"When Sheikh Hasina returned to power in 2008, Bangladesh's total debt was just $33.66 billion. When she fled amid an unprecedented student-led uprising on August 5, she left behind a burden of $156 billion in local and foreign loans for the country to carry." - Source: The Daily Star (https://www.thedailystar.net/news/bangladesh/news/al-govt-leaves-behind-156-billion-debt-3682281)

ADB Study: The Economic Impact of the COVID-19 Outbreak on Developing Asia

The link for the study: https://www.adb.org/what-we-do/covid19-coronavirus

Key Messages:

• The ongoing COVID-19 outbreak affects the People's Republic of China (PRC) and other developing Asian economies through numerous channels, including sharp declines in domestic demand, lower tourism and business travel, trade and production linkages, supply disruptions, and health effects.
• The magnitude of the economic impact will depend on how the outbreak evolves, which remains highly uncertain. Rather than focusing on a single estimate, it is important to explore a range of scenarios, assess the impact conditional on these scenarios materializing, and to update the scenarios as needed.
• The range of scenarios explored in this brief suggest a global impact of $77 billion to $347 billion or 0.1% to 0.4% of global GDP, with a moderate case estimate of $156 billion or 0.2% of global GDP. Two-thirds of the impact falls on the PRC, where the outbreak has been concentrated so far.
• The estimated impact on individual developing Asian economies—and on sectors within these economies—is provided in this brief, including a hypothetical worst-case scenario for a given economy that experiences a significant outbreak of its own.

Asia's Journey to Prosperity: Policy, Market, and Technology Over 50 Years

Asian Development Bank publishes this book (Asia's Journey to Prosperity: Policy, Market, and Technology over 50 Years) which presents an overview of Asia’s growth and transformation in the last 50 years and discusses key policy lessons that can be drawn from the region’s experiences.

The book provides a summary of underlying factors that can explain Asia’s development performance, as well as the large variations across the region and time periods. In particular, it focuses on the roles of technology, markets, and policies in several areas including human capital development, trade and investment, infrastructure, macroeconomic stability, poverty reduction, gender equality, environmental sustainability, development finance, and regional cooperation and integration.

The Trouble with Macroeconomics

Paul Romer, a renowned macroeconomist and the current Chief Economist, World Bank writes on importance of science and facts in the paper 'The Trouble with Macroeconomics'. 

Probably, the most striking words came out from this paper through the following statement: "an indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error."

So true!

Capitalism in Crisis: What went wrong and what comes next

Mark Blyth writes on the crisis of capitalism, in the current form, in his article, Capitalism in Crisis: What went wrong and what comes next, in Foreign Affairs. 

Good reading! 

BB’s goal: Growth Support vs. Price Stability

Why ‘currently’ Bangladesh Bank (BB) should prioritize ‘growth’ more than ‘inflation’?

First, in the first sentence of the ‘Highlights’ of the current monetary policy statement (MPS) for the period of July-December 2015 is just as follows:

“This is a cautious but explicitly pro-growth monetary policy stance supporting the 7 percent growth target and the 6.2 percent inflation target for the fiscal year 2016.”

Please see the link for the MPS:
https://www.bb.org.bd/monetaryactivity/mps/mps_current.pdf

Through this statement, BB made it clear that it weighs ‘growth’ more than other issues of its concern including ‘inflation’, during the current MPS period.

Second, the country targets to reach to 7.0% in FY2016. And with only 0.8% export growth in the first quarter of the fiscal year, what are the means through a reasonable analyst will give the country that targeted growth. It would be curious to know.

Third, Bangladesh wants to be a middle income country by 2021, and for that the government targets to have 8.0% GDP growth by 2020. Historically, export has been the main driver of growth, and will remain so until so many years to come. Then why not the central bank, like other government institutions, focuses more on ‘growth’ than other issues within its jurisdiction?   

Why ‘currently’ the issue of inflation should not be a concern of BB?

Domestic inflation has been on a declining trend, at least in the last two years, mainly because of reduced global food prices and lowered money supply (M2) growth. [Please see the graph of inflation.]

(i)            There is a long-term declining trend of inflation, and then who should care about inflation fear;

(ii)           Inflation trend is stable too!

(iii)          Domestic average inflation is 6.3% in August 2015, which is almost closed to the target inflation rate of 6.2%;

(iv)         Global commodity prices remain stable, and M2 growth of 12.6% in July 2015 remain far below the target M2 growth of 15.6% for December 2015. Unless someone forces, there is no scope of M2 overshooting until December 2015, and then of further rise in inflation. Please remember, BB sets 6.2% inflation target while keeping 15.6% M2 growth. The why one should make BB to be fear about further inflation? Only skepticism rules over the fact, and misguides BB.

How poor!

Why ‘currently’ depressed export growth should be the prime concern of BB?

As BB announced a pro-growth monetary policy, and export is the main drivers of growth, BB should open its door of instruments (e.g., exchange rate) for supporting exports so that it may ultimately bring good news for the 7.0% growth target. Export growth over the last two years has remained quite unstable around the lowest point and negative territory. In general, export growth has been declining since ind-2014. With these kind of export growth, a country just can’t grow, can’t achieve its short-term and long-term goals of reaching higher trajectory of growth (7% to 8% growth).     

Why it’s not possible to improve import growth position without the required momentum in export growth?

First, historically, in the medium-term, trend in import growth has been closely linked with the trend export growth. (Please see the 3-month moving average graph of export and import growth)

Second, import growth of commodities is controlled by those commodities which are used as basic inputs for major export industries, meaning without the increase in import of those commodities, the export growth will remain as it is now.

Third, one just can’t import according to her wish. Import commodities must have a demand in the country. The demand will either come for consumption purposes, or industry uses. Consumption demand is largely dependent on economic condition. Hence, even to increase consumption demand/import, the country should encourage exports, the main driver of economic growth.  

Why exchange rate depreciation shouldn’t be a concern for inflation overshooting?  

First of all, exchange rate depreciation has little impact on the Bangladesh inflation dynamics. This is evident; any economist may check this fact with extensive econometric research.

Second, some experts have been arguing that current exchange rate is not the equilibrium exchange rate, but the equilibrium exchange rate would be far below the current official exchange rate, as the central bank has been intervening in the foreign exchange market to keep it stable. Then, logically, the official exchange rate which is higher than the equilibrium exchange rate, would have been harming the inflation development over the last few years. But in reality, we observe that inflation rate has been on a declining trend, meaning the market exchange rate is not basically harming inflation trends.

Third, some experts also have views that sterilization process to keep exchange rate below the equilibrium rate has been increasing money supply, which is another channel through which exchange rate may harm inflation. But again, if one looks carefully, M2 growth has been always below the target M2 growth, at least in the recent past, despite the fact that the central bank has been doing sterilization for long. This is because net foreign assets under M2 is so insignificant portion (the share of net foreign assets in M2 was only 24.0% of total in June 2015) that may rarely be able to disturb the overall M2 growth. Thus, the concern is unnecessary.         

Probably, the core team of the central bank authorities knows this fact, and that’s why the current MPS is rightly convinced for the necessity of the exchange rate depreciation with keeping the current depressed exports growth in mind, and it’s the right time for the central bank to keep its words by acting accordingly.

Please read the first paragraph of Page 8 of the current MPS:

“While the central bank's purchases of foreign currencies from the market is defusing appreciating pressures on taka and thus on the exchange rate, lackluster performances of exports convince us to lower the value of taka against the dollar and thus depreciate the exchange rate.”

This is really wonderful!

Why other export factors are less important to BB?

Some analysts try to say: other issues such as infrastructure and business climate are more important than exchange rate depreciation for export growth. In this long-run, this is true. But analysts forgot the basic facts: (i) depressed export growth needs quick/short-run action, and dealing infrastructure constraints and appropriate business climate are long-run measures; (ii) while talking about BB’s playground, infrastructure and business climate are not BB’s cup of tea, meaning BB is not in a position to address infrastructure constraints and challenges to business climate. So, it’s better to keep the discussion within the boundary of BB.

BB can use its exchange rate instrument to support export.   

Why analysts keep their eyes shut on real effective exchange rate (REER)?

Can analysts do recall their basic macro knowledge? When REER appreciates, it reflects the erosion of export competitiveness. The following graph shows the trend of REER over the period:  

An analysis of the graph:

(i)    This is the probably longest period of REER appreciation in the history of Bangladesh. The last depreciation of REER took place in November 2012, and after than it has been always the music of REER appreciation. It means, Bangladesh has been losing its export competitiveness since December 2012, or for 32 months.

(ii)           REER appreciation has been rising since August 2014, meaning rising trend in erosion of export competitiveness. This is due to no counter-balance action taken by BB during this period.

Bangladesh Development Update: World Bank

World Bank, Bangladesh provides its Bangladesh Development Update. Major issues include:

1. GDP is expected to growth at 6.5% in FY2016;

2. Bangladesh is facing a declining trend in international competitiveness with external and domestic risks.

Link for the update.

Draft 7th Five Year Plan

A lot of you may have waited for long to see the 7th Five Year Plan. So, here is the Final Draft of the 7th Five Year Plan FY2016-FY2020: Accelerating Growth, Empowering Citizens.

Enjoy! 

Profiles of Helene Rey

IMF's Finance and Development profiles Helene Rey, Professor of Economics at the London Business School, and well-known for her work for international financial economics, macroeconomics and international financial system. A good read!

Link of the profile.

F&D, IMF (June 2015 edition)

IMF publishes the June 2015 edition of its Finance and Development magazine, which focuses on poverty related issues.  

Profiles of Raghuram Rajan

IMF's Finance and Development profiles Raghuram Rajan, its former Chief Economist and also the current Governor of India's Central Bank. As one of the finest economists in recent time, Raghuram Rajan not only got success in teaching at the University of Chicago, but as a practitioner as the Chief Economist of IMF, Economic Advisor to the Prime Minister Manmohan Singh, Chief Economic Advisor to the Finance Ministry, India and Finally the Governor of Reserve Bank of India, the rare quality one can imagine.

Link of the profile.

Background Studies of 7th Five Year Plan

It's already known that Planning Commission (PC), Bangladesh is in the process of preparing the 7th Five Year Plan (FY2016-FY2020). Recently, PC uploaded, in its website, 25 background studies which are conducted sectoral experts of the country for person/group who has the interest to know how the planning process is done.

Link to access the background studies.   

Maintaining Growth in India: R. Rajan

Raghuram Rajan, Governor of the Reserve Bank of India, writes on basic factors that may shape up the Indian growth process in future. He broadly focused on three issues: deepening regional and domestic demand, strengthening India's macroeconomic institutions including his central bank, and finally, joining in the fight for an open global system. More specifically, he talked about:

• Infrastructure development (for having links to domestic and international markets)
• Human capital development (developing skills that are valued in the labor market and  the creation of jobs in firms that have an incentive to invest in training) 
• Fiscal prudence (controlling budget deficits and monitoring the quality of budgets)
• Low inflation (while ensuring optimal conditions for growth) 
• Financial stability (no to asset price boom)
• Attracting more FDI while keeping India's interest intact 
• Searching more natural resources from abroad, and if necessary, using multilateral institutions for that 
• Playing strong role in the international monetary system   

Most of these excellent points that he pointed out may be relevant for the Bangladesh case also. A worth reading for Bangladeshi policymakers.

Link for the article.

Bangladesh Inclusive Growth Diagnostic Study

USAID and DFID have jointly produced a study 'The Inclusive Growth Diagnostic Study' which identifies the binding constraints that deter households and firms in Bangladesh from making investments and taking risks that would significantly increase their incomes. The analysis provides a framework that will focus attention on the most pressing obstacles (electricity, low skills and governance) to development. Based on it, policymakers may identify appropriate reforms and projects that will ease those binding constraints, stimulating economic growth.

Wasted Investment: China's $6.8-trillion hole?

The Economist published this worth reading article (Wasted investment: China's $6.8-trillion hole?) based on a research done by two Chinese government researchers. The topic is simple: based on the Chinese investment, the researchers calculated the efficiency of investment through incremental capital investment ratio (ICOR), and interestingly they found that China has made worthless investment of $6.8 trillion over 2009-2013 for building bridges and other infrastructure investments. With this ICOR analysis, they tried to show how Chinese investment has been becoming less efficient in the recent past.

While the Economist analysed the research findings of Chinese government researchers, and also it provided alternative analysis. Based on a coherent and using more realistic approaches to research, the Economist tried to show how Chinese researchers miscalculated the whole thing and what were the missing areas in their research that should be considered.

Researchers, who often get involved in debate, must read this article, at least, to know how an economic debate should take place.