Perhaps it is a time to have a look at the external sector of Bangladesh that constitutes roughly 40 per cent of the Gross Domestic Product (GDP). In this article, this writer will heavily draw upon Sadiq Ahmed, an eminent economist and vice chairman of the Policy Research Institute. An X-ray of the external sector is of utmost importance when the country has turned out to be more open over time, and has been serving as a barometer of the performance of the domestic economy. If one wanted to breathe a sigh of relief amid economic and political tensions gripping the economy till February 2013, it must have been an improvement in balance of payments (BoP) of Bangladesh. BoP is an account that depicts a country's external economic performance. Particularly, the period from 2011 to 2012 saw a series of external shocks especially resulting in a loss of reserves and a substantial depreciation of the Taka. Now things seem to have taken a positive look reversing the earlier trends. The BoP has been in a satisfactory state of health, if not the best. The rationale of the developments needs to be duly reckoned well before celebration.
The first cause of the seeming comfort could be the correction in monetary stance of the Bangladesh Bank when it decided to take a contractionary monetary stance on the heels of an expansionary one that allegedly produced the perils - high inflation, bubble in the asset market, depreciation of home currency Taka etc. But denouncing the earlier expansionary policy may not do justice to its makers as it was necessary to leave the economy out of the shadow of the worldwide economic recession. John Maynard Keynes was once asked about the change of his stance. He quipped, information changes, so do the conclusions. The recent change in monetary stance is akin to that. Medicine should follow the disease, not the other way round. However, this new tight policy arguably has helped reduce inflation, pressure on asset prices and eliminate the excess demand pressure in the first half of FY13. This signifies that you can be off the hook by adopting a prudent monetary policy e.g., controlling inflation, stabilising asset prices and ensuring conducive exchange rate management. Second, the recovery in exports and a surge in the flow of remittances reaching a record high surely have helped the turnaround. Third, a fall in imports and a rise in private capital inflows also went to ease the pressure. And finally, as rarely heard before, net capital inflows (both private and public) have increased following few positive policies. Many factors could be adduced to the apparent 'surprise', but the correction in the monetary policy and associated decline in demand for dollars is likely to have played a part. By and large, significant improvement in the capital account is a major positive outcome which, if sustained, could leave beneficial impacts on investment and growth in Bangladesh.
But things have changed radically since the last few months. The sky of the economy is covered with political clouds. The intense political instability followed by a series of hartals is poised to reduce economic growth. The export sector led by the readymade garments (RMG) has been worst affected, in terms of image abroad and inflows from abroad, due to a number of man-made disasters. As political tension mounts, imports are likely to go down substantially impacting negatively upon investment. Erroneously, the sluggish investment is adduced to the correction of monetary policy. But things as they are seem to tell a different story. There is no shortage of domestic liquidity with private credit running at 18-20 per cent. The fix, as we reckon, lies in putting the investment plate proper and creating an investment climate. Poor investment plate springs from the inability to implement infrastructural development projects fuelled by the lack of land availability, property rights, and quick decisions by bureaucracy. This has nothing to do with monetary policy as often tagged with. For some reasons or the other, the deteriorating investment climate is set to put the last nail on the coffin. The most recent political instability for the last few months associated with devastations in terms of human lives and property, rise of fundamentalist forces, etc. have led many investment and business delegations to postpone their visits to Bangladesh; some have allegedly packed up to back out; image crisis has cast a serious blow to the already fragile environment.
So, it seems that improvements on the external front might be outweighed by deterioration on the domestic front. Taken both domestic and external front together, Bangladesh, at least for the next six months or so when a new government is likely to take over, will be poised to pass through a tunnel without any light at the end. Everywhere politics dominates economics but in Bangladesh, politics destroys economics. Henry Kissinger once brutally termed Bangladesh as 'bottomless basket' in economic sense; now it seems that Bangladesh is going to be a politically bottomless basket and the onus lies on the politicians to lift the nation out of the shadow of such crisis. For the last few decades, Bangladesh worked very hard to emerge as a role model for developing countries where others of the same level had to learn from the country. We just want to get back our fame at any cost. As we sow, so we shall reap.
The writer is a Professor of Economics at Jahangirnagar University. firstname.lastname@example.org