Bangladesh economy: weathering the storm, containing the risks

The national budget for FY2023-24 (FY24) will be the last budget prepared by the incumbent government prior to the upcoming national elections. It is being prepared amidst a number of disquieting developments - both at the global and domestic fronts. The Bangladesh development narrative, with its impressive success in terms of economic performance and commendable progress in terms of key socio-economic indicators, have come under scrutiny in view of the developments of recent times. The challenge facing the economy is to restore macroeconomic stability, consolidate the gains of the past, and adjust to new realities keeping the growth and stability trade-off in the perspective. The upcoming FY2024 budget will need to address these attendant concerns amid election-related uncertainties. This will require renewed efforts towards raising the quality of macro-fiscal planning and management which, in turn, will require some hard choices on the part of the policymakers.
In this backdrop, a comprehensive paper of the Center for Policy Dialogue (CPD) focuses on six areas: (a) macroeconomic management; (b) fiscal framework; (c) prices of commodities; (d) subsidies; (e) health and education; and (f) environmental concerns. The paper highlights some of the key challenges in these areas which require immediate and heightened policy attention, particularly from the macro-fiscal management viewpoint, using the latest available data from official and credible international sources. Finally, this report puts forward a set of recommendations which might be considered by the policymakers while formulating the national budget for FY2024. The analyses and recommendations presented by this report may also inform the electoral debates subsequent to the national budget.
The current article, a part of the full paper, discusses the macroeconomic management situation of the country.
KEY TRENDS IN MACROECONOMIC CORRELATES: As FY23 commenced its journey in July 2022, it became evident that the Bangladesh economy would be under severe stress. At a time when the economy was coming out of the worst impacts of Covid-19, the adverse consequences of global price hikes following the war in Ukraine began to be felt on various correlates of the Bangladesh economy. CPD, in July 2022, had cautioned that the emergent macroeconomic pressure would not be short-term in nature and would be exacerbated by embedded structural weaknesses. Macroeconomic instability has remained endemic and a matter of great concern throughout the ongoing fiscal year of FY2023. While adverse impacts of economic headwinds, currency pressure and soaring commodity prices have started to recede in most Asian economies, as the economies took measures to adjust to the new normal, the Bangladesh scenario remained distanced. Indeed, the headline macroeconomic trends in the country evince cautionary signals. As the government prepares to present the national budget for the upcoming FY2024, it is important to acknowledge the changing trends of macroeconomic correlates and identify the elements of the emerging tensions and pursue a coordinated policy package. It needs also be recognised that Bangladesh is currently under an International Monetary Fund (IMF) programme, which would call for undertaking adjustments in the macroeconomic targets and defining some of the critical policy choices. 
Shrinking fiscal space in the backdrop of a lack of momentum in revenue mobilisation. Total revenue collection declined by (-) 3.1 per cent during the first half of FY23, driven primarily by the reduced tax collection by the National Board of Revenue (NBR). It is rather surprising that despite the rising commodity prices and substantial depreciation of the Bangladeshi Taka (BDT), the collection of value added tax (VAT) was substantially lower in the stated period compared to the previous year. While NBR has kept trying to boost revenue collection, a number of factors have militated against its declared objectives. From the very outset, the government took a cautionary approach towards spending budgetary allocations for Annual Development Project (ADP) projects. This was perhaps one of the reasons for the reduced revenue collection. However, the key reason is more likely to be the slowing economic activities resulting in limited revenue collection since no significant proactive administrative and institutional measures were undertaken. The tightening of imports not only reduced the scope for indirect tax collection at the external stage but also hampered production for the domestic market and consequently led to lowered tax collection at the local level. It is more likely that the IMF's condition (as part of the quantitative performance criteria and indicative targets for the first two reviews) to generate Tk. 3,456.5 billion in FY2023 as tax revenue would remain unmet.
Budget deficit financing relied highly on borrowings from the central bank. Shrinking fiscal space arising from lower revenue mobilisation has forced the government to go for restraining public expenditure. In spite of this, the budget deficit remained higher in the first half of FY23 compared to FY22. More importantly, the government's options for financing of budget deficit were limited to borrowing from the central bank. Foreign financing (both loan and grants components) did not make any significant improvement, while net sales of NSD certificates was negative as encashment exceeded new sales (to the tune of (-) Tk 30.65 billion), implying that the government borrowed less than what it repaid. Gross sales of NSD certificates declined (by Tk. 128.36 billion during the first seven months of FY23), while repayments increased (by Tk 23.95 billion). More stringent administrative measures (such as the requirement to present income tax return certificates for purchasing NSD certificates), lowered interest rates, dissaving, and the reduced ability of middle-income investors to save in the backdrop of declining purchasing power have contributed to this scenario in all likelihood. 
Since cash-strapped scheduled banks were unable to provide loans, the government was compelled to resort to the central bank to finance the budget deficit. According to the Bangladesh Bank data, the government borrowed about Tk 512.66 billion from the central bank during the first half of FY23 and repaid about Tk 207.35 billion in net terms to the scheduled banks. On the other hand, it is also to be noted that the central bank also retracted a substantial amount of BDT from the market as it sold a substantial amount of foreign exchange during this fiscal year (US$ 10.5 billion as of March 15, 2023). As a result, both broad money supply and reserve money growth rates are within the programmed limits. However, continued borrowing from the central bank will not be advisable as it may lead to added inflationary pressure. Regrettably, in view of the current trends, the government may not have many options as the budget deficit and its financing demand is set to rise during the latter months of the fiscal year.
The liquidity position of scheduled banks tightened amid deteriorating financial sector governance. According to the Bangladesh Bank data, during the first seven months, overall liquidity in the banking system had declined sharply (by Tk 665.81 billion). Indeed, the Islami banks as a group could not meet the total minimum liquidity requirement by the end of January 2023. Significant mal-governance and lack of prudential management were the reasons. Bangladesh Bank introduced a new tool to extend liquidity support to cash-strapped Islami banks, namely Mudarabah Liquidity Support (MLS), with a view to cushioning the banks' ailing financial health. The space also declined sharply for state-owned commercial banks and private commercial banks (as groups) as well. At the same time, with declining purchasing power and lowered propensity to save, currency in circulation outside banks increased by 24.1 per cent by the end of January 2023 (to the tune of Tk 512.16 billion).
It has now emerged as urgency that the central bank intervenes to change the current system of administered interest rates and embraces a market-based interest rate regime. The central bank has committed to IMF to adopt an interest rate corridor system with a view to enhancing monetary operations by the end of July 2023. Indeed, CPD has been arguing for some time that the central bank should opt for a market-determined interest rate regime in view of rising inflation and the tight liquidity situation. Recently, Moody's, one of the most reputed global rating agencies, downgraded its outlook for the sector in Bangladesh from "stable" to "negative". The issue of establishing good governance in the banking sector of Bangladesh and pursuing the needed reforms to this end is long overdue. Indeed, the central bank and MoF are committed to the IMF to implement three major reform activities in this regard. These are: (i) Bangladesh Bank completes the pilot risk-based supervision action plan to establish risk-based banking supervision by the end of June 2023; (ii) MoF submits to the Parliament the Bank Companies (Amendment) Act 2020 and the Finance Companies Act 2020, drafted in line with the best practices, to upgrade legal and regulatory framework by the end of September 2023; and (iii) Bangladesh Bank publishes banks' distressed assets in the annual financial stability report to support resolution of non-performing loans (NPL) and take measures to enhance transparency by the end of June 2023. [The NPL in Bangladesh continued to be high. Indeed, if the Basel III requirements are applied, the NPL will be significantly higher.] These reforms should be carried out in an unbiased professional manner ignoring the pressure from vested groups and keeping the best interest of the banking sector in mind. Besides, urgent steps must be taken to expedite legal steps against financial misappropriations in the banking sector and the wilful defaulters. One recalls here that CPD has been urging for setting up an independent Banking Commission, which would be mandated to propose a set of actions that would then be implemented in a time-bound manner. 
Despite some relief at the global level, there is no respite from rising commodity prices. Headline inflation at the global level has begun to ease. According to OECD data, headline inflation in G-20 countries is expected to decline from 8.1 per cent in 2022 to 5.9 per cent in 2023, while in G-7 countries, it is predicted to decline from 6.4 per cent in 2022 to 4.4 per cent in 2023. According to World Bank Commodity Price data, international prices of 10 major selected imported commodities for Bangladesh recorded significant declines. Regrettably, the falling global commodity prices were not reflected in commodity prices in Bangladesh domestic market. It is true that during this period, BDT also experienced a record depreciation (about 17.3 per cent, according to the Bangladesh Bank data). Also, the government made significant upward adjustments to the prices of petroleum products and electricity, which may have contributed to the upward pressure of commodity prices in Bangladesh. However, considering all relevant factors, it is hard to justify the high level of prices in the country. Weak market and supply chain management, manipulation in the market, syndication, lax enforcement of laws and regulations and weak institutional capacities have combined to lead to this situation.
The government is committed to IMF to adopt a periodic formula-based price adjustment mechanism for petroleum products by the end of December 2023. As the government prepares for this major policy reform, it is critically important that this exercise is carried out in an inclusive and transparent manner. The policy agenda must include an institutional efficiency audit of the monopoly operations of the Bangladesh Petroleum Corporation (BPC) and other state-owned entities associated with contracts, import and distribution. The prevailing tax structure applied at the import stage for these critical intermediate, and final products will need to adjusted in line with the government's overall tariff policy and cross-country practices. 
Despite tightening imports, balance of payments remains at risk. The sharp deterioration in the balance of payments resulting in a drastic decline in foreign exchange reserves and significant depreciation of the BDT is one of the most distressing signals witnessed by the Bangladesh economy in recent past years. During the first seven months of FY23, the deficit in overall balance reached USD 7.4 billion. Over the last months, there has been a conscious effort to curb imports along with the significant depreciation of BDT. Payments for merchandise import shipment declined by (-) 5.7 per cent during the July-January period of FY23. Opening of letter of credit (L/C) also declined by (-) 22.5 per cent during the first half of FY2023. On the other hand, after recording an impressive growth of 34.4 per cent in FY22, the export earnings continued to grow in FY23 amid the fragile global environment. During the July-February period of FY23, the growth of export earnings was 9.6 per cent. However, this is solely driven by the growth attained by the ready-made garment (RMG) products (14.1 per cent). It is a worrying sign to find that combined export earnings from non-RMG products have come down by (-) 9.9 per cent. It is surprising to find that the sharp depreciation of BDT, which should have enhanced their competitive strength significantly, had failed to be realised in export terms. This is even more surprising in view of the fact that unlike the RMG, where the local value addition is relatively low, in the case of these products, domestic value addition is notably higher. 
Remittance inflow continued to remain in positive terrain, albeit demonstrating a lower growth, recording a 4.3 per cent growth during the July-February period of FY2023. At the same time, the growth of overseas migration was far more impressive - about 27.5 per cent. Indeed, the average number of Bangladeshi workers going abroad per month was 91,741 during the first eight months of FY23, an unprecedented number, which was 71,957 during the corresponding period of FY2022. In this backdrop, apprehensions about an increasing inflow of remittance through informal channels have been gaining traction in recent times. Curiously, despite having a large surge in overseas employment of Bangladeshi workers going to middle eastern countries, remittance inflow from this region has failed to correspond to the rising number of migrant workers. Other possible sources of foreign exchange inflow also do not evince any significant positive picture. Despite improvement in the implementation of the project aid component of ADP in BDT terms, foreign aid inflow was lower in FY23. Indeed, in USD terms, net foreign aid declined by (-) 12.2 per cent during the first seven months of FY23. Apparently, the required emphasis was not given as regards higher utilisation of the committed foreign aid. While net foreign direct investment (FDI) posted a small positive growth (4.1 per cent), concerns remain in the area of (net) trade credit as this component of the balance of payments was found to be significantly negative [US$(-) 2.8 billion]. In the context of the balance of payments scenario, the financial account has emerged as a key concern, and all the elements here will need to be kept under constant scrutiny and monitoring. 
In view of the deficit in the overall balance of payments, the foreign exchange reserves declined by USD 10.5 billion (as of March 22, 2023) during this fiscal year. According to the IMF conditionalities, the Bangladesh Bank will need to compile and report official reserve assets as per the Balance of Payment Manual of the IMF (Sixth Edition) definition to improve transparency and reporting standards. This will have to be done by the end of June 2023, to which the Bangladesh Bank has agreed. It is likely that following this revision, it will be clear that the central bank will not have much room to pump foreign exchange and may have no other option but to allow BDT to depreciate as the on-going pressure on the balance of payments is likely to continue. Indeed, the risks manifested in external sector correlates are far from over. Since global prices have come down in recent months, it will help the government ease some of the prevailing import restrictions in the coming months. However, since the amount of deferred payments from both the public and private sectors is rather high, the pressure on the balance of payments is set to continue over the foreseeable future. It needs to be noted that the Bangladesh Bank will need to pursue a market-determined exchange rate for official foreign exchange transactions to enhance foreign exchange flexibility as part of IMF conditionalities by the end of June 2023. CPD has been arguing for a gradual move towards a market-determined exchange rate regime for quite some time now. This is already happening, although the way the exchange rate has taken the heat has hardly left anytime or space for the external sector to adjust. Now belatedly, the Bangladesh Bank has reacted to the reality, and it will need to go further. Indeed, the central bank should immediately opt for a market-determined exchange rate without further delay. It should also undertake an in-depth study as regards its ramifications on debt servicing, inflation and the balance of payments and strategise as regards flanking measures that will need to be undertaken. 
TAKE PREPARATION TOWARDS MACROECONOMIC MANAGEMENT IN DIFFICULT TIMES: The aforesaid trends in macroeconomic correlates suggest that the pressure points in the economy will continue over the coming months. The government in the past has tried to blame the war in Ukraine and the subsequent volatility in the global economy for the current situation. However, the crises in the Bangladesh economy accumulated over the years and were rooted in weaknesses in domestic policies, lack of good governance and inability to implement the needed reforms. Indeed, as the global economic situation is improving and global commodity prices are now coming down, there is hardly any room to blame the global volatility for the ongoing challenges confronting the Bangladesh economy.
As policymakers focus on the macroeconomic situation and policies, the implications for the general people and enterprises can and should not be ignored. The distress in the macroeconomic situation had a far-reaching negative impact on the development pathway of Bangladesh. In FY2023, the general people, particularly the fixed-income earning and low-income population groups, experienced significant erosion of purchasing power, impacting their well-being. They are compelled to opt for lower levels of consumption, depleting savings and curtailing expenses for education and health. The import restrictions have forced many enterprises to operate at significantly lower levels of capacity. The impact of import restrictions, along with the rising cost of doing business and the lower purchasing power of consumers, will have a long-term detrimental impact on business profitability and consumer welfare. The consequent impact on aggregate demand will have a negative knock-on impact on investment demand. Evidently, such negative consequences are much higher for smaller enterprises, be it in the manufacturing or in services sectors. Indeed, many enterprises may find it difficult to survive, and the economy may suffer from significant disinvestment.
If the macroeconomic instability continues, attracting fresh private investment will be difficult. The lower fiscal space has already forced the government to cut back on subsidies and overall public investment. The government's capacity to raise public expenditure on education, health and social safety net programmes will be limited in view of the shrinking fiscal space. The government will need to reprioritise public expenditure and opt for targeted fiscal measures. The national budget for FY2024 will need to be cognisant of this.
It is hard to predict the extent of the impact on the economy as data for the real economy is either unavailable or unreliable. Bangladesh Bureau of Statistics (BBS) is expected to publish quarterly Gross Domestic Product (GDP) estimates following the conditionality of the IMF beginning from the end of December 2023. The labour force data should also be made available at the earliest. This will help the policymakers assess the economic situation better and make informed policy decisions. This is particularly needed since the GDP data is often unsatisfactory. BBS has also recently conducted a household income and expenditure survey. However, how far the recent loss of purchasing power of the people arising from drastic price rises is captured in the survey will need to be considered.
Macroeconomic management in the coming months will be challenging. Policymakers will need to make hard choices. The fiscal, monetary and institutional policies will need to be reinforcing in nature. Macroeconomic management should be informed by the following three objectives: stability, discipline and consolidation. First, restoring macroeconomic stability should be the anchor of the macroeconomic policy stance. To this end, the government should immediately pursue market-based interest rates and exchange rates. Stabilising the prices of the essential commodities would require economic (e.g., tax and duty relief) and institutional (e.g., market monitoring and ensuring a competitive environment and enforcement of laws and regulations). Social protection measures for the low-income and fixed-income earning population groups should be given priority to ride over these turbulent times. Second, the government should make its best efforts to establish discipline in public expenditure by prioritising and ensuring good value for money. Also, discipline needs to be ensured in the banking sector by establishing good governance. The government should also closely examine the debt situation, which IMF has also emphasised. Debt management will call for consideration from both fiscal and external sector perspectives. The recent exchange rate fall would require much higher foreign debt servicing payments in BDT terms. Third, the government needs to consolidate domestic resource mobilisation and foreign exchange inflow. To this end, the utmost emphasis would be required to curb tax evasion and illicit financial flows. The foreign exchange inflow in all forms, be it export earnings, remittances through the official channels, foreign aid (commitment and utilisation), foreign grants for NGOs, and FDI, should be encouraged without exception. And lastly, policy formulation and implementation should be free from the capture of vested interest groups. The needs of the disadvantaged population groups will need to be met through adequate support programmes and speedy implementation of such declared initiatives as the 'family card'.

Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Towfiqul Islam Khan, Senior Research Fellow, CPD; Muntaseer Kamal, Research Fellow, CPD; Syed Yusuf Saadat, Research Fellow, CPD. [email protected]; [email protected]
[Abu Saleh Md. Shamim Alam Shibly, Tamim Ahmed, and Helen Mashiyat Preoty, Research Associates of CPD; Lubaba Reza and Mohammad Abu Tayeb Taki, Programme Associates of CPD also contributed to the piece which is based on CPD's Recommendations for the National Budget FY2023-24.]