Austerity can hurt more than help unless carefully considered

The country's economic trajectory in the future will depend on the nature of the world economy. Fortunately, in the last few days some glimmer of hope can be seen in the global economy, especially in terms of food prices.

Global fuel oil and fertiliser prices have eased slightly due to the recent agreement related to trade between Russia and Ukraine amid their war. Since the supply of wheat has already started in large quantities from these two countries, the price of the product has also started to decrease.

While it is true that the trade war between Russia and Ukraine has paused, the military war is not nearing an end. As a result, the European Union countries, which are already in crisis, may not be able to avoid recession.

A crisis in major markets could reduce demand for our export products if the domestic demand falls there. As a result, the price of export-oriented garments may also decrease. This will have a major negative impact on export earnings, which will create pressure on foreign currency reserves and in turn prolong the stress on the exchange rate. 

Several initiatives have already been taken by the government to deal with such a crisis. There is, however, scope for serious discussion about which of these initiatives will work and which will bring opposite results.

The government's recent austerity measures have been largely aimed at tackling the dollar crisis and controlling inflation. Our imports of food, other commodities, capital equipment and industrial inputs depend on the supply of dollars.

The measures to discourage the import of various types of luxury goods, including flowers and fruits, deserve praise. Apart from this, curtailing government employees' foreign visits and limiting the expenditure on different projects will save some foreign currency. These initiatives will have no additional impact.

But it must also be remembered that the production of many of our products is dependent on imports. Just as we need gas and electricity to maintain our industrial production, various materials also need to be imported.

Failure to import fertilisers, pesticides and seeds on time will disrupt our agricultural production. As a result, food security may also be at risk.

We can already see a food crisis in Africa. If the production of food is disrupted, such a crisis can also happen in our country. 

In this situation, the supply of electricity and oil should be secured to ensure irrigation for agriculture. The lack of rain in different areas of the country has meant that Aman cultivation has started through irrigation. As there is load shedding, diesel is being used for irrigation.

Again, due to load shedding generators are being run using oil in homes and offices. And the subsequent increase in the use of captive generators in industrial plants has meant that the demand for gas is also rising.

Although load shedding is done to save oil and gas, it may end up increasing fuel consumption instead of reducing it. We are not sure whether such a step was carefully considered before being taken.

Furthermore, load shedding has also meant that the production in the industrial sector is less, which will decrease export earnings. If production is less than domestic demand, prices will increase. The loss due to load shedding can be greater than the value of fuel saved.

Incidentally, it may be mentioned that in order to save $400 million in Sri Lanka, the import of fertilisers was reduced. However, the cost of reduced food production due to unmet demand for fertilisers was $450 million. In this situation, profit and loss should be calculated more carefully before taking any decision to deal with the crisis.

The Bangladesh Bank is also taking initiatives from the arbitrage concept in the currency exchange rate. In determining the exchange rate of the currency, the Bangladesh Bank has set a much lower rate than the market. Due to non-availability of dollars in the market at this rate, international trade is being disrupted on one hand, while on the other remittance and export earnings are not coming into the country properly.

If expatriates can get Tk7-8 higher than the rate set by the Bangladesh Bank [through informal channels], then they will not send money through formal channels. The central bank has to fix the exchange rate logically. The difference between market and central bank rate cannot be too high as then the amount of dollars they have to supply to close the gap is not available in the reserves. 

As the central bank of India has that ability, they have fixed the dollar rate at Rs80. But we don't have enough dollars in reserves to spend to maintain the currency exchange rate. Prior to fixing the exchange rate to avoid major economic crises, as well as to keep the foreign exchange reserves at a comfortable level, the reality of the market should be understood.

Dr Zahid Hussain spoke to TBS Senior Staff Correspondent Jahidul Islam over the phone.