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The International Monetary Fund (IMF) in its latest update has said the world economy is limping. This assessment is the aggregate of economic performances of all countries -- developing, developed and emerging. Bangladesh as a developing country, recently elevated to lower middle -income category, cannot be an exception to this global trend. Even though incipiently fragmented, we are still integrated into the globalised economy significantly enough to expose us to exogenous shocks. Sudden appearance of Black Swans like the Covid pandemic has made the vulnerability worse. With hindsight one can say that some policies in the macroeconomic domain were fraught, but that will be disengenuous. Policymakers did not have crystal ball before them while making decisions. What is to be scrutinised is the timeliness and adequacy of measures taken to keep the economy on an even keel in the face of turbulence.
Bangladesh tided over the Covid crisis more or less satisfactorily. Though the pandemic brought down a significant number of people below the poverty line, the economy was resilient enough to stage a steady recovery. No sooner the robust stride to regain the lost ground and move ahead had begun than the Ukraine war broke out, pulverising the global economy with oil and food supply shocks. International supply chains, battered by the pandemic, went haywire after the start of the war because its economic fallout was immediate and swift. Inflation, the bane of economic growth and daily living of the majority, raised its ugly head prompting central banks in the developed countries to switch monetary policy from quantitative easing to tightening, hiking policy rates in quick succession.
The above unforeseen changes in global economy have proved formidable for developing countries like Bangladesh where shrinking fiscal space and poor transmission of monetary policy make policymakers task difficult in the best of circumstances. In times of emergency like the present one, they are required to show their mettle in a manner that is commensurate with the task. To judge by the economic situation unfolding in recent months it cannot be said that they have taken the bull by its horns. Newspapers are coming out with screaming headlines about the economic challenge gradually morphing into a crisis. The World Bank and the IMF have recently revised their estimates on Bangladesh’s growth prospects for the current fiscal, 5.5 and 6.0 per cent respectively. One by one, all the three international credit rating agencies -- S&P, Moodys and Fitch -- have downgraded Bangladesh’s credit standing. The sense of urgency in the corridor of power called for in times like the present may be prevailing in the inner sanctum of power but it is not visible to the public. Granted, making too much of the economic headwinds may create panic and being discreet is the better part quiet policymaking. But the public needs to know whether an inter-ministerial task force has been formed to address the multi-sectoral problems in a co-ordinated manner. Working in independent silos in a routine manner cannot cope with the emergent situation.
The two most serious problems assailing the Bangladesh economy now are high inflation, steeply raising cost of living and dwindling foreign reserves, undermining the country’s credibility. Added to these are the lingering blight of non-performing loans, money laundering and growing public debt. In the macroeconomic realm, these are all interrelated.
For the incidence of inflation the policy makers cannot be faulted because this is the reflection of the global phenomenon transmitted through trade and finance. But this does not exonerate the policy makers from the failure to contain this within reasonable limit. According to the Bangladesh Bureau of Statistics (BBS) the general point-to-point inflation reached at 9.63 per cent in September with record food inflation of 12.54 per cent. It registered a fall of measly – 0.31 percentage points from the core inflation of 9.92 in August. Both the figures are a far cry from 6.0 per cent targeted in the budget for the current fiscal year (FY24). The current account deficit arising from greater volume of imports that fed into inflation was sought to be contained through quantitative control. This has worked to a point but not rigorously enough. Non-essentials like foreign chocolates, cereals, milk, biscuits, fresh fruits and clothes with brand names are still being imported with the only change that their prices are higher now. Controlling imports has also been hampered by knee-jerk reactions of the government to import food items like chilis, onions, potato and even eggs. Various syndicates that control wholesale markets and manipulate prices have never been hauled up for racketeering and as a consequence they operate with impunity. Microeconomic management has not received much attention from the government as it should have.
The other major source of inflationary pressure, the government’s continuing dependence on borrowing from Bangladesh Bank, has inflated the broad money supply in the economy, worsening headline inflation. According to Bangladesh Bank, the government has borrowed over Tk 9 billion so far during the current fiscal year in addition to borrowing from commercial banks. Neither economy in public spending nor mobilisation of revenue resources has been as it should be, creating fiscal crisis deeper. Purchase of new and expensive cars for officials, civil, military and police, have continued as if there is no resource constraint facing the economy Implementation of several mega projects with long gestation periods simultaneously have also contributed to inflation through injection of money in large volume. Some analysts have attributed cap on borrowing rate as a contributory factor behind inflation. But private sector credit from banks, languishing around 11-12 per cent, can hardly be a significant cause for near double digit inflation. Rather, it is a cause for concern in respect of private sector-led growth momentum, together with falling volume of imports of intermediate goods for industries.
More than inflation, the depletion of foreign currency reserves, particularly in dollar has caused much concern among observers and analysts. Allied to this is the continuous change in the exchange rate causing uncertainty and speculation about the future. In 2021 Bangladesh Bank had a reserve of US$ 48 billion which has shrunk now to $20.90 billion, as per IMF’s BPM-6 calculation method. But on the basis of net reserve calculated by BB meant for IMF use, the actual reserve is $17 billion dollar, just enough to cover import for three months. This is the rock bottom of reserve required to be maintained by a country. According to the agreement with IMF, BB was required to keep a reserve of $25.3 billion dollar in September last which has been defaulted causing concern.
Of course, foreign reserve is not a one way process of depletion. It is also replenished through export earnings, remittance by wage earners, foreign aid and loan and foreign direct investment (FDI). Export earnings during the first quarter of the current fiscal have been slightly higher (13 per cent) than in the corresponding period last year (9.4 per cent) but short of the target this year. Among exportable, only garment has posted an uptick, while exports of agricultural products, frozen and live fish, leather and leather products, jute and jute products and home textiles have declined. Remittance, the second biggest earner of foreign exchange, has been less than both the amount recorded last year and targeted for the current fiscal year. As the number of wage earners has been on the rise after Covid pandemic (1.3 million in FY23), this fall (13 per cent) in remittance is suspected to be the result of the difference between the managed and unofficial exchange rates. To resolve this problem the exchange rate should be allowed to be determined by market forces of demand and supply. This is likely to depreciate the value of taka further, making imports expensive and causing inflationary pressure. But with macroeconomic stability and prospects resting heavily on foreign exchange reserves now, this is the only pragmatic thing to do.
Non-performing loans (NPL) afflicting the financial sector is an old chestnut making headlines in print media and mentioned by analysts ad nauseam. Bangladesh Bank has done precious little to improve the situation, being at the beck and call of the finance ministry, its political boss. Unless the nexus between the financial sector and politics is severed the situation can only get worse before it gets better. According to a news item published in a Bengali daily, distressed loan (including NPL) stood at TK 1.86 trillion in 2018 which has ballooned to Tk 4.13 trillion till June 2023, making 26.79 per cent of disbursed loan distressed (Bonik Barta,15 October). According to IMF, ‘distressed’ loan includes classified, rescheduled and written-off loans. The World Bank estimated, using BB figures, that by the end of 2022 Tk 1.20 trillion belonged to the category of NPL. Delegating power to banks to re-schedule their outstanding loans, taking only 2 per cent (instead of previously 30 per cent) of defaulted loan, BB has indirectly encouraged borrowers to default, increasing the volume of non-performing loans.
Like NPL, money laundering is haemorrhaging the economy since long. According to a report published in Dhake Tribune online, the amount of laundered money from Bangladesh in 50 years, from 1972-73 to 2022-23, stood at Tk 144.46 trillion. The name of the foreign banks where money has been stashed away was made public quite some time back. Money Laundering Act, which criminalises laundering and authorises the confiscation of laundered assets, has not been used so far, the source said.
With general election looming in the horizon, no significant policy intervention can be expected now. But a government claiming its strong suit to be economic development in recent years can ill afford to leave policymaking in the lurch. Something has got to be done now because time is of the essence.