Wednesday, 7 December, 2022

Recession in 2023: Measures Must Be Taken Now

Nironjan Roy

Prime Minister Sheikh Hasina conspicuously mentioned in her news conference arranged after returning from the UK and the USA visit that the global economy will fall into a severe recession in the year 2023. Indicating the possible worst economic situation in the coming year, she urged all people to be cautious and also advised countrymen to be mindful of savings and increasing production. Since the eruption of the Russia-Ukraine war last February, Prime Minister Sheikh Hasina repeatedly warned people of imminent economic recession and the consequences thereof. Keeping this in view, she has taken some measures with a view to overcoming this situation and at the same time, asked the countrymen to be cautious and prudent. The level of farsightedness and prudence Prime Minister Sheikh Hasina demonstrated in taking some crucial decisions cannot be explained in writing. What our professionals cannot even think of, Prime Minister Sheikh Hasina can easily foresee well ahead. This is her unique characteristic based on which she has taken our country to the desired level. Defying tremendous criticism and strong opposition from many professional groups and environmentalists, Sheikh Hasina in her own decision moved ahead with Rooppur Nuclear Power Plant project in Ishwardi, Pabna. She rightfully realised that keeping the country’s power generation to only one source i.e. gas and oil is a very risky measure and therefore, she looked for a substitute source of energy that she found by undertaking coal-based power project and nuclear power plan. Her decision has been substantially proven during the worldwide fuel crisis resulting from the Russia-Ukraine war. Similarly, when many countries are struggling to apprehend how the economic situation will evolve in the coming days, Sheikh Hasina has rightly realised that the coming year will be the toughest year of global economic recession and the likely consequence thereof.

Severity of recession in the coming year: Not only Sheikh Hasina, but many renowned economists and financial analysts have also predicted a global economic recession that will likely take severe shape in the coming year. But this concern is not widely discussed in the western media and by policymakers. They are only talking about the high inflation rate and therefore, their action is so far confined to increasing the benchmark rate. It is obvious that the reason for this is mostly political, so naturally, the magnitude of the recession must be different. In the developed economy, three parameters which include unemployment rate, housing price and stock market are considered determining factors in assessing recession, although the official criteria for defining a recession is the fall of economic growth in successive two quarters. However, for some mysterious reasons, these three sectors have not been affected to that extent. The unemployment rate is not that high but some big companies, including Google and Facebook, have announced job-cut, and the trend of job-cut may deteriorate in the coming year intensifying this recession. Although housing price has paused due to persistent interest rate hike, a significant fall in this market has not occurred yet. It is anticipated that the coming year may be worse for the housing market with a big fall in housing prices as many mortgage loans may not get renewed in the coming year because of high-interest rates and job-cut. So the year 2023 is crucial for the housing market. Stock-market is now a different aspect because the share price index is no more considered an economic barometer. How and when stock market moves are very difficult to be predicted under any analysis because the market rises when it is supposed to fall or vice versa. During the coronavirus pandemic, the whole world economy was almost standstill which must have been reflected in the stock market with a fall in the share price index but actually the market, although initially declined, had a record high. Similarly, the world economy is at the doorstep of recession with the forecast of declining consumer demand due to high inflation and companies projecting lower earnings. Under this situation, the stock market is supposed to decline which is not happening at all and in reality, the market is sometimes abnormally rising while sometimes, drastically falling. Therefore, stock market movement is not indicative of the current economic situation anymore. In fact, the stock market is now in the grip of some fund managers, hedge funds and one per cent richest population, so general rules and analysis do not apply to this market now.

Diversifying exports: The epicentre of this recession will be the western world but its impact will be global, and our country will not be immune from it. Needless to say that fundamentals and structure of our economy are different, so the impact of the recession may not be felt the way the western world would feel. However, some sectors may be hard hit. Our export volume, mostly dominated by readymade garments, may experience a decline because westerners at first cut their spending on clothing during a recession. So, export orders in the coming year may decline and if such a situation really happens, garments exporters may go for job-cut what will not only increase unemployment but also result in a decline in our foreign currency earnings. In order to face this likely economic consequence, measures must be taken from now to diversify our export, bringing many non-traditional items under the export list. It is worth mentioning that the scope of exporting many non-traditional but essential items has largely widened because many items produced in our country have reached that quality and standard. Environment-friendly jute bags, packaging boxes, plastic containers, fruits, cookies and bakery items and spices can now easily be exported to the developed world. It may, however, be mentioned here that these items are being exported to many developed countries on a very limited scale mainly for meeting the demand of Bangladeshi community. But this export volume can be increased manifold by targeting the market of mainstream citizens. For doing so, export policy and foreign exchange regulation must be updated to encourage and facilitate small exporters and if possible, expatriate Bangladeshis living in different countries must be involved. Many expatriate Bangladeshis, who are struggling to explore self-employment opportunity, can easily be engaged with this opportunity and Bangladesh High Commission in those countries have a great role to play in this regard.

Minimising import cost and maximising remittance: An action plan must be undertaken to keep import volume as minimum as possible discouraging the import of non-essential luxury items. Even, measures must be taken to keep import cost minimum by avoiding unnecessary incidental expenses. Our most commercial banks have lost their correspondent relationship with many banks in the developed world, and consequently, LCs (Letter of Credit) established by commercial banks of our country are not accepted by most banks and exporters in the developed world. Under this situation, our importers have to import through middlemen for which additional cost in the form of the commission is added to the import bill which increases overall import payment. At the same time, expatriate Bangladeshis face tremendous difficulty in remitting foreign currency through banking channels because our banks do not maintain a correspondent relationship with multiple banks. They then find an easy way of sending money through an exchange house which sends significant amounts through non-banking channels which is commonly known as hundi. Regardless of severe criticism, sending money through hundi is now a reality. In order to get rid of the curse of hundi, our commercial banks will have to re-establish their correspondent relationship with as many banks as possible. Needless to say that establishing a corresponding relationship and counterparty limit with the maximum number of banks not only reduces import costs but also increases foreign remittance considerably. It is obvious that many large banks in the developed world particularly in the USA and Canada have resorted to stringent compliance procedures and adopted de-risking policies, so it is very difficult for our banks to restore correspondent relationships with those banks. However, they may overcome this situation by establishing correspondent relationships and counterparty limits with many small and medium-sized banks. The practice is now being followed by many developing countries around the world.

Other measures: Additionally, policies must be in place to avoid foreign currency debt, especially US dollar-denominated debt, because the USA appears to be pursuing hard currency policy for long time. Besides, the interest rate on dollar-denominated loans is rising, so borrowing at a high rate is always a risky measure that needs to be avoided. Bangladesh Bank must consider increasing deposit rates with a view to discouraging spending and increasing savings. Although Bangladesh Bank has already started rising their policy rate (bank rate), in reality, the policy rate hike is not truly reflected in deposit rates. So, Bangladesh Bank may have to resort to direct intervention for rising country’s deposit rates. It is almost certain that the anticipated global economic recession may take the worst shape in the coming year. In order to face this situation, Prime Minister Sheikh Hasina recommended some specific measures which include (I) increasing country’s production (II) exercising restraint at all levels, and (III) maximising export volume. At this moment, these are the best options to be undertaken with immediate effect in order to well prepare the country for managing the situation likely to be arisen out of the coming year’s worst global economic recession. Prime Minister has given clear directions, so concerned departments, including Finance Minister, Commerce Minister and Bangladesh Bank, must now act upon them.

The writer is a Banker, Toronto, Canada and can be reached at  [email protected]