Currency, BoP odds affecting economy

Global supply-chain disruptions and price hikes amid aggressive policy-rate raise by the US Fed are creating serious global uncertainties affecting Bangladesh's economy, too, says the central bank.

"Exchange-rate pressures due to high import prices and subsequent balance-of-payments adversities are prominent (in domestic economy)," the Bangladesh Bank says in a quarterly financial-review report released Wednesday, predicting further economic shocks.

The publication acknowledges multidimensional challenges that have emerged in the economy as a result of the ongoing Russia-Ukraine war and its spillover effects on commodity and financial markets, trade flows, and exchange rates.

As such, the central bank is extending necessary policy measures to contain demand while supporting supply-and production-enhancing activities in tackling the ongoing inflationary and exchange-rate pressures.

The quarterly, prepared for the period of April-June 2022, however, shows headline consumer-price index inflation (point to point) having 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 a notable depreciation of the local currency or BDT.

The rise in inflation, particularly food inflation, hit hard rural areas, with a disproportionately higher impact on lower-income groups, the BB quarterly review notes.

"Elevated global commodity and energy prices created significant challenges to the external sector during last fiscal year by pushing import payments up, which outstripped the rise in export earnings," it also notes.

The latest publication of the BB says growing trade deficit, in tandem with relatively moderate remittance inflows, resulted in a surge in the current-account deficit to US$ 18.7 billion in FY22, surpassing the surplus in the capital and financial account.

"The resulting large deficit in the balance of payments (BoP) exerted depreciation pressure on the foreign-exchange market."

To limit excessive exchange-rate volatility BB intervened in the foreign-exchange market with net sales of around USD 7.4 billion in FY22.

Liquidity in the banking system maintained mostly a downward trend throughout the fiscal year, mainly because of a partially sterilized intervention in the foreign-exchange market coupled with a rising growth of private-sector credits and a declining deposit growth.

"As a result, the foreign-exchange reserves declined to USD 41.8 billion at the end of FY22 from USD 46.4 billion at the end of FY21."

Among the indicators related to the performance of the banking sector, a rise in non-performing loans and provisioning shortfall on the one hand and advancement in profitability and maintaining adequate liquidity on the other reflected a mixed performance of the industry at the end of FY22.

The capital market witnessed some volatility with a downtrend in Q4FY22, reflected in a downturn in price indices, market capitalization, and turnover. The weak performance can be attributed to a downturn in the share-price index in emerging market economies, commodity-price instability in both global and domestic markets, sharp depreciation of BDT against USD, and fiscal tightening in advanced economies.

Compounding adverse effects of elevated global commodity and energy prices, recent upward adjustment of petroleum and fertiliser prices on the domestic market, and a significant depreciation of BDT against USD could intensify the cost-push shocks to the economy.

Moreover, several measures to limit unnecessary and luxury imports, rationing power supply, and austerity policy of the government might provide some respite in terms of containing local demand.

The government and the BB continued their supportive measures, including stimulus packages and refinance schemes for the productive sectors of the economy in improving the supply side to maintain price stability while keeping the growth momentum going.

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