Is Bangladesh experiencing the effects of economic “slowbalization”?



In ancient Greek mythology, Sisyphus had to repeatedly roll a boulder up a hill after it rolled down each time he reached the summit. That was deemed as an appropriate punishment by the Greek Gods.

Today, the same punishment is bestowed upon the central bankers with the government playing the role of the Greek Gods.

Every time the central banks attempt to regulate the monetary policy, the "market gods" compel them to lower rates and revert to "easing mode".

The era of economic "slowbalization" had begun long before the Covid-19 pandemic struck, as it was evident that the global economy was kept afloat by constantly pumping money into the system, without a material rise in real output levels.

The global economy was hovering on consumerism, with the manufacturing and service sector at the peak of the business cycle.

Fiscal stimulus driven by populism is what is keeping economies like Bangladesh airborne, preventing an emergency crash landing for the time being.

But the question arises, "is Bangladesh Bank going overboard with the whole money printing scheme?" "Will the government announce a brand-new stimulus package tomorrow and call it a refinancing scheme without even acknowledging that a majority of the money being created is through quantitative easing (QE)"?

While the risks of an economic recession are high, an earnings recession could end up happening if economic activity does not pick up during the second half of this year.

With remittance falling at record rates, the fear of capital flights is heightened even further.

The RMG sector has experienced a stream of cancelled orders even with improved lead time. Other sectors have suffered the same fate and exporters who have long blamed the stronger domestic currency against the US Dollar (USD) should brace themselves for worse.

This is because the fate of equity markets tends to be linked to the manufacturing sector, and while both the companies and the stock exchange continue to shut down operations, cash flow to both employees and shareholders have ceased to exist.

But unlike most developed countries such as the US, Bangladesh has a relatively low debt-to-GDP ratio.

Although it had risen to 14.7 percent during the last fiscal year, it is still bearable in comparison to the likes of Italy which, according to a recent Goldman Sachs report, is expected to reach a level close to a staggering 160%.

With a low tax net and a tax-to-GDP ratio of 9.3%, it is unlikely that tax revenue alone will be enough to meet the government's need to finance the economy and bailout certain businesses.

 Therefore, although QE seems well and fair now, the government must ensure that inflation does not spiral out of reach.

A potential risk we, as a nation, face besides inflation is the repayment of foreign debt, most of which is denominated in foreign currencies, especially in USD, which will become increasingly more difficult to pay off if the USD continues to appreciate.

Public debt poses no inherent danger to governments who issue their own currency, such as the UK, Japan, or the US.

It is not because of their ability to borrow at very low costs, or their perceived status as economic superpowers, but because a government that issues its own currency will never have the need to borrow its own currency.

For example, Japan has its own sovereign currency. In order to enable Tokyo to spend more, the Bank of Japan manipulates the numbers on its computer screen and increases the quantity of Japanese Yen in its bank account, once Tokyo asks for authorisation of such payments.

Being an issuer of a sovereign currency goes hand in hand with slumberous nights as one never has to worry about how they are going to pay their bills.

The Japanese government can afford everything being sold in its own currency. Although inflationary pressures are a concern, they will never need to borrow Yen. That's QE again.

In addition to that, it can always determine which bonds to sell along with their coupon rates. These government bonds then help the private sector's finances to shore up, as most of the credit available to private businesses through banks were already taken out as loans by the government.

While countries like Japan do not need to issue bonds to finance their budget deficits, countries like Bangladesh have no choice but to add to national debt.

Modern Monetary Theorists believe governments can never go bust.

During times of financial crisis, raising taxes or issuing bonds will further aggravate the problem. Hence this newfound idea of distributing "helicopter money" via QE may add to the problem of a depreciated Taka against the USD, but the practical aspects far outweigh the theoretical notion of bond issuance, increased borrowing and increased savings to revive the economy.

The decrease in both the borrowing and lending rates have made credit look more attractive, especially on a risk-adjusted basis, but few can now avail such opportunities.

The Federal Reserve's room to manoeuvre the interest rates into negative territory may end up weakening the dollar, which might support gold prices and emerging-market currencies like the Bangladeshi Taka.

But I doubt that the "market gods" will release the Sisyphuses of central banks to allow monetary policy to normalise.

If it fails to trigger positive economic growth, we will witness more direct fiscal easing measures from the government.

But in an environment of low interest rates, what more will the central bank do to stimulate economic activity once things return to normal?

Is Bangladesh ready for negative interest rates? Could hyperinflation be on the cards? Who knows?

But for now, I shall gladly allow the Sisyphuses and Modern Monetary Theorists to take centre stage.

Sayeed Ibrahim Ahmed, is an experienced investment analyst, the author is currently a Senior Lecturer in Finance at American International University Bangladesh (AIUB) pursuing research along the lines of capital markets and economic policy