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The question conveyed by the above caption does not beg for an answer, because it is obvious. Given the unfolding global economic scenario, it is not a question if challenges and uncertainties face the policy makers in Bangladesh at present but what are their dimensions and implications. Do they portend an inevitable slide in to 'crisis' or embody simply a temporary hiccup that can be weathered without testing the limits of fiscal and monetary policies and other options open to the government? The answer will depend on what is meant by economic crisis.
The common sense definition of an economic crisis in an economy like Bangladesh is when growth rate regresses by 50 per cent or more of the average trend in preceding normal years, the price inflation goes beyond 10 per cent, the country has less than two months' foreign exchange reserves required to meet import payments and the country is unable to repay its foreign debts. The definition is not a text book one and, ipso facto, arbitrary. With the help of this definition let us look at the headwinds or challenges that have manifested through the indicators mentioned.
The impressive growth rate posted by Bangladesh economy during the past decade, cruising around 8 per cent, received a sudden and major set back during the pandemic of 2020-21, declining to 3.5 per cent. Since then it has made steady recovery, creeping to regain the lost momentum, reaching 6 per cent during last fiscal. For the current fiscal (FY23) the government has fixed the rate at 8 per cent but multilateral institutions ( World Bank, IMF, ADB) have estimated it to be between 6 and 6.5 per cent. In view of the economic uncertainties and challenges on various fronts, the growth rate may end up between 5.5 and 6.0 per cent by the end of the current fiscal year. It will be less than the desired or expected but not a major setback signalling reversal of the growth momentum. Like most economies in the world, Bangladesh economy will slow down during the current global economic turbulence, lagging behind the previous high water mark of 8.5 per cent annual growth of Gross Domestic Product (GDP). This is not the same as in an economic crisis when an economy registers negative economic growth. The resilience of Bangladesh economy to maintain a minimum positive growth, however, will depend on the duration of the global economic crisis originating in America and Europe, particularly the war in Ukraine. If the war continues beyond six months, all bets will be off, not only for Bangladesh but for almost all countries.
Inflation rate is a reliable bellwether of economic crisis because it not only indicates the state of cost of living but also measures the difference between nominal and real growth of the economy. The quarterly review report, prepared by the Bangladesh Bureau of Statistics (BBS), shows that the headline consumer price index (point to point) increased to 7.56 per cent in June, 2022, up 1.34 percentage points from March 2022, with a faster rise in food inflation, driven mainly by the pass-through of global commodity prices and depreciation of Bangladesh taka (BDT), caused by deficit in current account of the balance of payment. Even after making allowance for the tradition of estimating the figure on the lower side by the BBS, the incidence of inflation can be safely assumed to be below the threshold level of 10 per cent at present. But the upward pressure on it will continue till the exogenous factors (appreciation of dollar, increase in prices of trade able goods and services in global markets etc) behind it remain active and strong. In fact, rate of inflation jumped to 9.52 per cent in August and then came down to 9.10 per cent in September. It dropped slightly further in October to 8.91 per cent.
As regards the third indicator, foreign exchange reserves, the present amount after meeting the latest payment obligations, is estimated to be little over US$35 billion. At the current level of US$7.0 billion required for monthly payment of import bills and US$1.0 billion ( approx) for debt servicing, the present reserve is well above the safe limit of payment capacity for two months' of import bills, leaving enough to meet monthly debt servicing of US$1 billion that may fall due.
So, as of now, neither the present level of inflation nor the foreign exchange reserves, indicate that Bangladesh economy is in the midst of a crisis. But this does not mean that a crisis is not looming in the horizon. When almost every country is facing economic crisis of varying magnitudes due to turbulence in the global economy, Bangladesh cannot be above vulnerability. Recognising this is important because the economic turbulence originating abroad and transmitted to Bangladesh economy through global integration cannot be stopped by monetary and fiscal policies but policy measures can be taken by Bangladesh government to mitigate its egregious effects. This implies becoming fully aware of the urgency of the situation and using all policy instruments to forestall the worst from happening. It is not the time for either breast beating for past achievements or for scare mongering, crying 'wolf'.
CHALLENGES FOR THE POLICYMAKERS: The first thing in order for policy makers is to identify the challenges in various sectors of the economy in concrete terms along with the factors behind those, essay their magnitudes, formulate policy measures in a concerted manner (not piecemeal by ministries) and monitor the enforcements of policy measures taken. Since the exogenous factors are still evolving, the policy measures taken will require fine tuning on regular basis. An overview of the challenges now facing Bangladesh economy, accompanied with discussion of policy measures taken is given below.
Both import and export volumes and values fell during the pandemic of 2020-2021, the former more precipitously. After the deceleration of pandemic and resumption of normal economic activities and normal consumer expenditures, imports began to surge. But it was not the volume of imports but their values (prices) that became notable and exceptional. The prices of almost all imported items showed higher levels than before the pandemic. This was explained by supply chain dislocations and higher fare charged by shippers and freight-ship owners. Higher prices of imported goods became a global phenomenon and a legacy of the pandemic- period economic recession (it has not been christened as such). All import-dependent countries, including Bangladesh, experienced growing pressure on their current accounts of balance of payments with deficits bulging by leaps and bounds. Bangladesh economy, chronically having to absorb a moderate deficit in the current account, suddenly faced a humongous growth in the amount of the deficit at the end of the 2021-2022 fiscal. Letters of credit amounting US$ 89.16 billion were opened during 2021-2022, which was a record. At the end of the fiscal year, the deficit in current account amounted to $18.69 billion. The overall balance of payment in FY22 ended with a deficit of 5.38 billion dollar. The government tried to stem the volume of imports by restricting non- essential items and advised banks through Bangladesh Bank to require higher margin from importers for opening letters of credit. Still, according to figures of Bangladesh Bank, the deficits in balance of payment and current account have increased during the first quarter of present fiscal (July-September, 2022) compared to the corresponding period in the last fiscal, $36.1 billion against $25.4 billion. It means quantitative and regulatory controls have not been effective in containing the volume of imports so far. Policy measures to address this problem have to be reviewed, strictly enforced and closely monitored. It seems a sense of urgency is yet to dawn upon the field level officials and staff. It also implies a lack of supervision at higher level.
The balance of payments account have shown growing deficit not only for higher prices of imports but also because of static or lower growth in the amount earned in exports and wage earners' remittances. According to Bangladesh Bank figures, both exports and remittances declined by 7 per cent during the first quarter of FY23.To meet this deficit, $5 billion have been sold from the foreign exchange reserves decreasing the latter to $35.73 billion at the end of October, 2022. The reserves stood at $45 billion in August last year. The slower rate of replenishment of reserves compared to the outflow, though not alarming as of now, is a matter of concern.
To improve the balance of payment account on the income side, the volume and value of exports and amount of remittances have to be increased. With near recession prevailing in the importing developed countries, increase in volume is feasible only if the competitive advantage of Bangladeshi exporters are increased, enabling the exporters to offer lower prices to buyers. The policy options for this have to be scrutinised item by item, a task the Export Promotion Bureau should carry out expeditiously and propose necessary policy decisions by fiscal and monetary authorities. Monetary authorities, including banks and foreign exchange dealers, have recently increased the exchange rate for exports to Tk 100 per dollar from its previous level of Tk 95.5 as incentives to exporters. But, for the near term (overlapping the war in Ukraine) no significant increase in either export volume or values can be expected. For this time frame, the policy goal should be to at least maintain the status quo in export earnings.
As regards the second most important source of foreign exchange earnings, remittances by wage earners, the current demand for foreign markets may hold on during medium, particularly in the middle- eastern countries which are the main destinations of migrant workers because of the bonanza they are earning after the Ukraine war. If there is global recession, the demand may weaken. So, for the near and medium term the policy goal should be to give incentive to migrant workers to send their earnings through formal banking channel. A decline in amounts remitted was noticed in the recent past when there was a widening difference between official exchange rate and the rate offered by unofficial foreign exchange (hundi) dealers. The recent decision by Bangladesh Bank to allow banks and association of foreign exchange dealers to jointly decide on the rate has somewhat improved the situation but this arrangement towards liberalising the management of foreign exchange rate has not yet given adequate incentive to wage earners in the middle- eastern countries to discourage them from using unofficial channel for remittance. According to a newspaper report, about 0.9 million workers who went to these countries recently seem to have made no contribution to remittance. Giving an example the newspaper has quoted Bangladesh Bank, saying that though over 0.5 million workers went to Saudi Arabia during the current fiscal (till September) remittance from that country declined by 30 per cent(Bonik Barta, November 01). Where has their money gone? Similarly worrying is the downward trend in remittance from other oil producing countries. The recent raise in the exchange rate for exporters has not coincided with similar raise for the benefit of wage earners. On the contrary, the association of foreign exchange dealers and association of banks decided on October 23 to lower the rate of inward remittances to Tk.107 from Tk 107.5 (The Financial Express, November 7). This is not very pragmatic, particularly at a time when the economy needs all the foreign exchange that is available . The policy makers need to pay more attention to this vital sector of the economy.
The challenge of coping with higher import bills was reflected through the turbulence in the foreign exchange market, particularly the rate of exchange between taka and the US dollar, the dominant foreign currency in the basket of currencies used by Bangladesh Bank. This rate had been managed by the central bank through periodic decisions about the rate, on the basis of market condition. The sudden increase in demand from importers for dollar to pay for import bills made the market so skittish that it became difficult for Bangladesh Bank to keep pace with the day to day changes in the foreign exchange market. After changing the taka-dollar exchange rate twelve times which saw taka equivalent to a dollar rising from Tk 85 to Tk 95, the central bank became wiser and allowed a semblance of freedom to market to decide on the exchange rate between taka and dollar. Since late September, the association of banks and association of foreign exchange dealers have been periodically fixing the rate, with Bangladesh Bank monitoring. The results have not been made public on a regular basis. But from occasional news published in papers it appears the new arrangement for determining a realistic rate of exchange between taka and dollar has yet to achieve the goal. But it is an improvement on the past practice of managed rate and should continue.
Since the shortage of dollar in the market is likely to persist in the short term and Bangladesh Bank has to inject money in to market from the reserves to meet the continuing demand arising from imports, it should require banks to get approval before opening letters of credit. This step will bureaucratise foreign trade in private sector but under the circumstances it may be helpful in tamping down demand for imports through second- guessing by a regulatory body.
The main driver of inflation and consequent pressure on foreign exchange reserves has been the import of crude oil which has remained high (above 95 dollars per barrel) after the Ukraine war, particularly following decision by OPEC-plus not to increase production. 'Import' of inflation through crude oil has raised the question as to why exploration of oil and gas has not been given top priority. Has the oil importing lobby played any part in slowing down exploration of oil and delayed supply of gas from Bhola gas field? The question has been raised. Be that as it may, exploration of oil and gas must proceed wit he greatest urgency that the government can command.
Bangladesh government has already requested multilateral institutions for loans as budgetary and balance of payment support. Negotiations are afoot to avail the same and if approved soon the reserves can be expected to be augmented by $8 to $9 billion dollars, raising the reserves above $40 billion. With reasonable export earnings and remittances added to this during the rest of the current fiscal, Bangladesh economy can meet the challenges it faces in meeting the import requirements and debt servicing obligations. But with global inflation running amok, foreign exchange can continue to be a serious headache for import- dependent countries like Bangladesh.
As regards the problem of increasing inflationary pressure, its origin being outside the country, very little can be achieved through tweaking monetary policy. But a contractionary fiscal policy can reduce the pressure on price levels somewhat by curtailing non- essential public expenditures. However, the brunt of the austerity measures adopted should not be made to be borne by the low income earners. On the contrary, social safety net programmes should be expanded to give the poor and low income earners relief from the rising cost of living. Tight fiscal policy should not mean a reduced role of the state in ensuring basic needs to the people. In this respect, government can modify the systems of paying subsidy through targeting the people who need them most.
No, Bangladesh is not in the midst of an economic crisis. It is not likely to be so in the near future, provided necessary measures are taken now. It is a very important proviso, unlike any in the past. What is needed most urgently now is not public pronouncements ( which can become self-fulfilling) about how healthy the economy is and to whose credit it is due, but policy measures taken on emergency basis and their diligent enforcement on the ground. The challenges that Bangladesh economy faces at present are neither those of underdevelopment, nor of 'a test case' but those of a market economy integrated into a globalised capitalist system where the 'centre' still dominates the 'periphery' through trade and transfer of capital. The shocks to which Bangladesh economy is exposed having their origin outside the country, there is not much that can be done by way of controlling the causes. The challenges to policy makers are, therefore, reduced to managing the effects of the shocks successfully at a minimum cost. Needless to say, here time is of the essence.