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Sunday, July 7, 2013

External sector position and 'Dutch Disease'!

Though two articles were published today in two different newspapers, but they drew almost the same conclusion. Interestingly, both (Dr. Monzur Hossain and Dr. Abul Basher) are young and promising economists of the country, working at the same institution, Bangladesh Institute of Development Studies (BIDS).

1. Active exchange rate policy and fear of appreciation
2. The looming threat of Dutch disease in Bangladesh economy

The concerns made in both articles are valid:
(1) Reserves have been accumulating fast;
(2) Reserve accumulation has a direct impact on nominal exchange rate;
(3) With lower domestic inflation, real effective exchange rate has been also appreciated which has  negative effect on export prospects;
(4) Most importantly, monetary policy alone can't handle this issue, rather a desperate effort is needed from government side, especially to vibrate investment scenario so that imports get its momentum and all concerns through reserve accumulation goes out of scene.

Well, it is certain that some will have different view, especially in the area of optimum level of reserve accumulation. In the absence of any studies on optimum level of reserve accumulation, it will be difficult to comment whether the current level of reserve is the one the economy deserves to have. There are some views that reserve accumulation should be at least 8 months of import payments (experience of China and India), far higher than the current position (4 months of import payments). Another issue is whether the current situation is a static or dynamic. Based on the current import situation and overall gloomy investment scenario, it seems that it's not a static situation, reserve accumulation will die out when investment scenario will start to move to a positive change. Who knows, then this reserve accumulation won't be enough to handle import payments!    


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