'Being skinny is not a problem, but if you are losing weight every day, then it is a problem'

Bangladesh's reserve was almost $48 billion just over two years ago, which on Sunday, came down to nearly $21.5 billion after clearing the import bills of $1.3 billion with the Asian Clearing Unit (ACU). 

This falling trend of a depleting reserve worries economist Dr Birupaksha Paul, a professor of economics at the State University of New York at Cortland in the United States and former Chief Economist of Bangladesh Bank. Dr Paul opened up on issues like exchange rate, interest rate caps, the value of knowledge-based leadership, import restrictions, investment and more. 

What is the current state of Bangladesh's reserves, and why are we failing to maintain our reserves?

As per the IMF manual BPM (Balance of Payment Manual 6), our current reserve is around $22 billion because there will be some recent ACU (Asian Clearing Union) payments. Bangladesh Bank tries to show that they have coverage for around four to five months. That is not true. 

The finance minister, in the last budget, said there's around five months' coverage, which is also not true. This may be true only when you restrict your import too much, which is not a healthy sign. 

When you have little food on the plate, you can say that this will provide food for 10 people. Actually, you are giving little to everyone, which is why you can manage to feed 10 people – [but] not in a solvent or natural way. 

So number one worry is that you are restricting your imports, which will eventually affect your output because import is part of our investment – 65% of our import is capital machinery, intermittent goods and raw materials. 

We have heard that the import of capital machinery has gone down, which is a bad sign. And it has already started to show up in the growth rate, which we cannot expect more than 6%. 

The World Bank and IMF are even more sceptical.

The growth, at this moment, should have been around 8% if we believe in the trend. During the coronavirus pandemic, Bangladesh was supposed to do good because it's a resilient economy. After the pandemic, all the economies in the world experienced recovery. Even the US economy grew 2% to 4%. 

Given Bangladesh's growth rate, which was above 7% in the last decade, it should have now been 8%. Bangladesh never touched the double-digit that a potential economy should touch. So if I look at it from that angle, the growth now is 2% to 3% down. 

One of the reasons for that is the import control. You control your import and then show that your coverage is high. This is one worry. 

The most important worry, however, is not only the balance of how much you have, but rather the rate of depletion of the balance. 

Just two years ago, the balance was $48 billion, and now, even as per the Bangladesh Bank manual, we have come down to $30 billion. It is almost a 40% collapse in over two years. This collapse is the most important factor. 

So what I am saying is that being skinny is not a problem, but if you are losing weight every day, then it is a problem. 

The trend indicates some kind of impending crisis. That is how I see it. I don't count how many months of coverage you have, Bangladesh hasn't reached the stage of Sri Lanka or Pakistan, but the trend can make Bangladesh Sri Lanka or Pakistan if it is not reversed. 

Taking care of artificially overvalued Taka has been identified as one of the key tools in addressing the reserve crisis. On the other hand, some fear inflation could soar with a devalued Taka.  What is your take on this? 

In macroeconomics, unemployment, growth and inflation are important variables. To control these three things, you have two policy tools – interest rate and exchange rate. In both cases, non-economic exercises have been taken up. 

Bangladesh is the only country that did not follow interest rates to control inflation. And now you're blaming that inflation will be triggered through your import channel. This is a wrong accusation. 

Bangladesh has an approximately $450 billion economy. You have an import of $70 billion and an export of $45 billion or so. We have a trade deficit in regard to export volume. 

My point is, if you devalue the Taka, the prices of imported goods will go up. But coconut, onion and banana don't come from Russia. These are the common items consumed by poor people. So why are you imposing the inflation on them wrongly? 

The prices of rich products like Toyota, Mercedes-Benz, imported TVs etc. may go up. Some of the manufactured products' prices may also go up because you are using raw materials from overseas.

But to prevent that inflation from happening [on imported items], you are making inflation rampant across the board. 

The poor people, who are suffering from inflation, don't consume Mercedes-Benz, they consume essentials like rice, oil and pulses. Soybean prices might go up, but rice or potatoes are grown in Bangladesh. 

Besides, BBS figures on inflation are partial; they should do a separate inflation index for the poor and middle-class necessities. There is no impact of the dollar crisis for this category, and you have to accept it for the greater interest of the economy. 

The artificial undervaluing of the dollar is also increasing moral hazards and more money laundering. Because, if undervalued, I will have the incentive to send dollars through improper channels. The hundi users will give me at least Tk5-6 more, although Bangladesh Bank announced that it will be market-based. This is called policy hypocrisy. 

You told me that it will be market-based but it's not totally market-based, rather it is controlled by groups like BAFEDA and ABB. Who are BAFEDA (Bangladesh Foreign Exchange Dealers' Association) and ABB (The Association of Bankers, Bangladesh)? Are they market reflectors? Not at all. 

It is being controlled just like North Korea. At the same time, you are talking about markets. So this is policy hypocrisy – you announce something but you don't do it. 

Bangladesh Bank has been suffering for this and will continue to suffer. They have to adjust the exchange rate as per exactly what is happening in the market. Even then, some hundi will remain for convenience, speed, no bureaucratic complications etc, though. 

And secondly, why is the finance minister giving incentives to [remitters]? Is he getting some money from the sky? He is already burdened with a lot of expenses and he takes money from the central bank. 

At the end of the day, the money the Bangladesh government has taken from the central bank, by just printing it, has amplified the inflation. According to velocity, one Taka of money circulation will create five Taka in the economy. That has aggravated our inflation. 

So on the one hand you are talking about controlling your curb, on the other hand, you are taking salt to increase your blood pressure, which is inflation. So this is a lack of understanding of the relationship.  

This is happening because the right people are not in the right position, particularly in the line of finance. 

They can be politically appointed but they should consult with economists. But for the last two years, if you listen to them, the economists are talking in one language while the act of [finance authority] is totally different. When they fall in line, it happens only because of the pressure from the IMF or the World Bank. 

Moreover, during inflation, all the countries in the world raised their interest rate. Our neighbouring country raised their interest rate more than five times. The United States increased its interest rate 11 times in a record-low period. 

But we didn't. 

We stuck the cap to give zero real-interest loans to the super-rich. They are serving the super-rich, damaging the interest of the nation, setting the country at risk. And the country is at risk when I look at the depletion rate of the reserve. 

In a recent article, you said 'wrong policy' steps were behind what led to the deficit of $8 billion in 2023, and $7 billion in 2022, from the reserves. You also emphasised changing 'doctors' if necessary when the policies taken to address the crisis are not working. Can you elaborate? 

I indicated something using a very common parable. When a village quack is treating a patient and the patient is not doing well… his day to day condition deteriorates, what will his family do? They will take the patient to a different doctor or the local hospital. 

We are keeping the quacks [for running the economy] and more dangerously, they are challenging the economists, which is like the quack is challenging the doctors. 

We have been debating for the last one year, and they actually understand what will happen if you continue with the interest cap. At some point, the finance minister gave investment theory (to justify the cap). Suppose there is a fire in your house, and you are talking about health improvement. At this moment, you just have to extinguish the fire. 

When it is time to control investment because inflation is high, look how the US is controlling investment, which is a demand-side thing. You are instead talking about increasing investment? You are giving funds at zero real interest rate. Real interest rate means the nominal interest rate minus the inflation rate. 

So you are providing them at 9%, while inflation is 10%, and they are actually taking money for free. That is why, someone has to understand not only the interest rate, but the real interest rate. Someone has to understand not only the exchange rate, but also the real effective exchange rate, which is going up if you are keeping Taka artificially high.

And when it goes up, Bangladeshi products are becoming relatively expensive to foreigners, so our export will not grow as it is supposed to grow, and our import will grow faster than it is supposed to. So that is also worsening our balance of payment.

And finally, one thing I want to ask, if everything is so fine and excellent then why are our financial accounts suddenly dehydrated? Suddenly in a year? Why? There are some policy mistakes. 

The IMF, rating agencies mentioned categorically that the policy the country is following doesn't show any sense of risk management. 

Instead of rating going higher, we got downgraded by Moody's, and Outlook has also gone down. And the governor said this was [for] geopolitical reasons without digging deeper into economics.

Look, you could have changed two things – your per capita income and fiscal incapacity.  Per capita will grow gradually because the GDP is growing. But your fiscal incapacity, instead of increasing, has gone down. 

This is not the only thing they degraded us for. There are also wrong policies. The way the reserve is depleting is dangerous, and it is not like it's depleting after we've taking the right steps. 

So Sri Lanka recovered from a disaster, just rising from the ashes. But we are just deliberately maintaining the interest of the super-rich. And we are heading to a condition which can lead us to a disaster.

After the coronavirus pandemic, the war in Ukraine has long been blamed for causing damage to the economy. What area of our economy are these two crises in the recent past still affecting us? 

Covid is gone and to some extent, it was a blessing in disguise. We have developed our artificial intelligence, communication skills, etc. [because of the pandemic]. It has brought us to a new direction of research, medical science and health sciences. 

That is why all the countries were enjoying fantastic recovery. Just look at the United States where the Covid affected the most. After Covid, the US was so resilient that the country is still enjoying the lowest unemployment rate in 50 years, despite rises in interest rates and monetary tightening. 

So what else do you want? 

Unemployment is the number one problem for Bangladesh. Covid is no longer an excuse. Covid has given a new stage and recovery must have started, the growth should look even brighter. 

When Russia attacked Ukraine, that created a disruption initially. But now these excuses are not applicable. I will give you an example. Before January, the fuel price was $92, and now it is $84. The commodity prices globally have gone down 30%. So these things are no excuse. And more importantly, Bangladesh is more linked with the US, the Middle East and China, rather than Russia. 

Bangladesh doesn't supply bombs and artillery to Russia. Bangladeshis are not sending a lot of remittance from Russia, the export link is almost zero practically, in comparison to other big economies, and remittance is very little. 

And Bangladesh's economy started to go south particularly at the end of the 2010s when the real effective exchange rate started to rise, and Bangladesh started to experience higher and higher current account deficits. The symptoms of what we see now, the wrong policy of interest rate and exchange rate, started before Covid, Russia or Putin. 

So these excuses are useless now.

And look at the US economy, their target inflation is never above 2%. It went up 10% and now it has come down to 3%. So their success, I would say, is 70% depletion. And in our case, nothing. Our achievement is zero because of wrong policy and sometimes wrong policymakers are creating wrong excuses to cover their bad performance. 

The ongoing trend, if it continues for long, may further weaken our capacity to meet the import costs. Can you point out some policy steps that could help address the ongoing crisis?  

You have to ascertain the market price of the dollar. Then you have to demolish the so-called incentives. I am the remitter and I don't need any kind of grace from the finance minister. I need the real value for my money. 

Just like the Greek philosopher Diogenes told Alexander that "you don't need to give me anything, you can be a great hero, but I need the sunlight that I deserve." 

So that is what I am talking about, I need real value for my money, I don't need any grace from the finance ministry, which is already burdened with their incapacity. And their incapacity is one of the highest in the world. 

You have to scrap the system of so-called T-bill-connected interest rates. This artificial connection of interest rates with treasury bills is weird. When the governor should keep the ball at his own disposal, he's giving the ball to the finance ministry through treasury bill rate and making it complicated. 

The interest ceiling is now set by a 2% corridor over the treasury bill rate. Usually, central banks should influence treasury bill rates. The T-bill rate should not influence the central bank decision. 

Finally, stop deficit monetisation, which is adding fuel to the fire of inflation. And interest rates should be set free. When the exchange rate is market-based, you don't need to engage the police or DB to catch small money changers or traders when the DB cannot catch the money launders. There is no need for any police when the rate is fixed on the basis of the market. 

All the institutions' leadership should be knowledge-based and research should be encouraged. You have to understand the power of knowledge and get knowledge-based leadership rather than some kind of vested-interest-based policymaking, justifying and looking for excuses. 

Until the institutions have knowledge-based leadership and are given some independence, a crisis will be invited – it is some kind of self-invited crisis Bangladesh is heading towards.