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Economy faced with worrying time

Inam Ahmed
A crunching dollar crisis, weakening macroeconomic stale, increasing pressure on the balance of payment, high petroleum, food and other commodity prices, and a bleak global economic and trade scenario - die economy today faces all these plus a number of crilical political issues that make the future worrisome.
A recent study of the premier think-tank Centre for Policy Dialogue (CPD) estimates that since
May 2004 taka has lost its value by 6.11 percent against US Dollar, 9.6 percent against Indian Rupee, 11.26 percent against euro and 10.2 percent against yen. The national currency is likely to w< aken further as dollar gains ground, having wide-ranging Impact on wage and production cos: although it may give some fillip lo exports.
Comparing this with the increasing import bill one gets the chill. Food-grain import bill has gone up by 43.7 percent, petroleum 82.4 percent, fertiliser by 135 percent and
steel by35.3 percent.
"Unlike other fiscal years, when die first quarter usually passes off in a calm mood, this year began with a restive note due to a risky confluence of domestic and international factors. An upswing in investment has further exposed die vulnerability of the economy," observed CPD Executive Director Dr Dcbapriya Bhattacharya.
The international trends do not bode well as petroleum prices have touched $66 a barrel and global food
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prices -- Bangladesh is a net importer of both the items -- also recorded a significant jump of $41 a metric ton in a year. The global markets are also in an unsettled mood following the EU referendum in which the French and the Dutch voted against the proposal for an extended constitution. The looming German elections and the recent terrorist attacks in the UK have made matters even more critical.
To add to the worry, the US economy is showing no signs of fighting the ballooning fiscal deficit, while the Chairman of the US Federal Reserve Alan Greenspan has indicated that the US interest rates will go further up. And there comes little hope for a breakthrough in the global trade talks to be held in December in Hong Kong that can see Bangladesh on a gaining ground either in agriculture or nonagriculture market access. Even the recent G8 summit served little good news for Bangladesh, for that matter for Asia, in trade justice issue with most promises going to writing off debt of Africa.
"But the domestic political contours augur no less a daunting scenario -- the upcoming elections will exert pressures on public finance and the economy now under the IMF programme is also going to face a number of challenges in economic management. The reforms have become back-loaded due to slow progress in implementation of some critical measures. Experience shows the development administration usually goes into a state of paralysis ahead of the elections. This will further accentuate a sense of policy limbo, which is apprehended in the wake of electoral transition," opined Dr Debapriya.
The planned post-monsoon agitation by the opposition will only add to this challenging situation. This may also affect the emerging positive trend in the foreign direct investment.
As if all this was not enough to weigh down on the economy, the domestic investment upswing is acting as a deadly cocktail, as it has exposed the economy to external pressures.
The export that increased by 12.82 percent till March, as the latest balance of payment statement for July 2004-March 2005 shows, could not meet the import demand that grew by 26.4 percent. Even a 16 percent remittance growth and a significant inflow of foreign assistance -- $500 million under the World Bank's Development Support Credit and $100 million under the Education Sector Support Credit, all coming as budgetary supports -- was overshadowed by the import surge and the resultant foreign exchange crisis. The crisis is as much a result of the demand crisis as of the Bangladesh Bank's role -- it did not let the banks buy dollar from it as per demand and
also dictated the market not to allow rates going significantly up. Without the foreign aid and remittance flow the situation would have reached a crisis point, as many point out.
On the fiscal side, the developments are not too healthy -- revenue expenditure growing faster than earning last year fuelling further inflation, although an overall fiscal balance could be maintained because of non-implementation of the ADP. Though it is true that inflation was largely underwritten by global price increases of food, petroleum, fertiliser and steel, the nature of public finance also played a role here.
Against such a backdrop, the CPD apprehends that food price is likely to emerge as a separate issue, as the next aman paddy production may have little impact on price due to a continued high cost of production. Added to this worry is the global price situation and the coming seasonal Monga and floods. Without an early food-for-work programme, the situation may become critical.
The banks have increased interest rates on lending, but deposit rates remain insignificantly changed to encourage mopping up of surplus from the market.
In view of the emerging scenario, Dr Debapriya maintained, "There is an urgent need for a coherent, integrated and informed consideration to address such inter-related macroeconomic issues -- exchange rate, interest rate, taxes, tariffs and public expenditures. The government may suitably use the non-functional Coordination Committee for Fiscal and Monetary Affairs for this purpose."
"Maintaining the macroeconomic stability and sustaining the growth momentum pose a win-win situation for the government and opposition. They both have a stake in maintaining a good economy now and beyond the elections. The government will not want to face the election with spiralling inflation, unstable exchange rate and high interest rate. It will also not be in the interest of the opposition to inherit a weaker economy. Thus, while the government and the opposition may be at loggerheads on electoral reforms, they may try to reach an understanding to ringfence the national economic interests for their own good," suggested the CPD ED.
As this piece was going to the press, one good news, albeit small, emerged -- China has re-valued its currency for the first time in about a decade by 2 percent. This is a small hope for the garment exporters who had been witnessing the onslaught of Chinese producers in both the US and the EU markets.