Initiative. This agreement had allowed grain imports from Ukraine to many countries, including Bangladesh, despite the ongoing Russo-Ukrainian war. On top of that, due to floods and droughts in India, wheat imports from the neighbouring country to Bangladesh have also stopped. 

Consequently, food inflation remains high in Bangladesh. More importantly, unlike India and Thailand, overall inflation in Bangladesh remains stubborn because of a high taka-dollar exchange rate and not-so-high interest rate. Both rates moved towards market-determined solutions, but only partially. Hence, inflation continues to show its ugly face.

However, food security continues to be prioritised by the government through open-market sales of subsidised food baskets and robust social security measures for the disadvantaged. Also, the agricultural sector has been incentivised with sufficient fiscal support to improve supply and ease food inflation. 

The central bank has also been providing low-cost credit to agriculture and micro, cottage, small and medium enterprises to increase the supply of goods and services. While the industrial sector has yet to gain the desired momentum, exports, and remittance growth remains positive. Despite political unrest and high inflation posing business challenges, overall economic growth remains optimistic. ADB's growth forecast for Bangladesh for this fiscal year has been revised upward (from 5.3% to 6%).

As per the Bangladesh government's claims, the growth for the last fiscal year is even higher (6.5%). Imports have been reduced significantly to improve the balance of payment situation, which went into disarray. The fear of significant export reductions was avoided, thanks to the government's numerous policy support initiatives to keep up industrial production. 

Subsidies, incentives, and other agriculture-friendly initiatives of the government and the central bank have offset the effects of natural calamities on agriculture. Consumption has been bolstered significantly due to the Eids and other festivals. All these probably led the Bangladesh government to set a growth target of 6.5% in the last fiscal year. And it seems now the target was not misplaced.

However, inflation in Bangladesh remains a major headache and is misaligned with the Asian inflationary landscape. ADB has forecasted overall inflation to be 3.5% in the Asia Pacific region in its Asian Economic Outlook. On the contrary, the Bangladesh government has set an inflation target of 6%. Realising this target may be challenging given the existing high food inflation and not so tight monetary and fiscal policies. 

This is why the visiting director of the IMF Krishna Srinivasan has suggested tightening monetary and fiscal policies while maintaining growth. Indeed, if that can be done, Bangladesh will be able to successfully graduate from the 'LDC' to 'Developing' status in 2026. It is to be noted here that owing to Bangladesh's achievements in different socio-economic indicators over the last 14-15 years, a globally acclaimed US newspaper has recently dubbed Bangladesh 'a case study of economic uplift in the world.

Yet, we must also remain cautious about the government's fiscal deficits. There should be strong measures to curtail public expenditure as much as possible, particularly in an economy with a low tax-GDP ratio and dry down of foreign exchange liquidity. Global rating agencies' downgrading of sovereign ratings occurred primarily due to macroeconomic challenges. 

We must, therefore, be highly prudent in managing our public expenditures and finance only the development projects that are soon to be completed with the potential of increased employment. The remaining development expenditure could be postponed or drastically pruned for at least a few months to encourage macroeconomic stability. Indeed, we must understand that there are better times to talk more about growth. It's time to stabilise the economy.

At the same time, we must also focus on stability in the external economy. Especially the single exchange rate (between BDT and USD), as indicated in the latest monetary policy, must receive top priority. Even now, the USD is being sold for Tk4 to 5 higher than the exchange rate set by Bangladesh Bank (Tk109). Recently, the exporters' exchange rate was raised by a Taka by BAFEDA and ABB, which is still much below the existing market rate. This implies that there is still high demand for USD in the market. 

Therefore, on the one hand, we are to increase the supply of USD in the market, and on the other hand, there remains scope for improvement in terms of market-based exchange rate. Otherwise, there will remain enough scope for speculative attacks by the manipulators. Only a transparent market-determined solution can enhance the confidence level of credible stakeholders to make inter-bank foreign exchange transactions vibrant. The interbank market remains dry, which does not augur well for foreign banks and investors.

Our external economic management also requires some reorientations. Due to numerous measures such as raising LC margin, vigorous import price/invoice monitoring, curtailing luxury imports, etc., imports have been reduced. As commercial banks are now less inclined to open LCs, smaller importers face many challenges. Industrial raw material imports rely on short-term Usance Payable at Sight (UPAS) LCs. 

Due to the negative payment behaviours of some banks in Bangladesh, foreign banks (especially Dubai-based ones) have been curtailing credit lines for Bangladesh. Many banks, including public ones, failed to settle the LCs in time, giving a wrong signal to the foreign banks. Given this backdrop, we should focus on easing imports to the country, if needed, by providing a separate window of import support from the central banks, particularly for small entrepreneurs. 

It must be noted that imports have been an integral part of our incredible macroeconomic growth over the last one-and-half decades. Both the industrial and agricultural sectors rely on these imports. The imports are also linked to the employment of a significant share of our employees. Import duties also serve as a major source of the government's income. Therefore, barriers to imports will hinder macroeconomic stability in the medium and long term. So, what can we do to address these overarching challenges?

1. Bangladesh Bank must retake the inter-bank foreign currency market oversight to help make it more vibrant.
2. Commercial importers must be allowed to open LCs with ease. There should be no place for panic related to LC opening.
3. Interest rates of investment bonds and premium bonds must be raised as the Fed continues to raise policy rates and make its treasury bonds more lucrative. Managing these bonds should be digitised, and at the same time, initiatives must be taken to ensure that more remittance is sent to the country using MFS. All this will increase the flow of foreign currency.
4. To avoid delays in import payments, the central bank should return to digital dashboard-based monitoring of those payments.
5. Bangladesh Bank must send positive signals to strengthen relationships with foreign banks. They should regularly discuss with local representatives of those banks. The central bank must inform the foreign banks that it will strengthen the monitoring of timely import payments, and errant banks will be brought to the books.
6. Focus on Foreign Direct Investment and Foreign Portfolio Investment to get higher inflows.
7. Increase commercial FCY borrowing as the country's external debt-to-GDP ratio remains comfortable.
8. The limit for commercial imports without opening LCs (currently USD 0.5 million) should be applicable for every shipment.
9. The 'deferred payments' facility should be 120 days for commercial imports. This will ease the pressure on commercial importers.
10. It must be ensured that payment settlements for contractual imports are made promptly. If that can be done, there will be less reliance on LCs, and consequently, foreign currency spent on confirmation charges can be saved.
11. Local trade receivable in foreign currency must be brought under the online trade platform. This will enable instantaneous payments and contribute to reducing the liquidity crisis.
12. There should be no hurdles to exporters in any form. Logical reasons for delayed payments for exports must be considered. Moreover, the size of the BDT pre finance fund should be increased along with ensuring the supply of foreign currency required to facilitate import payments under offshore banking.
13. The right incentives should be in place to encourage the repatriation of income from the service sector. Service exporters could be allowed to invest abroad with part of the foreign exchange they bring in.
14. The free flow of raw materials for local export-oriented industries should be ensured through back-to-back export contracts and back-to-back LCs.
15.  Bangladesh has formally initiated trade settlements in Rupees with neighbouring India. Import payments through swaps or a separate Rupee line of credit between India and Bangladesh could be piloted. 

I have pointed out only a few operational innovations here. Of course, many more such ways forward can be mapped if the stakeholders could come together and exchange their views. And this is how we will achieve and maintain macroeconomic stability without sacrificing much of the growth.

The writer is an eminent economist, former governor of Bangladesh Bank, and Emeritus Professor at Dhaka University.