Another fresh year starts today with many negative features. However, there will also be no dearth of enthusiasm to overcome the various economic challenges. From the domestic to the global front, there is no doubt that economic outlook for 2023 is going to be rather depressing. Growth will be lower and recession is likely to be widespread. Inflation has already reached a dangerous level and there is no indication that it will get subdued too soon. Unemployment is also rising. All these possibilities have left policymakers, economists and business leaders unsure of what to expect and how to prepare for 2023.
Against such backdrop, underestimating the scale of the economic challenges will be a grave mistake which may bring serious consequences for an economy like Bangladesh where inflation, unemployment and disparity--all three--are quite high.
Inflation, both food and non-food, is a matter of serious concern globally these days. In the just-concluded year, central banks across the world will aggressively raise policy rates to cool the mercury of inflation while fiscal authorities apply tax and tariff measures to support the move. The battle against inflation will continue in the current year as food and fuel become scarcer, pushing up the price indices further. Annual average rate of inflation reached 7.48 per cent in November last which was 6.15 per cent in June. The high rate of inflation will continue to affect both spending and saving habits, especially, of the low-income people of Bangladesh. Though food scarcity is nothing new in the world, the current one is different, argues the United Nations Conference on Trade and Development (UNCTAD). In its report titled 'Double Burden', the UN agency said that triggered by the Covid-19 pandemic and the war in Ukraine, the current food crisis is different due to a stronger US dollar. During the previous crises, the value of the US dollar usually declined as food prices climbed. It had provided some relief for the food-importing countries. This time, the US dollar has become stronger which ultimately increased the import bills of developing countries. Higher food price coupled with stronger dollar makes the import quite expensive and even difficult for many countries.
Bangladesh has already sustained a big blow from stronger dollar as its local currency depreciated significantly in 2022 and the foreign-exchange market also became volatile. As a result, imports become costlier and higher global price is channelled into the country though imports. Thus, the country has also been troubled by the imported inflation and the central bank stepped in to curb the pressure by restricting non-essential imports.
If the US dollar becomes strong further in the coming months, it will be more difficult for Bangladesh to maintain stability of the foreign-exchange market. Trade deficit crossed US$9.50 billion in the first four months of the current fiscal year (FY23) and current-account deficit reached US$4.50 billion in the same period. Despite double- digit growth in export earnings in the first five months (July-November) of FY23, it is not adequate to ease the pressure on exchange rate. Slowdown in remittance earnings, which registered only 2.14-percent growth in July-November period of 2022, already exerted pressure on the foreign- exchange reserves. In fact, the forex reserves came down below $36 billion at the end of November, showing the weakness of reserve management. The overall pressure on external sector may continue into the first quarter of 2023 and ease in the second quarter provided that the global economic situation will have been improved and local demand dampened to some extent.
Another major risk for Bangladesh economy is the volatile energy market. Due to winter season, demand for electricity is low now. By the end of February next, the situation will start to change. Increasing demand will create pressure on import-dependent power generation and load-shedding may return as there is no significant improvement in the current energy crunch. The crisis is no short-term one, as labeled by some of the policymakers, but a medium-to long-term crisis for the country. Industrial output may also face disruption, which will be costly in the long run.
As the just-concluded year was a terrible one for the country's banking sector, it will be a big challenge to fix the sector in 2023. Over the years, a number of commercial banks have become weak owing to poor governance and undue intervention. High amount of default loan coupled with poor performance in other indicators reflects the weak banking sector. Vulnerabilities of some leading and well-known commercial banks were also exposed in the past year. It gave a shockwave to the financial sector, which may blow up further in the new year. It is known to all that without reducing default loans, the capital adequacy of banks cannot be improved since higher default loans usually lead to increased provisioning requirements and ultimately shortfall in capital. An estimation of the Centre for Policy Dialogue (CPD) shows that total volume of default loans has increased more than three times in the last 10 years. It was Tk 427.25 billion in June 2012 which increased to Tk 1,343.96 billion in September 2023.
It is to see how the government and the central bank act to address the problems in the banking sector and restore the business confidence. The trouble in the banking sector largely originated domestically over the last decade and nothing to do with the current global crisis. Policymakers' indifference to the vulnerabilities in the banking sector makes things worse. Now, it becomes core challenge in 2023 for the sake of maintaining macroeconomic stability and sustainable growth in the near future.