When the value of US dollar is declining across the world, the reverse is happening in Bangladesh. Bangladesh taka is becoming weaker against the greenback. The main reason behind this depreciation of taka is that the foreign capital investment is coming in a very small-scale. The import cost cannot be tackled with export earnings and remittance. And as a result, the central bank thinks that the current financial year (2010-11) will be ended with a deficit in the balance of payment.
The International Monetary Fund (IMF) has warned the government saying that Bangladesh's foreign currency reserve will decline by $4 billion to $5 billion within the next one year to one-and-a-half years.
Except inflation, Finance Minister Abul Maal Abdul Muhith will have to spend most of his time in anxiety in the next financial year (2011-2012) in dealing with this imbalance in the balance of payment. The country's macro economy has long been in a stable condition. This is the first time that the stability has come under threat. The external sector has been gripped with a tremendous pressure due to a rise in the import cost, a nominal growth in remittance, the lowest overseas loan and investment. The finance minister is going to announce the new budget with the overall economy remaining under pressure. Implementation of the major fiscal plans will mostly depend on coming out of that pressure.
Advice to Exercise Caution
The country's position in the balance of payment was almost sound. The foreign currency reserve was at a satisfactory level. But the situation has changed very fast. The export earning this year made a record increase, but the import cost surpassed the rise. The economy has been failing to rein in the pressure coming from a 41 percent rise in the import cost. This situation is virtually created due to a huge rise in the price of food and fuel oil in the international market and also a rise in import cost of cotton, an export supportive import item. There are also pressures for importing various equipment for the power sector.
The remittance inflow in the last few years has been protecting the sound position of the foreign currency reserve. But this time the reserve is dwindling. This is leaving its impact on the exchange range between taka (Tk) and US dollar. Simultaneously this has been creating pressure on the balance of payment.
Renowned economist Prof Wahiduddin Mahmood advised the government to proceed with caution in maintaining macro economic stability. He told the Prothom Alo that the government could undertake in its hands the projects of private sector partners in the infrastructure development sector. Ensuring adequate foreign assistance and private sector foreign investment are urgent for the implementation of those. Otherwise these projects might stop in the half way. In addition, a crisis may be crated in the balance of payment while funding those from internal sources.
Prof Mahmood suggested giving due importance to the balance of payment while preparing project plans and said the big projects have economic necessity. He said that such projects had also political demands. But at the end the projects have to be finalized considering the supply of fund. Funding risks, analyzing profit, and loss and the priority issues involved the projects are also very urgent matters. Drawing an example, he said that some investment in the development of the Hazrat Shahjalal International Airport could alleviate its standard up to the mark. But in spite of doing this preparations are afoot to construct another big international airport.
State of Balance of Payment
The latest current account of balance of payment prepared by the Bangladesh Bank is for the period of July-March (2010-11). According to it, the country has a current account surplus of $689 million. If the monthly average for first nine months and the trend are taken into consider and equated with 12 months the country will face a deficit at the end of the year.
It has been observed that there has been a nominal capital income until March. The foreign direct investment was also very insignificant at $574 million. There is also a very minor mid and long-term investment at $863 million. A huge deficit has been created in the financial sector because of payment of huge loan and interest against short-term loan and halt in channeling huge export earning. And as a result, the overall deficit until March stood at $529 million.
The US-based international credit standard determining organizations -- Modish Investor Services and Standard and Poor -- publishes its report on Bangladesh's annual rating evaluation in March. These two organizations reminded about future pressure on the balance of payment.
Apprehension about export: In a news conference, the organization of readymade garment producers, Bangladesh Garment Manufacturers and Exporters Association (BGMEA), has expressed the apprehension that the growth in the country's garment sector might sufferer slump in the coming days. The garment factories are not receiving huge delivery order like in the past. Many buying orders are going to China, India and Pakistan. The backward linkage industries, including cotton production, have achieved tremendous progress in the said countries.
According to statistics of the Bangladesh Bank, the import cost against exported garment items has almost increased by twice. Two reasons are responsible for this. The price of cotton in the international market has been doubled. Nearly a doubled quantity of cotton and yarn is being imported to the contrary this year for export in comparison with that of 2010. The owners of the garment industry have doubled the import of cotton and fabrics this year as the EU has relaxed its priority in export-the rules of origin of general system of preference (GSP).
According to the date available with National Board of Revenue (NBR), the import of woven fabrics during the period January-March 2010 was at 41808 tons. The import in the current year stood at 78,741 tons. That means the import has risen by 88 percent in the first three months of the same period of the previous year. However, in the first three months of the previous year the net fabric import was at 1,710 tons. This has stood at 2,263 tons in the current year. That means the import has been increased by 32 percent.
The growth in the garment export during the same period was 42 percent. It is being told that for introduction of the new rules of origin the owners of the garment industry have stooped purchasing local yarn and are brining in cloth from Europe before exporting the same after sewing. A big pressure has been created on the balance of payment as the use of locally made yarn and cloth have reduced significantly.
Bangladesh Textiles Mills Association President Jahangir Al Amin said that approximately 200,000 tons of yarn had already piled up in 250 spinning mills of the country.
IMF Puts Conditions Again
One year ago the government refused to take assistance from the IMF for maintaining the 'balance of payment' because of political outlook. But at present and under a fragile condition, it has to sit for dialog for taking recourse to the IMF. An IMF delegation will visit Bangladesh in the first week of June before placing the national budget.
It has been learnt that Anup Shing, director of the IMF for Asia-Pacific division, sent a letter to the finance minister in April 2010. In the letter, he said that the government and Bangladesh Bank would have to make clear commitments for getting loan from them. The rate of foreign exchange will have to be relaxed. At the same time, the IMF set a condition for launching contractionary monetary policy. The organization said that the credit flow would have to be reduced further. The pressure that has been created on the revenue expenditure centering the coming budget would have to be removed.
Multifaceted Moves
Bangladesh Bank Governor Atiur Rahman in a recent letter to the top executives of the scheduled banks reminding them of bringing in foreign capital and fixed loans. The letter said that Bangladesh had been successful to infuse dynamism into investment and foreign trade overcoming the global economic meltdown, but it could not do the same in the field of foreign investment. Despite being surplus in the current account of the balance of payment this weakness in the inter-flow of the capital sector has been exerting pressure on the exchange rate of taka.
Moreover, the Bangladeshi Bank on 11 May had asked the chief executives of the commercial banks to bring home quickly the income of the export items. It was told at that time there was gap of $2billion between export price and realization of export earning. The set deadline of bringing in export earning is four months. The central bank believes a quick channeling of this income will increase the loan distribution and LC opening ability of the banks.
The International Monetary Fund (IMF) has warned the government saying that Bangladesh's foreign currency reserve will decline by $4 billion to $5 billion within the next one year to one-and-a-half years.
Except inflation, Finance Minister Abul Maal Abdul Muhith will have to spend most of his time in anxiety in the next financial year (2011-2012) in dealing with this imbalance in the balance of payment. The country's macro economy has long been in a stable condition. This is the first time that the stability has come under threat. The external sector has been gripped with a tremendous pressure due to a rise in the import cost, a nominal growth in remittance, the lowest overseas loan and investment. The finance minister is going to announce the new budget with the overall economy remaining under pressure. Implementation of the major fiscal plans will mostly depend on coming out of that pressure.
Advice to Exercise Caution
The country's position in the balance of payment was almost sound. The foreign currency reserve was at a satisfactory level. But the situation has changed very fast. The export earning this year made a record increase, but the import cost surpassed the rise. The economy has been failing to rein in the pressure coming from a 41 percent rise in the import cost. This situation is virtually created due to a huge rise in the price of food and fuel oil in the international market and also a rise in import cost of cotton, an export supportive import item. There are also pressures for importing various equipment for the power sector.
The remittance inflow in the last few years has been protecting the sound position of the foreign currency reserve. But this time the reserve is dwindling. This is leaving its impact on the exchange range between taka (Tk) and US dollar. Simultaneously this has been creating pressure on the balance of payment.
Renowned economist Prof Wahiduddin Mahmood advised the government to proceed with caution in maintaining macro economic stability. He told the Prothom Alo that the government could undertake in its hands the projects of private sector partners in the infrastructure development sector. Ensuring adequate foreign assistance and private sector foreign investment are urgent for the implementation of those. Otherwise these projects might stop in the half way. In addition, a crisis may be crated in the balance of payment while funding those from internal sources.
Prof Mahmood suggested giving due importance to the balance of payment while preparing project plans and said the big projects have economic necessity. He said that such projects had also political demands. But at the end the projects have to be finalized considering the supply of fund. Funding risks, analyzing profit, and loss and the priority issues involved the projects are also very urgent matters. Drawing an example, he said that some investment in the development of the Hazrat Shahjalal International Airport could alleviate its standard up to the mark. But in spite of doing this preparations are afoot to construct another big international airport.
State of Balance of Payment
The latest current account of balance of payment prepared by the Bangladesh Bank is for the period of July-March (2010-11). According to it, the country has a current account surplus of $689 million. If the monthly average for first nine months and the trend are taken into consider and equated with 12 months the country will face a deficit at the end of the year.
It has been observed that there has been a nominal capital income until March. The foreign direct investment was also very insignificant at $574 million. There is also a very minor mid and long-term investment at $863 million. A huge deficit has been created in the financial sector because of payment of huge loan and interest against short-term loan and halt in channeling huge export earning. And as a result, the overall deficit until March stood at $529 million.
The US-based international credit standard determining organizations -- Modish Investor Services and Standard and Poor -- publishes its report on Bangladesh's annual rating evaluation in March. These two organizations reminded about future pressure on the balance of payment.
Apprehension about export: In a news conference, the organization of readymade garment producers, Bangladesh Garment Manufacturers and Exporters Association (BGMEA), has expressed the apprehension that the growth in the country's garment sector might sufferer slump in the coming days. The garment factories are not receiving huge delivery order like in the past. Many buying orders are going to China, India and Pakistan. The backward linkage industries, including cotton production, have achieved tremendous progress in the said countries.
According to statistics of the Bangladesh Bank, the import cost against exported garment items has almost increased by twice. Two reasons are responsible for this. The price of cotton in the international market has been doubled. Nearly a doubled quantity of cotton and yarn is being imported to the contrary this year for export in comparison with that of 2010. The owners of the garment industry have doubled the import of cotton and fabrics this year as the EU has relaxed its priority in export-the rules of origin of general system of preference (GSP).
According to the date available with National Board of Revenue (NBR), the import of woven fabrics during the period January-March 2010 was at 41808 tons. The import in the current year stood at 78,741 tons. That means the import has risen by 88 percent in the first three months of the same period of the previous year. However, in the first three months of the previous year the net fabric import was at 1,710 tons. This has stood at 2,263 tons in the current year. That means the import has been increased by 32 percent.
The growth in the garment export during the same period was 42 percent. It is being told that for introduction of the new rules of origin the owners of the garment industry have stooped purchasing local yarn and are brining in cloth from Europe before exporting the same after sewing. A big pressure has been created on the balance of payment as the use of locally made yarn and cloth have reduced significantly.
Bangladesh Textiles Mills Association President Jahangir Al Amin said that approximately 200,000 tons of yarn had already piled up in 250 spinning mills of the country.
IMF Puts Conditions Again
One year ago the government refused to take assistance from the IMF for maintaining the 'balance of payment' because of political outlook. But at present and under a fragile condition, it has to sit for dialog for taking recourse to the IMF. An IMF delegation will visit Bangladesh in the first week of June before placing the national budget.
It has been learnt that Anup Shing, director of the IMF for Asia-Pacific division, sent a letter to the finance minister in April 2010. In the letter, he said that the government and Bangladesh Bank would have to make clear commitments for getting loan from them. The rate of foreign exchange will have to be relaxed. At the same time, the IMF set a condition for launching contractionary monetary policy. The organization said that the credit flow would have to be reduced further. The pressure that has been created on the revenue expenditure centering the coming budget would have to be removed.
Multifaceted Moves
Bangladesh Bank Governor Atiur Rahman in a recent letter to the top executives of the scheduled banks reminding them of bringing in foreign capital and fixed loans. The letter said that Bangladesh had been successful to infuse dynamism into investment and foreign trade overcoming the global economic meltdown, but it could not do the same in the field of foreign investment. Despite being surplus in the current account of the balance of payment this weakness in the inter-flow of the capital sector has been exerting pressure on the exchange rate of taka.
Moreover, the Bangladeshi Bank on 11 May had asked the chief executives of the commercial banks to bring home quickly the income of the export items. It was told at that time there was gap of $2billion between export price and realization of export earning. The set deadline of bringing in export earning is four months. The central bank believes a quick channeling of this income will increase the loan distribution and LC opening ability of the banks.
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