Can regulatory decisions mend an economic crisis that has political dimensions?  

Much of the economic crisis experienced by Bangladesh is the consequence of long standing political decisions. For instance, undertaking an aberrant monetary policy and a rigid single-digit interest rate regime to supply 'cheap credit', using more and more of NBR and non-NBR revenue to sustain increased expenditure of public administration, selling government bonds to Bangladesh Bank itself, continuous silence over money laundering and laundering-friendly interest policy, nepotism in the governance bodies of commercial banks, introducing and continuing policies in favour of black money, reducing collateral numbers in bank lending, giving incredible opportunities to defaulters - were all political decisions. 

Now in crisis, we are experiencing the severity of these decisions. Unfortunately, the government is yet unable to take political decisions against looters and reset the energy security policy. The question is, will such a one-sided strategy yield results?

If the political part of the crisis is not reversed, regulatory restrictions can achieve very little. To bring the policy-making decisions back to the central bank, a grand political reset is much needed, placing the questions of good governance, accountability and transparency on the table.   

According to official estimates, the foreign reserves of the country have fallen to $39.7 billion, although the figure is contested by the IMF, which estimates reserves to be $32.5 billion. Some sources claim that 'Export Development Fund' or EDF, non-investment grade bonds, reserve loans given to various state-owned banks, development projects, loans given to Sri Lanka and Sudan etc. are included in the reserve accounts. These are not in hand, not usable. 

That is, 'expendable' reserves are incredibly low. To address this, EDF loans should be reacquired to increase 'usable' reserves. More importantly, such a crisis of 'usable' dollars is impossible without having a large debt 'burden' of 'sovereign guarantee'. It's important to shed light on this as well.

When it comes to exports, LCs (letters of Credit) should be audited to assess whether exporters have smuggled or laundered parts of the EDF loans. BB policy alone may not work here, because many of those loans were politically motivated. 

Massive interest rate waivers to defaulters - 4% instead of 10% - will not work and have never worked before. The industrial scale of loan defaults and rent seeking cannot happen beyond the knowledge of the government.

That being said, Bangladesh Bank has recently taken some serious decisions, the speed and approach of which seem unusual. Perhaps, the Prime Minister directly advised the BB Governor to save foreign reserves, which kickstarted the journey of immediate 'contraction and recession' in Bangladesh's economy. 

BB has taken big decisions to stop imports except for food, fuel, and raw materials, the impact of which is far-reaching. 

Firstly, BB reduced the bank's dollar holding limit (Net Open Position, NOP) from 20% of their capital to 15%.  Secondly, the banks were asked to encash 50% of the foreign currency held in the Exporter's Retention Quota (ERQ) for future import payments. Exporters can now retain 20% of their earnings in foreign currency from the previous 60% rate.

BB has also ordered banks to report any private import letter of credit (LC) worth more than $5 million 24 hours before opening.  

Currently, exporters have $720 million in the ERQ account. The new move could immediately supply at least $360 million in the foreign exchange market. 

However, this will lead to a shortage of funds in foreign currency when the exporters will have to settle import payments. The purpose of extending the ERQ status was to ensure the required dollars for the next imports, to meet sudden needs, and make various payments hassle-free and faster. 

In this, exporters can save themselves from multistage currency conversion loss. With this reserved ERQ revenue, the RMG industry meets various liabilities abroad. If it is reduced, exporters may have to buy dollars from abroad to repay these debts later, which will increase the cost. 

If businessmen need money suddenly, they have to take permission from Bangladesh Bank. Simply put, BB's decision has made trading a bit more difficult. Moreover, Reducing the NOP  limit of commercial banks to 15% will add another $569 million to the market but will reduce the capacity of commercial banks to provide LC service.

Furthermore, BB has imposed restrictions on the opening of import LCs to prevent a dollar crisis. BB suspended the opening of LCs worth $25 million at five institutions. In the history of the central bank, there was no such incident of withholding valid LC documents.

Due to fuel price hikes in the spot market, the government has reduced the import of fuel oil due to the dollar crisis. Planned electricity load shedding has started across the country by reducing the supply of gas and oil in the power sector. This is a sign of an extended fuel crisis. The government has decided to stop diesel-powered power generation of 1,125 MW for the time being.

The burden of 'unjust' capacity charges from idle power plants has also increased, which was Tk21,600 crore in the last financial year. The non-producing idle rental centres are claiming $1.5 billion more! The subsidy loss in the primary energy sector is around 100 crores daily. 

To counteract the crisis, the government has decided to close shops after eight o'clock in the evening and introduce compulsory load shedding for 1-2 hours a day. If the situation worsens, it may decide to close petrol pumps one day a week, and reduce office hours by 1-2 hours.

BB's policy decisions may start an official 'recession' in the country. In the private sector, which accounts for 89% of the formal labour market, the government's contraction policies have reached a peak. 

However, the government's own 'dollar draining' import purchases and public administration expenditure did not experience a major contraction. There is no initiative to stop unnecessary 'development' projects. 

There was no direct announcement of cancelling the contract of inefficient rental and quick rental power plants that produce less electricity by burning more fuel. Even in the electricity-fuel crisis, there is no 'new' understanding of the green power generation strategy. 

There is not enough 'fuel diplomacy' with Opec's major oil and gas producers instead of a commission-friendly 'spot market' for continuous and sustainable fuel supply. It is surprising to know that a 14-year-old government lacks so much in primary energy diplomacy. It does not have any large-scale constant fuel supply agreements with Opec countries.  

There is no implementation of available reform proposals to increase the country's gas production and offshore exploration. Officials travelling abroad continue. Investment in foreign lobbyists or PR firms abroad has not stopped. 

Government austerity initiatives in the abroad missions and embassies have not been taken. There is no effective initiative to discover new labour markets or means of remittance income by sending expatriates at low cost. 

In other words, although contraction has been imposed on the private sector, there is not enough initiative to reduce the 'dollar expenditure' in the public sector. However, due to a lack of good governance and accountability, and institutional decay, there is a fear that even the new regulations would be violated through corruption. The political, business and administrative influential will definitely find loopholes and continue the 'dollar drain'.

Some of Bangladesh Bank's initiatives as part of the monitoring framework are certainly useful. But the political integrity of regulatory audits of under-invoicing in exports, over-invoicing in imports, and monitoring of the number of dollars kept in Nostro accounts of private banks are missing. That is, rather than a direct effort to save the dollar, the government's efforts are inadequate and, in some cases, indirectly, there may be efforts to save corrupt political and business leaders. Discouraging the opening of LCs via several active and passive measures, will have a profound impact on the economy, and energy cuts will infuse industries to scale back production. 

Obligation to open LCs at 100% margin means blocking the flow of trade capital, affecting both import and export trade. The price of goods will rise again. Much-needed imports too will be blocked, and industrial production will be disrupted. This will further increase inflation and reduce export earnings. And this will lead to layoffs and more misery in public life.

Faiz Ahmad Taiyeb is a Bangladeshi author, columnist and sustainable development critic. He is the author of bestseller Bengali books titled 'Fourth industrial revolution and Bangladesh','50 years of Bangladesh economy' and a few others. He is reachable at [email protected]

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.