"Inflation control via price adjustments unlikely success"

Valiant freedom fighter, noted economist and environmental expert Dr. Qazi Kholiquzzaman Ahmad is the chairman of Dhaka School of Economics and the former chairman of 'Palli-Kormo Shohayak foundation' (PKSF).  Apart from this, he played significant roles in various national and international organizations, including being the founder chairman of Bangladesh Development Council and the chairman of Bangladesh Economic Association.  In 2009, he was honored with the "Ekushey Padak" for his contribution to poverty alleviation, and in 2019, he was awarded the highest national civilian honour, the "Swadhinata Puraskar", for his outstanding contributions to Bangladesh.

He has recently talked to Views Bangladesh about the state of the country's economy, foreign exchange reserves and the impact of inflation in an interview taken by renowned economics writer M A Khalek and Views Bangladesh  assistant editor Girish Goiric.

Views Bangladesh: In recent times, Bangladesh Bank's reserves are decreasing rapidly. Why do you think this situation has arisen?

Dr. Qazi Kholiquzzaman Ahmad: It is evident that the foreign currency reserves are dwindling. According to available information, the reserves currently stand at $21 billion, whereas just a few weeks ago, they were around $30 billion. There are various reasons behind this decline.

I observe that, in most cases, the country's economic and other issues are correctly identified by the government, and policy directions or skillful approaches are also adopted for problem mitigation. However, in the implementation of these policies and strategies, various hindrances or negligence often occur. In some cases, both expertise and accountability may be absent. As a result, notable deficits can be observed in various areas when it comes to achieving success.

Naturally, there are two aspects to the situation regarding foreign currency reserves: accumulation or depositing and expenditure or withdrawal from the reserves. The primary sources contributing to the accumulation of foreign currency in these reserves are primarily export earnings, remittances sent by Bangladeshi expatriates working abroad, and foreign direct investment, loans, and assistance from foreign sources. Foreign aid has significantly decreased in recent times.

Views Bangladesh: We know that the government has been discussing export diversification for many years, but no progress has been made. Who is responsible in that case?

Dr. Qazi Kholiquzzaman Ahmad: Bangladesh's export earnings rely heavily on the production of textiles, accounting for approximately 80 to 84 percent. This sector incurs significant expenses related to the import of raw materials, resulting in substantial annual foreign currency expenditure. Around 40 percent of foreign currency is obtained from this sector. Although there has been extensive discussion about diversifying export sources, progress in this regard has been slow.

However, there has been some progress in the import of medicines and leather and leather-related products. Efforts are being made to boost the export of domestic handicraft-based products, but progress remains limited. It can be seen that in this context, there is a clear indication of diversification in imports, but progress remains restricted. Remittances contribute to a significant portion of foreign currency inflow in Bangladesh, with approximately a substantial percentage being deposited in foreign currency reserves.

However, there is a challenge in that a considerable number of Bangladeshi migrants working abroad are unskilled or semi-skilled laborers. The remittances they can earn are limited due to their low earning capacity.

Compared to skilled professionals, the influx of earnings from labor migrants is much less. Therefore, encouraging and facilitating the migration of skilled and professional workers could lead to a substantial increase in remittances. Policies and initiatives have been put in place with this goal in mind, but progress has been slow.

Furthermore, issues such as exploitation and abuse often plague labor migration processes, affecting the income of many who travel abroad for work. Nonetheless, Bangladesh benefits from the remittances sent by skilled and professional workers employed in various industries, businesses, and service organizations abroad, amounting to nearly 6 billion U.S. dollars annually.

Indeed, foreign currency earnings through the labour force have already established themselves as a crucial source of income for Bangladesh. Currently, approximately around 1.5 crore (15 million) Bangladeshi nationals are employed in various countries worldwide. For those who are unable to go abroad for work, obtaining foreign currency becomes a challenge. Instead, the domestic labor market faces increased unemployment pressures.

Views Bangladesh: Still the remittance flow through the banking sector is not increasing as expected but the hundi system continues to dominate?

Dr. Qazi Kholiquzzaman Ahmad : This is true; a significant portion of remittances in Bangladesh comes through informal channels rather than official banking systems. As a result, this money does not get deposited into foreign currency reserves.

The government has already relaxed regulations in this regard and has allowed a substantial margin in the exchange rate (recently, 110 Taka against 1 US dollar for remittances, slightly lower for imports and exports). However, remittances through banking channels are not increasing as expected; instead, the use of informal methods like hundi is on the rise.

Why is this happening? Even though sending money through banking channels offers a rate of 110 Taka against 1 US dollar, hundi transactions often provide a significantly better exchange rate. In the informal market, it is possible to receive 118 Taka or even more per dollar. Migrant workers toil tirelessly abroad to earn money and send it back home, so they naturally seek the most favorable exchange rates when remitting their earnings. They often follow the path that allows them to get more Taka per dollar.

They may not always prioritize the love for their country over financial gain. Especially when many individuals in responsible positions or in residence in the country are involved in corrupt practices and theft of millions of dollars, those who enjoy a comfortable lifestyle may engage in various opportunities. For them, it's all about convenience. Finding a solution to this issue is not easy, but it requires a comprehensive approach to address these challenges effectively.

Views Bangladesh: What initiatives can be taken to reduce imports and expenditures in that case?

Dr. Qazi Kholiquzzaman Ahmad: Previously, efforts were made to reduce imports and expenditures in the sector. In pursuit of stabilizing the foreign currency reserves at the Bangladesh Bank, stringent measures were imposed on opening Letters of Credit (LCs). As a result, there has been a noticeable reduction in import expenditures in recent months. However, these initiatives to curtail imports have had adverse effects on the country's domestic production and growth.

The government's import policy clearly specifies which goods can be imported and which cannot. Still, some influential importers, at times, create a list of imported goods according to their preferences and proceed with importing those items.

Many times, false declarations are made while importing goods, indicating that government directives are not effectively enforced. Efforts to combat smuggling, which includes over-invoicing and under-invoicing, have proven ineffective. Although the government has adopted policies to limit foreign travel expenditures, government officials at various levels continue to enjoy unrestricted foreign trips for various reasons.

Due to these factors and others, there is currently instability in the foreign currency reserves, and progress has been limited. Another source of foreign currency growth is foreign investment, loans, and aid. Although foreign investment has increased in recent times, it is still limited in Bangladesh.

Various factors contribute to the restriction of foreign investment in the country. One significant reason is the occasional political instability that discourages potential foreign investors. They prefer countries with a stable political environment. Despite ensuring a form of stability during its 15-year tenure, the Awami League government faced occasional instability, particularly during elections.

Furthermore, foreign loans are being taken, and some aid is coming in, but they are not always utilized effectively. Those responsible for project management or programs sometimes make mistakes, mismanage funds, and engage in corrupt practices.

Views Bangladesh: Due to all these policies, the cost per unit of domestic production is likely to increase. Can this also lead to further inflation?

Dr. Qazi Kholiquzzaman Ahmad: One viewpoint suggests that completely liberalizing the exchange rate of foreign currency, which would have an impact on the market, is appropriate. This would lead to an increase in remittances and foreign exchange reserves.

However, I don't find this view very acceptable. Because at present, completely liberalizing the exchange rate of foreign currency could lead to extensive devaluation of the currency. This would significantly raise the prices of imported goods, leading to increased hardship for the common people.

While efforts are being made to reduce inflation at the national level, it may become even more challenging, and price stability may further deteriorate. On the other hand, the cost of development imports will also increase, contributing to inflation. Printing more money has already fueled government expenditures, and now a decision has been made to stop it.

Given the current situation, where foreign exchange reserves are at stake, it might be possible to meet the expenditure of four months with foreign exchange. As the situation regarding foreign exchange reserves remains fragile, it is not a delicate condition. In the light of experience, generally, it is considered a feasible situation to meet the expenditure of three months with foreign exchange reserves. However, significant efforts need to be made to determine how this situation can be improved. The ongoing devaluation, if continued, can pose a significant challenge to address.

Views Bangladesh: Foreign exchange reserves are decreasing. Money laundering from the country increases drastically before national elections. Many people think that before the national elections, a class of people who have earned money under the government umbrella in various ways are sending their money abroad for security reasons. It is also acting as an important factor behind the decrease in reserves. What do you say?

Dr. Qazi Kholiquzzaman Ahmad: What you said may be true. But nothing can be said for sure. Because I do not have any information related to this. A lot of money is being smuggled abroad through hundi. Also huge amount of money is smuggled abroad every year under the guise of international trade.

Through over invoicing during import and under invoicing during export, money is being laundered from the country abroad or the foreign currency due to the country is not coming from abroad.

Money laundering in various ways is a critical problem for the economy of Bangladesh. Not only that money laundering increases before national elections but also money is being laundered throughout the year. The situation of acquiring foreign currency from foreign exchange reserves and using it for smuggling abroad is not easy; however, in the case of imports, it is sometimes done through order invoicing. It is also possible to smuggle money abroad by purchasing foreign currency from the parallel market.

Nevertheless, I cannot provide precise information on this matter as I do not have specific data on this issue.

Views Bangladesh: Behind this issue, there may be a lack of government oversight?

Dr. Qazi Kholiquzzaman Ahmad: In reality, a situation has arisen in Bangladesh where some people are finding ways to evade taxes and engage in illicit financial activities.

They are involved in smuggling money abroad and even though the government is trying to monitor and regulate these activities, it's challenging to cover all the avenues. Essentially, we have a crisis in our understanding of values.

Many are pursuing personal wealth and power, and while the government formulates policies and enforces laws, if there is a moral crisis among those responsible for implementation and if there is a lack of ethics among them, then how will the issue be resolved? It's imperative to maintain our ethical values at all levels.

For those who are entrusted with implementing policies, especially at the ground level, many of them are facing a moral crisis. This needs to be addressed. Only through collective efforts to resolve the issue and by achieving objectives together can we find success. Sometimes, I have doubts in my mind that there might be individuals within the government at various levels who question the achievements of Sheikh Hasina's government from a past era.

Views Bangladesh: In Bangladesh, inflation is quite high, currently ranging from 12 to 12.5 percent. Recently, the government has increased the prices of some goods. Is it possible to control inflation in this way?

Dr. Qazi Kholiquzzaman Ahmad: Attempting to control inflation solely by adjusting prices is unlikely to be successful. This is because nationwide, and even in a city like Dhaka, comprehensive market monitoring by the government is challenging.

Opportunists find various ways to evade paying higher prices. Although the government has recently increased prices for some goods, it is reported that this measure is not effectively enforced. Inflation in Bangladesh is influenced not only by changes in exchange rates and increased monetary circulation in the market but also by the dominance of a particular group of businesspeople who manipulate the market as they please.

They exercise significant control over the market, and some say that certain influential quarters have assured that inflation will decrease shortly, possibly through political statements. To achieve rapid progress, the government's implemented measures must be executed correctly, and those who manipulate the market need to be brought under control to ensure normal behavior between buyers and sellers in the market.

Views Bangladesh: Thank you

Dr. Qazi Kholiquzzaman Ahmad: Thank you also to Views Bangladesh.