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Bangladesh’s next economic crisis could take place in the financial sector, warns a top economist of the World Bank.
“If there is any possibility of economic vulnerability in Bangladesh that could be in the financial sector,” the Bank’s chief economist for South Asia Hans Timmer told the FE in an interview on the sidelines of the World Bank-International Monetary Fund spring meeting in Washington DC.
The central bank should play more important role in the crowded banking sector because the non-performing loans (NPL), especially in the state-owned banks, are increasing and it is becoming a problem, he said.
That’s where policies can be improved to check the possible crisis, he added.
The economist said, “From the current account, it is important to realise that you have a big advantage as you have large reserves. The central bank has preserved it. But that is not as much as many other countries have,” he added.
“You have the reserve equal to nearly five months of import payments. But in many emerging economies it is double than your country,” the economist said.
“Countries that have large reserve, find it much easier to absorb volatility in financial market. So if you suddenly see reversion in capital flows or increased uncertainty in international financial market, the countries that have large reserve have an advantage.”
In that sense, it is not going in the right direction what happened last year when the reserve was sold to try to prevent further depreciation of the current account, Mr Timmer said.
“The pressure on the currencies in all countries in South Asia …. is no longer temporary, but this is a signal that really the relative prices have to be adjusted. And this is a signal that the current account deficit that is widening is unsustainable,” he said.
This means Bangladesh needs more flexible exchange rate, which can provide that adjustment in relative prices you need, he noted.
For Bangladesh’s central bank, “it is a challenge that the monetary policy on how you can go for more flexible exchange rate that can help you build up the reserves again and that can help you adjust the relative prices and at the same time, keeping inflation under control and not overshooting and marinating confidence in the whole system.”
Referring to the country’s current account balance, Mr Timmer said although Bangladesh and other South Asian countries are doing well, their export is only one-third of their potentials, and the gap is widening.
Quoting a World Bank report on “Exports: Wanted”, he said that the region’s export gap has widened over time, standing at over 20 per cent of GDP in 2017.
About the trade war between US and China, the WB chief economist said in the short-run it can be positive.
“Your export to the US and China has increased,” he said.
The incidents like Brexit, and US-China trade war put more pressure on the country like Bangladesh not just to benefit from trade but also for the shared trade benefit, he added.
Asked about the possible cut of trade benefit in the global market after graduation to a developing country status, the chief economist suggested Bangladesh create a strong bloc with other similar nations for putting pressure on the developed world so that the country does not lose the benefits.
source (FE)
