The stock of international reserves now stands at nearly $14 billion. It is enough to pay for our imports of about five months. This is a comfortable level of reserves albeit not nearly as good as some of the Asian countries. The comfort level is also suggested by the expansive comments about the reserves made by some government leaders.

The stock of reserves could be compared to the bank account of a company or an individual. The size of the account is usually regarded as an indicator of the health of the account holder: the larger the account the more prosperous the holder. However, there are situations in which the size of the account can be misleading. For example, a large size of the account could be due to large bank loans taken out by the company (or the individual) on which it eventually defaults (recall Destiny or Hallmark). It is not just the size of the account, but also how it was acquired that matter.

The stock of international reserves can be built up in many ways, and some of these do not necessarily augur well for the economy. If the government borrows, say two billion dollars, from the international market at a high interest rate, the reserves will go up by two billion dollars soon after the deal is done. But the government will have incurred a liability of paying hefty interest charges and the principal during the period of the loan. Unless the borrowed money is put to good use, the stock of reserves could be at a lower level than that when the loan was taken.

Chart 1 shows the monthly movement of international reserves since July 2002. The stock of reserves grew steadily till the end of 2008, increasing by $4.2 billion during this five and half year period. But the very next year reserves made a quantum leap of $4.8 billion to stand at $10.3 billion at the end of the year. The level of reserves remained virtually unchanged during the next two and half years. But during the first eight months of FY2012-13 the reserves again increased sharply by $3.5 billion to reach $13.8 billion.

It is sometimes suggested that the robust flow of remittances caused these sharp increases. However, the time series of remittances does not support such a conclusion. The steadily rising inflow of remittances certainly contributed to the trend growth of reserves, but the spurts are unlikely to have been caused by such inflows. The growth of remittance inflow was particularly strong in 2008 but reserves did not increase much, which however shot up the next year when the remittance growth had declined markedly.

Chart 1 reveals a strong relationship between a sharp increase in reserves and a collapse of imports. When imports grew around the trend, the stock of reserves also grew randomly around the trend. But when imports fell off sharply, the stock of reserves shot up.

A reduction in the level of imports has exactly the same immediate implication on the overall balance of payments, and hence on the reserves, as an increase in exports or remittances.  If imports had grown this year at the same low rate as that of the last year (5.47 percent), total import payments during the first eight months would have been about $3 billion higher than what was actually spent, and consequently reserves would have been lower by this amount. The stock of reserves would then have grown around its trend path.  Thus it would seem that the principal factor assisting the large growth of reserves during this fiscal year was the sharp reduction in imports.

The other factor that helped the growth of reserves is foreign loans. The government has recently allowed some corporations to borrow money from overseas at commercial terms (bdnews24.com, 9 April 2013).  This decision is intimately linked to the monetary policy of the country. By allowing overseas borrowing, the monetary authorities have prevented both a tightening of the domestic credit market and a reduction of the reserves.

The collapse of imports this fiscal year is due partly to the global economic slowdown and partly to the monetary policy.  The global slowdown has reduced the import demand of our important trade partners and hence, our export receipts (for example, the growth rate of export to the USA has fallen off from an average of nearly 15 percent during 2010 and 2011 to almost zero in 2012). Since the import contents of our principal export products are fairly high, the reduction in export shipments has directly contributed to the reduction of our import demand.

The monetary policy of the country has been contractionary during the last year or so. Bangladesh Bank has reduced the growth rate of credit supply from 27.4 percent in 2010-11 to 19.6 percent in 2011-12 in consonance with the terms of an agreement with the IMF. The credit growth declined to only 7 percent during the first 8 months of 2012-13. Private credit grew by only 6.3 percent. Such modest rates of credit growth presage a slowing economy. BB has already revised its forecast of GDP growth downward considerably. Revised forecasts of international organisations are even lower.

One of the macro variables that declines during an economic slowdown is import demand since it is strongly related to income.  It is only to be expected that imports will fall off during the current year. Imports have already declined by 7 percent during the first 8 months of FY2012-13. A matter of particular concern is that the import of capital machinery has declined by 18.5 percent and that of machinery for miscellaneous industries by 10.2 percent. These are suggestive of a large fall in investment during the first eight months of 2012-13. This dims the growth prospect of the future.

The decline in imports that we are experiencing now is a strong indication of an economic slowdown. The temporary sharp increase in reserves is due mainly to this slowdown and not to the vibrancy of the economy.  Reserves cannot be increased indefinitely by reducing imports.  Sooner or later falling imports will worsen the balance of payments and reserves rather than improve them.

Similarly the balance of payments and reserves can be improved by foreign borrowing only temporarily.  Such borrowing is advisable only as short term fix when other sustainable adjustments are being made. If the economic situation does not improve, there will be a large hole in the balance of payments in the near future when the amortisation of the loans falls due, and this hole will need to be plugged from other sources.

The problems the economy is facing now are real problems which will not be resolved by monetary measures.  The slump in investment demand cannot be reversed by tinkering with just interest rates and credit. The business sector, as well as others, is anticipating several months of political turmoil.  The global slowdown, especially EU economic slump, will continue this year according to IMF forecasts.  Power and infrastructure problems that dog the economy are likely to remain unaddressed or even worsen if the government continues with its business-as-usual attitude.

Each of the previous four governments since including the last caretaker government succeeded in significantly raising the average growth performance of the economy during its tenure (see Chart 2). The economy was poised for a leap to 7 percent growth trajectory in 2011-12. Unfortunately that golden opportunity has been sacrificed at the altar of corruption and confrontational politics. For the first time we shall have a fall in the average growth.  It is particularly galling that the military-backed caretaker government that ruled under very adverse domestic and international circumstances such as repeated floods, food price explosion, public apathy, a financial meltdown and a deep recession in the West had a superior record of performance than that of the current elected government which did not face any major disasters except perhaps those of its own making.

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M. A. Taslim is the Chairman and Professor of the Department of Economics, University of Dhaka.

Photo: bdnews24.com

Hartal presents an interesting, though difficult and controversial, topic for analysis by social scientists. If what the news people and the ‘media experts’ say are any guide then we must agree that hartal is a very bad thing which imposes great inconvenience on the people and also harm the economy. Indeed, this might be found to be the view of the majority of the people if a quick survey were done. However, what people say and do need not always be consistent, and I suspect hartal is a case in point.

Hartal has been used as a political weapon against the government ever since M K Gandhi invented it to intensify the Indian independence movement. It has gradually evolved in Bangladesh into a potent political weapon in the repertoire of the opposition to embarrass and unseat the incumbent government. While hartal has been used sporadically by various political parties to advance their demands since liberation, it became more frequent and virulent since the latter part of the Ershad regime and the restoration of the system of freely elected government in 1991.

The march to elected parliamentary form of government after the fall of the dictatorial regime of General Ershad did not proceed as expected. Despite the fact that the election in 1991 was held under a neutral, non-party caretaker government constituted consensually, the Awami League (AL) refused to formally accept electoral defeat or congratulate Bangladesh Nationalist party (BNP) that won the largest number of seats (though not an absolute majority). On the contrary, it discovered ‘karchupi’ (fraud) in the election outcome. Although the elected members of the party did take oath as members of parliament, they frequently boycotted parliament sessions, thus setting a trend of opposition boycott that were to become entrenched subsequently.

As the time for the next election approached, the opposition (i.e. AL) became intensely suspicious of the prospect of a free and fair election under the incumbent government. It demanded the institution of a neutral, non-party caretaker government during the election period (which was initially mooted by Jamaat). As the government was not receptive to the idea on the ground that it was contrary to the existing provisions of the constitution, the opposition resorted to frequent agitations and hartals to realise their demand. Eventually the government relented and amended the constitution to make provisions for a caretaker government. None of the nation’s constitutional experts and legal minds at the time foresaw that the structure of the caretaker government had a fatal flaw.

A fresh national election was held in 1996 under a caretaker government. BNP lost the election and AL emerged as the single largest party although it did not win an outright majority. It formed a coalition government with some minor parties. The losers (BNP) did not accept the election results gracefully following the precedence set by the previous opposition and consolidated the boycott culture by absenting themselves now and then from the parliament.

The next election was held in 2001 relatively peacefully as serious doubts about the impartiality of the caretaker government did not arise yet. Although AL became suspicious when the caretaker government promptly reshuffled the bureaucracy to suit the perceived need of a free and fair election, it did participate in the election. The election results surprised many, the immediate past incumbent, i.e. AL, failed to secure even one-fifth of the seats.

Predictably, AL again discovered ‘karchupi’ in the election outcome and declined to formally acknowledge the winners. It intensified the trend of boycott and hartals. The virulence of the hartals increased markedly.

As the time for the next election neared and the identity of the chiefs of the Election Commission and the caretaker government became known, the constitutional flaw mentioned above became apparent. The constitution required the immediate past Chief Justice to be the Chief of the caretaker government. But the incumbent government chose the Chief Justice, and it could ensure that a loyal person is selected. This is precisely what AL alleged and refused to participate in an election held by a constitutionally appointed caretaker government. It resorted to mass movement and violent hartals to advance its demand for a neutral caretaker government. The violence of the movement turned extreme with the ‘logi-baitha’ demonstration that was vividly telecast to a stunned population by a number of television channels.

The intensity of the violence ensured that the constitutionally appointed caretaker government was overthrown and a ‘military-backed’ caretaker government was installed in January 2007, apparently with popular support. The new government, whose legality is still in question, ruled for two years in a virtual constitutional vacuum. Fortunately, it decided to hold an election for the next parliament.

The result of this election caught everyone by surprise. The AL-led coalition won nearly 90 percent of the parliamentary seats. BNP was virtually electorally massacred. BNP rejected the election results outright on the ground that the election was ‘engineered’. But it followed the practice of taking oath as members of parliament and then boycotting it, only the period of boycott got longer.

The BNP-led opposition remained relatively calm during the first three and half years of the government being satisfied with staging occasional protest meetings and processions against the ‘misrule’ of the government and such things as price hike. But as the next election approached it had to confront the fact that the AL-led coalition had adversely tilted the level playing field by doing away with the non-party caretaker government through an amendment of the constitution.

Sensing that the election held under the current dispensation will be rigged, the BNP-led coalition now finds itself demanding exactly the same thing as did AL-led coalition in 1996. Interestingly, while both the major parties changed their positions on neutral caretaker government since the mid-1990s, only Jamaat has remained steadfast on the necessity of such an interim regime. It sided with AL in 1996, but this time it is with BNP.

Although the ICT trial and death sentences against Jamaat stalwarts have greatly complicated the political situation, the principal demand of the opposition coalition still remains the restoration of the caretaker government. It has already enforced several days of hartal to press home their demand and is gearing up for more. These hartals have already become quite violent, and with the progressive hardening of the attitudes of both sides it could get nastier.

The principal purpose of the narrative above is to bring out a single point: the hartals have been used by the opposition during the last quarter of a century as a political weapon against the incumbent government mainly to secure free and fair elections. If seeking people’s mandate in a free and fair election is the objective why would the opposition enforce hartals that would supposedly inconvenience and even harm them? Wouldn’t that be irrational? As it happened, every time a free and fair election was held, the opposition won the electoral battle handsomely. In this matter the politician’s instinct proved to be right, at least so far.

This electoral fact immediately raises the question if people consider hartals and the associated violence to be very bad why do they so overwhelmingly vote for the opposition who perpetrate the hartals?

Some possible answers to the paradox are:

(1)            Actually people are not seriously opposed to hartals. This might sound frivolous at first, but a little thought should suggest that a very large section of the population including the rural population is not much affected by hartals. Even industrial establishments, such as garment factories, remain operational during hartals. Many institutions, such as schools, have found ways of working around hartals to minimise inconvenience.

(2)            People do regard hartals as bad, but their dislike of the incumbent government is greater such that they tend to support the opposition that agitates against the government. It can be argued that in this situation the opposition gains more by not resorting to hartals, but just focusing on elections. This may turn out to be true, but at the moment it is only an untested hypothesis whereas hartal is a tested and trusted weapon to unseat the government. If the opposition opts for a still untested non-hartal route under a partisan interim government, and it turns out to be wrong, the opposition would be condemned to wilderness for five years or more. It is unlikely that any opposition would risk this route when they have the hartal option. It should also be recognised that hartals perform the useful function of denting the credibility of the government and making it unpopular, and thereby enhancing the prospect of the opposition winning in a free and fair election under a non-party caretaker government.

(3)            Hartals badly affect only a small section of the population. Those who have their properties destroyed, those who cannot travel or reach their destinations, casual workers who lose their wages, and those who are physically hurt or have their near and dear ones killed or arrested should all be rather unhappy with hartals. However, they could be even unhappier with the government as they might blame the government for their plight. Furthermore, the larger part of the electorate may regard such sacrifice as acceptable cost of realising the goals. In this situation the opposition may correctly judge hartals to be favourable to their cause on balance.

Whether any (or all) of the above is true can only be established through a rigorous study; but it would seem that opposition’s penchant for using hartals to realise their demand is a well thought-out political strategy that has succeeded repeatedly. Unless the opposition burn fingers at least once they are unlikely to consider any change in the strategy.

A common perception about hartals is that it imposes large costs on the economy. Pictures of torched vehicles, smashed shops, shuttered workplaces and empty roads during hartals create such an impression. Torching and smashing of vehicles and properties no doubt cause large losses to the individual victims, but the impact on the wealth of the macro economy is minuscule.

Of greater significance is the loss of GDP due to the shutdown imposed by hartals. However, no credible estimate of the economic loss has been made, and data spin doctors seem to have sway in this matter. One recent estimate puts the economic loss at $200 million for every day of hartal (Daily Star 26^th March 2013). This would imply that if there is 30 days of hartal in this fiscal year (we already had 15) the total loss this fiscal would be $6 billion. This is equivalent to about 5 percent of the GDP. Hence, if such a large loss is actually suffered by the economy, the GDP growth rate this year should come down to about 1 percent. How likely is this to happen? We shall have to wait a few months until BBS publishes GDP estimates. For a guess we may look at the past evidence.

As mentioned above hartals have been used by the opposition to embarrass the government during the tenure of each government during the last quarter of a century with the intensity increasing during the election years. If hartals did cause serious economic losses then the growth rate should have dipped during the election years. However, Chart 1 below does not seem to support such a conclusion.

Source: EPB and BBS

As evident from the chart, there are two marked dips in the growth rate: 2001-02 and 2008-09; and a smaller one in 1993-94. There were some hartals in 1993-94, but very few during 2001-02 and none in 2008-09.  Hence, it is difficult to argue that these dips in the graph were caused mainly by hartals. A more persuasive explanation is that these downturns were associated with sharp reductions in exports during these years (see Chart 1).

The demand for our exports is crucially dependent on the state of the global economy and trade.  Hence, there is also a close relationship between the country’s exports and the volume of exports (or imports) of the world. This is borne out by Chart 2; a downturn in world exports pulls down our exports, and conversely.

The growth of global exports is in turn very closely related to global GDP growth rate.  Hence, the downturns in our economy were ultimately related to the health of the global economy.  The global economic downswing following the Dot-com bubble at the turn of the new millennium and the deep recession at the end of the first decade following the western financial meltdown caused the slide in the export income of the country during these years, which reduced the GDP growth rate.

If hartals were exacting a toll on the economy as claimed, then the worst-affected years should have been the latter part of the first and second BNP-led governments.  The growth rate during the former was above average of that era despite frequent hartals. The latter period saw the emergence of very violent hartals culminating in the ‘logi-baitha’ mayhem. Surprisingly, these years posted the highest growth rates (in two consecutive years) in four decades. It would be a bit far-fetched to argue that there were some adverse effects of hartals, but these were offset by other factors.

Source: WTO

There does not seem to be much evidence so far of significant losses to the macro economy due to hartals. This is obviously at variance with the common perception of both experts and laymen, and is likely to be viewed with some skepticism. The onus is on the social scientists to explain the paradox more fully.

Epilogue

There can be no doubt that hartals do cause enormous harm to some people who get caught up in the violence. More than 100 people, including law-enforcers, have been killed during the last few weeks of political agitations, thousands injured and arrested, and much property destroyed. Life and property of every citizen of the country must be treated sacrosanct, no matter their importance in the macro economy. The government, as well as every citizen of the country, should do everything possible to prevent such tragic consequences. It is important that legitimate grievances of the opposition, including their concerns about elections which seem central, are heeded to and the lawful non-hartal avenues of protests are not closed off. Above all, there must be an attitude of tolerance and reconciliation among all parties if there is to be a fruitful attempt for a quick end to the current political impasse and mayhem.

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M A Taslim is Professor and Chairman of the Department of Economics, University of Dhaka.