Dollar crisis to go by next June

Bangladesh Bank is anticipating the pressure on the balance of payments will blow over by the end of this fiscal year thanks to hearty assistance from development partners –-- an outlook termed wishful by economists.

At the end of this fiscal year, the balance of payment deficit will be just $150 million in contrast to $5.4 billion at the end of June, according to the central bank's latest projection, which was prepared last month.

The recovery will be thanks to generous project aid and budget support, record remittance inflows and export receipts, according to documents seen by The Daily Star.

As per the outlook, exports will hit $55 billion in fiscal 2022-23, up 11.8 percent year-on-year.

Remittance will cross the $25 billion-mark for the first time. Last fiscal year, remittance inflows amounted to $21.7 billion.

A record $16 billion will come in from development partners in budget support and regular aid disbursements and foreign direct investment, up from $13.7 billion last fiscal year.

The inflows from the three overheads mean the unprecedented deficit seen in the balance of payment, which has historically been in the surplus, at the end of June will be cut to just $150 million.

If the deficit is just $150 million, then there is no pressure on reserves, said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

"Provided that the economy does not suffer any further global shocks, I think the strain on the foreign currency reserves would not be there after November-December," BB Governor Abdur Rouf Talukder told reporters last month during the annual meetings of the WB and the International Monetary Fund in Washington DC.

The pressure on the balance of payment had eased in the first quarter of the fiscal year, he said.

And with the budget support from development partners, there would be no pressure on reserves, Talukder added.

Economists though differ with the rosy outlook.

"It is too optimistic a scenario -- the numbers are excessive. They are too many downside risks," said Ahsan H Mansur, executive director of the Policy Research Institute.

The direction of the balance of payment in the first two months of the fiscal year has been opposite to what is assumed in the projections for the whole fiscal year, Hussain said.

From mid-September, remittances have moved down from a $2 billion per month trajectory to the $1.3-1.7 billion a month trajectory thanks to multiple exchange rate system.

"At this rate, it will be impossible to reach even close to the $25 billion projected for the year," he added.

According to data released by the BB yesterday, inflows in October were 7.4 percent lower than a year earlier at $1.52 billion.

"There are doubts of remittance hitting $20 billion this fiscal year," said Mansur, a former economist of the IMF.

The outlook is heavily banking on the budget support to come through from the development partners.

"What if the agreements don't happen? That's where the problem is. In that case, it will be difficult to support the imports," he added.

Despite the host of government measures, imports are expected to swell to $91.8 billion this fiscal year from $82.5 billion in the central bank's projections.

Project implementation capacity must also improve by leaps and bounds for the projected foreign aid to come through, according to Hussain.

But disbursements have been slow so far this fiscal year.

The projections look very ambitious even considering reforms that could happen if there is an IMF programme complemented by budgetary support from the WB, the Asian Development Bank and others, he said.

"Under the business-as-usual scenario, that is no significant reforms, reducing a $5.4 billion overall balance of payments deficit in the previous fiscal year to just $150 million is pie in the sky."

If all decisions are taken based on these projections, then there will be danger ahead, according to Hussain.

The hit then will feel more brutal as it would be unexpected by the authorities.

Subsequently, Hussain called for strong reforms in exchange rate management and the financial sector without further delay. 

Reforms include, among others, moving to a uniform and flexible exchange rate and removal of the interest rate cap.