A global recession in the making: Can Bangladesh avoid it?

World Bank President David Malpass and many other economists are worried over the possibility of a global recession, which they think is inevitable amid the Russia-Ukraine war following the pandemic. The concern is growing also in Bangladesh about what is in store for the country in this volatile world, bdnews24.com reports.

Khan Ahmed Syed Murshid, a former director general at the Bangladesh Institute of Development Studies or BIDS, thinks the economic indices now forecast quite a safe time ahead.

But he also sees sufficient causes for concern. In his words, Bangladesh is a “victim of global circumstances”.

Bangladesh’s growth peaked just before the coronavirus pandemic shattered the global economy in 2020 and the ripple effects are still felt after more than two years.

The country weathered the crisis with vaccines and lockdowns and was making a decent recovery until Russia began its invasion of Ukraine. Moreover, a recent resurgence of the coronavirus in major Chinese cities and subsequent restrictions hit the global supply chain.

The prices of essential commodities began surging up in Bangladesh, like the rest of the world, with inflation hitting 6.29 per cent in April and putting the lower- and middle-income people under tremendous pressure.

A boost in imports brought some relief as it served as a sign of bolstered economic activities during the recovery from the pandemic, but soon it turned into a crisis as the value of the dollar has soared against the taka amid the global unease.

From May 2021 to May 2022, the taka devalued against the dollar by 3.35 percent and the current account balance of foreign transactions slipped to the highest deficit in the country’s history.

Bangladesh’s exports are posting decent growth but remittances have fallen, and reserves are under pressure due to the higher spending of dollars on imports.

The situation in Sri Lanka, which is going through the worst economic crisis in its history, fuels the anxiety as the island nation defaulted on debt for the first time. Inflation and economic crisis, exacerbated by political instability, also brought down the Imran Khan government in Pakistan.

The United States and Europe are also hit by inflation as fears of a major recession are growing.

The World Bank forecast 3.2 per cent global economic growth this year, bringing down the projection by around a whole one percentage point.

"As we look at the global GDP ... it's hard right now to see how we avoid a recession," Malpass, president of the global lender, said by the end of May. He gave no specific forecast.

Simon Baptist, the global chief economist at the Economist Intelligence Unit, said: “As the war in Ukraine and pandemic disruptions continue to wreak havoc on supply chains, stagflation is here to stay - marked by low growth and high inflation for at least the next 12 months.”

The question remains - will Bangladesh slide into a recession with the rest of the world or will it be able to regain the pre-pandemic level of economic growth?

Dr Selim Raihan, executive director at research organisation SANEM, said the collective economic stability Bangladesh acquired over the past one and a half decades is under huge pressure due to the global financial unease.

“The Russia-Ukraine war is the main reason behind it. The war caused prices of food products, fuel and raw materials to go up.”

He thinks the challenge Bangladesh faces now is bigger than that of the pandemic.

‘NO FEAR’ IN GDP GROWTH

GDP growth measures the increase of total year-on-year production for a specific period of time, indicating the expansion of a country’s economy. If the total production decreases any year, the economy is compressed, leading the growth rate to drop below zero, which is generally called a recession.

Bangladesh achieved a record 8.15 per cent growth in 2018-19 fiscal year. The emergence of COVID-19 brought the growth down to 3.45 per cent in 2019-20 financial year. The economic growth then accelerated by 6.94 per cent in 2020-21 fiscal year.

Last month, the Bangladesh Bureau of Statistics or BBS estimated that the economy has overcome the hurdles of the pandemic and is going to, once again, cross 7 per cent GDP growth.

The estimate does not forecast the risk of Bangladesh slipping into recession.

Planning Minister MA Mannan said the BBS gave a provisional growth estimate taking the first nine months, July 2021 to March 2022, into account.

“Real GDP growth has hit 7.25 per cent in the ongoing fiscal year, according to a provisional estimate,” Mannan said.

Binayak Sen, director general at BIDS, doubts the projection. He said it might not be possible to achieve the estimated growth.

“Investment in Bangladesh went down during the pandemic. We had just begun recovering from that when Russia and Ukraine engaged in war.”

“This has caused the prices of different commodities, including food, to rise on the international market. This will greatly impede our growth and social security.”

The World Bank in a report last month reflected similar findings.

INFLATION A THORN

Inflation has become a huge cause for concern amid the rising prices of commodities. The 6.29 per cent inflation in April is the highest in 18 months.

Some varieties of rice got costlier by Tk 10 in the space of a month in Bangladesh and the prices of other products remain unstable.

The government set a target of keeping the average inflation within 5.3 per cent in the current fiscal year, but the Asian Development Bank predicts it will stay above 6 per cent at the end of the year.

Selim Raihan said, “Inflation is under massive pressure. Import-reliant inflation is one of the factors. Over the past decade, there was little worry about the value of the taka which was being adjusted by raising or reducing the flow of dollars into the market. But that, too, is now under the pump.”

Economist Murshid suggested more attention to agriculture and social security to manage the pressure in the coming weeks and months.

RESERVES

The central bank is struggling to prevent the reserves from depleting due to the rise in the value of the dollar. The Bangladesh Bank came under criticism for revising dollar prices four times over the past two months. On Thursday, it relinquished the reins of dollar prices to the open market.

Regulatory taxes have been imposed on the country’s dollar market to slash the demand for several imported goods, while incentives have been placed to encourage remittance inflow.

Zaid Bakht, a former BIDS research director, thinks there is no cause to sweat over the pressure on the economy.

“The economy is under some strain. The pandemic affected it for two years and now there’s the war. Products are now hard to find and priced higher. There definitely are some problems. But I don’t see a reason to be upset considering the current strength of our economy.”

Dr Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, is also unhinged by the prospects of an economic crisis in Bangladesh.

“The key challenge now is controlling inflation. We've to take necessary measures to be able to do that.”

OTHER INDICES

Analysts think aside from the rise of the dollar, a decline in reserves, an increase in inflation, and a deficit in the current account balance of foreign transactions, other economic indices remain positive.

The government collected Tk 2.27 trillion in revenues until April this fiscal year to reach 69 per cent of the target and register a 15.27 per cent year-on-year growth.

In the same period, Bangladesh imported $73 billion worth of goods - a 41 per cent year-on-year rise. Exports stood at $43.34 billion at the same time, growing by 35.14 per cent year on year.

However, the huge difference between exports and imports has led to a $14.07 billion deficit in the balance of payments until March of this fiscal year.

From July to May of this financial year, $19.19 billion entered Bangladesh in remittances, which is 15.95 per cent lower than the same period last year.

Bangladesh’s foreign currency reserves reached $48 billion in August last year but have slipped to $42 billion now due to the simultaneous rise of imports and the dollar. Analysts, however, see the current reserves, which can meet import costs for six months, as comforting.

The government announced that the per capita income in Bangladesh will reach $2,824 at the end of this financial year, improving from last year’s $2,591.

It took Bangladesh 40 years to achieve $1,000 per capita income but it accelerated by 180 per cent in the 10 years that followed.

The BBS estimates that Bangladesh’s GDP will reach $465 billion at the end of 2021-22 financial year to enter the top 40 largest economies in the world.

The Bangladesh Bank accounts that credit flow to Bangladesh's private sector grew 12.48 per cent until April this fiscal year. The government’s foreign debt stood at $90.79 billion as of December last year while domestic debt was Tk 6.17 trillion until March.

According to International Labour Organization, as many as 3.6 million people will be left unemployed in 2022, which is 500,000 more than the previous year.

In the first six months of the fiscal year, foreign investment stood at $21.58 billion, which is 12.9 per cent more than the same period the year before.

WHAT EXPERTS SAY

Zaid Bakht said, “Our economy is recovering at a fast pace, the credit growth of the private sector is around 12 per cent. We're importing too much. Why is this happening?”

“Have the businessmen lost their minds? They have their calculations. They can see that good times are ahead. So they're investing, expanding. The banks are giving out credits. Rather there’s a shortage of liquidity in the banks now.”

“We'll definitely be in a good position once we recover,” he said.

Selim Raihan added, “We can see now that remittances are declining despite growth in exports. There’s a leap in imports. Overall, the demand for dollars has risen a lot in the country.

“The existing economic challenges, as in employment generation, inclusive growth, recovery from the pandemic, inflation, rise of dollar value and imports, and a fall in remittances are causing additional pressure.”

The average inflation over the last six months of this fiscal year is almost 6 per cent. The government revised the original target of inflation from 5.3 per cent to 5.8 per cent.

Zahid Hussain suggested increasing subsidies in the food and power sectors to control inflation and safeguard the marginalised people from its impact.

The former World Bank economist said the hike in prices of food and fuel on the international market caused import costs to increase. Imports will go down once the prices of these commodities drop, he said.

He also advised providing government policy support for import-dependent commodities. “Inflation can mostly be kept under control if the government can execute these tactics with prudence.”