Photo : TDM
A crisis in the foreign exchange market and a rapid depletion of foreign exchange reserves are being brought on by the exploding current account deficit. According to Bangladesh Bank, the quantity of foreign exchange reserves fluctuated steadily during 2021, reaching a peak of 48060 million US dollars in August 2021. However, due to large imports, the country's current account deficit increased dramatically from $4.57 billion in fiscal 2020 - 21 to $18.7 billion in fiscal 2021- 22. Bangladesh's foreign exchange reserves are gradually dropping because of the country's unfavorable export-import balance, significant reliance on imported oil and gas, and declining trend in remittance inflow. The Bangladesh Bank’s foreign exchange reserve declined to 29873.9 million US dollars in May 2023 from 48060 million US dollars in August 2021.
Finding Solutions
To prevent a full-blown currency crisis from developing because of the growing current account imbalance, their challenge is to reassess monetary and exchange rate policies. Since, the foreign exchange reserve needs to be flourished as soon as possible to keep the economy stable, following policy schemes are suggested:
1. It is high time for expatriate white color employees (Professors, doctors, engineers, accountants, businessmen and other high-income earners) to show their patriotism in the crisis of foreign currency reserve. They can invest their money in their homeland. That will help increase foreign direct investment (FDI), foreign currency reserve and employments. Sometimes they claim not to get adequate support from bureaucracy to start business or investment in Bangladesh. Government can play a vital role in that case to relax the constrains (that are responsible to some extent for not having expected FDI in Bangladesh) like licensing, rules and regulations, bribery and so on.
According to World Investment Report 2022, FDI in Bangladesh reached a three-year high in 2021, scoring second-most popular destination in the subcontinent after India. However, Bangladesh experienced a negative growth of FDI from 2021 to 2022. We observed an increase in FDI of 1.2 USD billion in June 2022 as compared to 1.6 USD billion the previous quarter.
2. The government can create an investment opportunity for expatriate white color employees and blue color labors in bond market (like Sonchoypotro), or real-state business. Remittance warriors will send foreign currency to the central bank/government agent/government authority for investment. Government or Bangladesh bank will invest their money on behalf of them in the above-mentioned portfolios.
3. Lucrative opportunities can be developed in current or forthcoming national initiatives where foreign nationals or immigrants can invest their money and make profit. Moreover, it may be proposed to them to receive a specific tax credit in exchange for their investment in that project over a specific period of time. In addition, they will receive honorary status and other incentives from the government for their investment.
4. The government can also borrow dollars by issuing short term bonds or Fixed Deposit Receipt (FDR) from the white color expatriates and pay them back with a handsome return when the reserve crisis is over (maybe a couple of years later).
5. The Bangladeshi government ought to consider setting up conditions that would motivate migrant workers to send their remittances through legal routes in faster time. In particular, the government must offer improved banking services so that migrant workers' families can safely liquidate remittances. Foreign exchange rates in the banking industry must be competitive. In order to guarantee high-quality service, the government must also encourage private financial institutions to participate in remittance transmission.
6. Only funds sent into the nation legally through authorized remittance methods will be eligible for the monetary incentive. Remittances increased over last year for eight straight months, from July 2019 to February 2020, when the 2 percent incentive program was put into effect in July of FY 2019–20. It motivates wage earners who are employed overseas to send more money to their relatives who live in Bangladesh. Currently the incentive rate is 2.5 percent. Proposing more cash incentives in remittance coming through authorized channels can work as a great way to increase foreign exchange reserve. This will reduce unauthorized transfers of money from abroad, and the government will be able to increase its reserve.
7. There needs to be a reduction in government spending that depends on foreign currency. Every aspect of government spending must undergo a critical evaluation. The expenditure for new or early-stage large infrastructure is better postponed until the economy navigates into sustainability. The government's spending on ineffective activities like not employment generating and less important is better eliminated or significantly reduced. Additionally, the efficiency of the money spending on social safety nets needs to be reviewed. In reality, the government has already started to reduce or eliminate spending on unimportant items however, government’s initiatives should be accelerated.
8. Tax authorities may change the tariffs (the proposal is a type of contact between the regulatory agency and the business providing the product of services) and non-tariff rules that prevent the import of luxury goods and automobiles. Cost-driven inflationary pressures will be somewhat reduced by lowering tariffs on imports of food and energy.
9. The interest rate at which the central bank lends money to commercial banks is called the bank rate. There was a drastic fall in the bank rate from 2021 to 2022. However, in order to reduce inflation, monetary tightening - and thus an increase in interest rates - is now necessary.
10. The government can give special honor to the remittance warrior in the airports like establishing a special gate to exit the airport and giving them guard of honor. Hopefully, they will feel proud to be citizens of Bangladesh and working abroad.
11. Government can also make a law to make sure that no Bangladeshi citizens can hold dual citizenships. If anyone takes U.S. or any other countries’ citizenship, they will no longer be the citizens of Bangladesh. This law may help protect money laundering.
12. We came to know that ruling party and the opposition party have their wings in different countries. If the party members really love our country, they must come forward to overcome the crisis by sending dollars in different forms like buying government bonds in dollar or invest in Bangladesh. They can also negotiate with the law makers and businessmen of the foreign countries and convince them for FDI in Bangladesh.
13. The government can create a pension fund for expatriate labors for making sure they will have old age security. Expatriate labors must start paying premium in foreign currency and continue for the next 10 to 20 years. The government will also pay a reasonable amount against their contribution to their pension account each month. The precondition for holding a pension account is that they have to send their remittance through proper channels.
14. We need to focus on the diversification of exported goods and searching new export destinations.
15. The Padma multipurpose bridge opened a great opportunity for investment diversification. We have to utilize this infrastructure to boost industrialization and export diversification. We can attract the foreign tourists to visit different locations in the Southern part of Bangladesh using the bridge.
Government and Central Bank of Bangladesh have to design and adopt above mentioned policies in the short run and long run depending on the merits of the policies. What we observe, Ukraine-Russia war will play a vital role in the international foreign currency market. To overcome the dual crises foreign exchange reserve and inflation, central bank has to let the exchange rate fix by the market and adopt contractionary monetary policy by decreasing money supply.
Dr. Nazmul Islam is an economist and faculty of Economics at Bangladesh University of Engineering and Technology (BUET), Email: niresearch71@gmail.com.
TDM/SD
