Business Supplement Issue-20

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6 Sunday, July 9, 2017 DT OPINION Loosen the regulatory system We have to make moves to build a forward-looking and fast-growing trading nation • Mamun Rashid Despite a lot of constraints and somewhat love for the “Approval Raj,” the Bangladesh Bank has offered a lot of support and “hand-holding” to the growing private sector in Bangladesh. Starting from allowing backto-back import L/Cs for apparel exports, it continued with export retention quotas, holding foreign exchange for overseas business development, loans from foreign bilateral and multilateral agencies, parent company loans, issuance of repatriation guarantee, increase of the travel quotas, special quotas for treatment abroad, remittance of tuition fees for studying abroad, remittance of foreign consultants fees and technical fees, repatriation of profit or dividend against foreign direct investment, and investment in traded securities in the bourses. In fact, most Bangladesh Bank officials are busy processing approval requests for various private sector entities on a day-today basis. Even after 45 years of independence, almost every third inward or outward remittance requires central bank clarification, or consent, or mostly approval. While individual remittance has gone through reasonable reforms or liberalisation, enterprise-level inward and outward inflow still remains an issue which warrants a lot of filtering, making the outward flows still quite complex and cumbersome. After independence, we inherited a war-torn economy with a very low foreign exchange reserve. Therefore, we appreciated the slow pace of reforms in the foreign exchange regime. In 2001, our net foreign exchange reserve dropped to lower than $1 billion. The then Governor of central bank contacted his many counterparts in the Middle East to provide some foreign currency liquidity support to take care of increasing commodity imports and imports for exports. Known to be the foreign exchange man, Allah Malik Kazemi requested all global banks operating locally to put in some foreign currency deposits with the central bank. The good thing was, despite all the challenges, our trade was happening, and L/Cs were opened, routed, and confirmed through the global banks. Where L/Cs were being opened and settlement monitoring was heightened, Bangladesh Bank didn’t follow the route of RBI, such as putting up a 300% cash margin for opening L/Cs or “no export, no import” commandments. Bangladesh Bank is still trying to hand-hold private enterprises Foreign currency being counted at a money exchange Nothing can happen if our regulatory regime does not become more friendly and helpful. Even if the regulators are helpful, they can’t do much without the right tools and guidelines through quick disposal of their FCY inflow-outflow requests. This is taking a lot of their time in the absence of clear guidelines. Emerging realities also don’t allow them to take shelter under existing guidelines for foreign exchange transactions or relevant core risk management guidelines. Development partners, especially the IMF, have been talking of the further liberalisation of the current account transactions and updating the outdated Foreign Exchange Regulation Act (FERA) 1947. Although it looks very odd for an independent country like Bangladesh to chalk out its growth path to a middle income country with this 1947 cross border transaction rule, the reality tells us that we don’t know when our distinguished members of the parliament could approve a new foreign exchange regulation act, suited more to the dreams of a forward-looking and fast-growing trading nation. The archaic 1947 act is not allowing Bangladesh Bank’s “very helpful officials” to do much in attending to emerging issues in international trade and remittance flows. They have been issuing prudential guidelines to: Increase travel quota (though still miniscule against the increasing travel needs of the individual business person or professionals), creating space within the student quota, remittance of withdrawal proceeds by a foreign investor, expansion of the EDF program, and extension of the deferred payment for USANCE L/Cs or increasing the space for e-wallets. They have issued almost 50 circulars in this regard in recent times. Our foreign exchange reserve is on its way to $35bn, yet a traveler can’t deposit more than $5,000 on his/her return to his/her account if not declared at the airport, or easily buy tickets for overseas travels. Remitting a single dollar outside the country for investment abroad still raises a lot of eyebrows. Establishing the local representative office or agency by the global corporations is still a tough exercise. The consular section at the local US or European country embassies or Indian high commission reportedly increased the issuance of non-immigrant or business visas manifold. When I asked the US consular head the reasons behind the move, she promptly replied: “Bangladesh’s economy is growing at a steady pace; its entrepreneurship is growing fast, they need to connect with their US counterparts for their exports and raw materials or capital equipment sourcing Syed Zakir Hossain or know-how purchases; there are more and more Bangladeshi students qualifying for good US colleges and universities; more Bangladeshi graduates are making their presence felt in the US professional world, and these realities are convincing us to facilitate their entry to the US for our own interest.” The whole world has started to accept Bangladesh as a global player in its chosen field. The buyers want our capacity to increase, see our performance improve, our workers’ productivity to go up, and entrepreneurs to reduce their business’ costs. Nothing can happen if our regulatory regime does not become more friendly and helpful. Even if the regulators are helpful, they can’t do much without the right tools and guidelines. We need to change, revise, and upgrade our foreign exchange rules. It also has to happen fast. Bangladesh not only requires continuous liberalisation in current account transactions, time is possibly ripe to start thinking about capital account convertibility in order for us to be ahead of our peers or competitors in the identified opportunity spaces. • Mamun Rashid is a leading banker and economic analyst in Bangladesh.
OPINION 7 Information is all we need No need to reinvent the wheel DT Sunday, July 9, 2017 GROSS NATIONAL INCOME (GNI) PER CAPITA, ATLAS METHOD (CURRENT USD) 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: World Bank But what will really drive that growth is the people in Bangladesh applying the methods of adding value that others have already worked out THE lAST WORD • Tim Worstall Sheikh Hasina has announced that income per capita in Bangladesh will be $12,000 by 2041. That’s up from the current $1,600 or so but we should point out that the PM hasn’t quite announced that it will be so, rather that we are aiming to reach that amount. We should also point out that while it is not unlikely to be easy, nor will it be a straight path, there is no fundamental reason why it should not or cannot happen. Compound economic growth just works that way; if growth is just a little higher than it is currently and continues on for those decades then it will happen. There is also no particular reason to think that it won’t happen that way. Of course, there is always the possibility of disaster, a rather higher possibility of bad economic policy being implemented, but it is a general assumption in the economic world that the currently developing countries will continue to develop. It’s such a basic assumption that it is even built into all our calculations about climate change, for example. This process is called convergence and there’s a very good reason we think it should happen. The difficulty with economic growth is that we’ve got to work out what to do next. Gross domestic product, or GDP, is the value that is added in an economy each year and we generally define economic growth as being a rise in GDP. The head scratcher, the puzzler, is always, well, what is it that we do to add more value? At which point a developing country has an advantage over a developed one. By definition, a developed country is at the technological frontier. They’ve already implemented all the ways to add value that they know of and thus to advance any more they’ve got to invent some more. This is not an easy task and that’s why it takes time. Thus the currently advanced countries grow at 1, 2 and if they’re lucky 3% a year, simply because there aren’t all that many bright people to work out how to add more value. A developing country, again by definition, is not at that frontier. If it were it would be rich already. But they have plenty of examples to follow – as in, developed countries – in terms of what to do to add more value. As we all remember from school – OK, there will be a clever clogs who never did this but for the rest of us – homework is a lot easier if you can copy it rather than having to work it all out yourself. A developing country can and should grow faster than an already rich one – thus that convergence – so that in the end we should all end up in roughly the same place, the same level of income and wealth. One such idea is using VAT as a major part of the tax system. VAT is a tax upon consumption and this causes less economic distortion or dislocation than taxes upon incomes or capital. So, the general move to a simple VAT system is a good idea for Bangladesh, despite it having just been postponed for a couple of years. The rise in taxation upon SIM cards probably isn’t such a good idea. Of course, I’m not trying to tell the government what they should do but a general observation is that mobile telephony is the one single technology we know of that promotes economic growth more than any other. The actual finding is that 10% of the population with a phone, in a country previously without a general landline network, adds 0.5% each year. That’s not 0.5% of extra growth, that’s 0.5% of GDP growth just from that 10% having a phone. Sadly, it doesn’t scale all the way, we don’t then assume we’ll get 5% GDP growth each year just by everyone having a phone. But information is the lifeblood of economic growth – as above, we’re trying to apply, in most circumstances, things that others have already worked out. Thus we must know, of course, what it is that those others have already worked out. We should therefore treat mobile telephony, and the next stage mobile internet, not as a consumption good but rather an intermediate. What that means is that communication is something that then feeds into the production of other things. And we tend to think that we shouldn’t tax intermediate goods, only final consumption, and or income. In general Sheikh Hasina’s goal is entirely achievable, even if I’d prefer to agree that it will be a bit of a stretch. I’m not the world’s greatest mathematician but I see that as being 8% compound GDP growth over the next couple of decades. China has recently achieved that, South Korea and Japan before that, India looks on the way to it and Bangladesh has been managing just under that for two decades now. Yes, it’s possible. Others have done it and Bangladesh is close to it already. As to how, well, generally a market and capitalist economy is going to help, for no one has done it without that. Other than that, the various policy decisions like VAT, or SIM card taxation, are going to make a difference at the edges. But what will really drive that growth is the people in Bangladesh applying the methods of adding value that others have already worked out. • Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
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