Remittances have proven to be one of the key statistically significant factors that influence a nation's growth through domestic spending, savings, and investments. In fact, remittances play a crucial role in raising the standard of living and monetary policy development, especially for developing nations like Bangladesh. Bangladesh is one of the world's top 10 highest remittance recipient nations, where more than 10 million workers in different countries (mainly in the Middle East) send remittances back home, which forms approximately 7 per cent of the nation's Gross Domestic Product (GDP), playing a significant role in the country's poverty mitigation agenda.
However, the Covid-19 pandemic has wreaked havoc on the country's remittances, with many Bangladeshi migrants being stuck in countries with strict lockdown measures or have migrated back due to health concerns. In addition, the loss of jobs has also substantially contributed to the fall in remittances-by approximately 15.12 per cent year-on-year in FY22, to US$ 21.03 billion-despite the high expectations of remittances inflow into Bangladesh during the festival of Eid-ul-Azha in July 2022.
The Covid-19 pandemic has wreaked havoc on the country's remittances, with many Bangladeshi migrants being stuck in countries with strict lockdown measures or have migrated back due to health concerns.
FOREX CRUNCH AND PLUNGING TAKA: Remittances have often ameliorated the current account deficits observed in the Bangladesh economy. However, the fall in remittances has affected the Balance of Payments (BOP) and strained the foreign exchange (FOREX) reserves, affecting the position of the Bangladeshi Taka against the US dollar. The Taka's misfortune was evident when it saw its biggest single-day fall in a decade (a fall of 0.91 per cent) to settle at Tk 87.50 against the US dollar. A year ago, it was Tk 84.40 per US dollar on the same date. As of December 2022, the Bangladeshi Taka stands at approximately Tk 105.82 for a US dollar. Despite this, it must be noted that the Bangladeshi Taka's approximately 3.18 per cent fall is not as bad as the fall in the value of the neighbouring currencies, such as the Indian Rupees (8.56 per cent), Pakistani Rupee (30.18 per cent) and Sri Lankan Rupee (79.82 per cent) in the same year, indicating the economic vulnerabilities in the South Asian region.
The weakening of the Bangladeshi Taka against the US dollar will make imports costlier, aiding the government's objective of maintaining a favourable trade balance. But it would also raise the domestic price of imported goods and other substitutable non-imported domestic goods, leading to further inflation. To cushion the impact on the value of the Bangladeshi Taka, the central bank attempted to sell its foreign exchange, causing a massive dip in the country's foreign exchange reserves-from US$ 46.39 billion in 2021 to US$ 39.77 billion by July 2022. This has also crippled the capital investments in the country as investors became wary of diminishing returns, deteriorating the long-term growth prospects of the country. Adding to the woes, the Russia-Ukraine War has exacerbated the dip in the foreign exchange reserves due to increased import bills on crude oil and food products, supply chain disruptions, and ballooning inflation in the West-all of which have negatively impacted the external sector outlook for Bangladesh for the immediate future, and also led the government to trim its growth forecast to 6.5 per cent in 2023-24.
INFLATIONARY FORCES: The uncertainties in the global markets, with their impact on the value of the Bangladeshi Taka, have posed a fundamental question to the political dispensation regarding the plight of the poor in the country. On the one hand, the poorer sections of society have to compromise on their food and nutritional needs owing to the price rises; on the other hand, the shortage of essential commodities such as gas has adversely affected all economic sectors in the country. In recognition of these issues and to keep the economy moving forward, the government had to slow down on some developmental infrastructure projects and put in place austerity measures such as curbing overseas travel of government officials and a gamut of other measures to save the nation's resources.
The uncertainties in the global markets, with their impact on the value of the Bangladeshi Taka, have posed a fundamental question to the political dispensation regarding the plight of the poor in the country.
The financially vulnerable sections of the society will be subject to abject misery as this cost-push inflation combined with a falling Bangladeshi Taka makes sustenance challenging for them. While transport, communication, clothing and footwear products are the major contributors to non-food inflation; in the case of food inflation, which has accelerated to 8.38 per cent in June 2022, the contribution of oils and fats has increased due to supply cuts by major edible oil-exporting economies. The prices of agricultural goods have also been affected as transportation and mechanisation have become costlier.
Bangladesh's composite inflation rate rose to 7.56 per cent in June 2022 compared to 5.36 percent during the last year, making it the highest inflation rate in the preceding nine years. Since the beginning of 2021, Bangladesh has witnessed a sustained rise in its inflation rate. One reason is the pandemic-induced disruption in the domestic and international markets, followed by demand-pull inflation when the markets opened again. The Russia-Ukraine war and the resulting increase in prices of essential goods is another.
Data shows that the revenue collected by the government is unable to keep up with the mounting expenditure due to the current inflationary pressures, increasing the country's fiscal deficits. Again, following the 'twin deficits hypothesis', the fiscal deficit influences the balance of trade, bringing down the foreign exchange reserve reserves, and adding more inflationary pressures on the domestic economy in the form of a vicious cycle. However, most developing countries bear the brunt of this - especially when major exogenous shocks such as the pandemic or the Russia-Ukraine conflict strike - hence, Bangladesh must also institute fundamental changes in the domestic economy to steer clear of this loop in the near future.
In August 2022, Prime Minister Sheikh Hasina mentioned, "Bangladesh will never become Sri Lanka. We think in a pragmatic way before taking any development project (and so) the country will continue to move ahead overcoming all global challenges." Therefore, the policies aimed at restructuring the Bangladeshi economy must work within the larger goal of equitable growth, as the underprivileged sections have been the most hit by the current economic shocks.
The piece is excerpted from www.orfonline.org.
Observer Research Foundation is a New Delhi-based think-tank.