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Current economic challenges of Bangladesh

| Updated: June 06, 2022 20:59:16

Workers at a ready-made garments factory in Gazipur are passing busy time. 	—Xinhau Photo Workers at a ready-made garments factory in Gazipur are passing busy time. —Xinhau Photo

South Asian economies are cruising through a tough time in terms of macroeconomic stability. Sri Lanka is already on the verge of economic collapse; the economic strength and stability of Pakistan have been gradually turning from bad to worse. India, though recorded praiseworthy growth in the past few years, is overwhelmed by unemployment and upward inflationary pressure. Bangladesh was a little better off economically compared to its other South Asian counterparts.  However, recent data show that the country is not insulated from the common economic challenges that have plagued other developing countries in the post-Covid period.

The country has put all its efforts to emerge from the turmoil caused by the Covid-19 outbreak. The pandemic has forced millions of people worldwide to sink below the extreme poverty line, as much as 97 million, according to some estimates. Bangladesh is not an exception. Statistics shows that 21.6 per cent of the total population lived below the poverty line in 2016 which jumped to about 42 per cent in the post-Covid period. Hence, pulling up those teeming millions from the poverty line would be a daunting task for the country which is fighting soaring inflation and foreign exchange instability.

Production and distribution of goods and services was repeatedly disrupted over the past two years. As a result, shortage of supply has been observed in almost all sectors of the economy. The ongoing economic and political instability in the international arena, especially the protracted Russia-Ukraine war, has severely disrupted the supply chain again. Consequently, prices of industrial and essential consumer goods, including raw materials, have skyrocketed worldwide. The same is observed in Bangladesh. The country imports fuel and foodstuffs such as wheat, edible oil from Russia and Ukraine. The Consumer Price Index (CPI) rose from 6.17 per cent in February 2022 to 6.22 per cent in March, the highest since October 2020. However, the real inflation is believed to be much higher than the officially stated rate because the food basket, based on which current inflation is calculated, has changed in the last couple of years. Hence, the government of Bangladesh must fight the soaring inflation if it aims to avoid a nationwide drop of purchasing power.

Second, the country has been experiencing a tumultuous foreign exchange rate, which is closely linked to inflation. The upward trend in the value of US$ against Bangladeshi Taka (BDT) is currently at the centre of discussion in the country. When inflation rises, the purchasing power of the domestic currency decreases. Like other markets, the value of the dollar against BDT rises when the demand for the dollar in the domestic market increases. At present, the primary reason for the increase in demand for dollar is the mounting import costs due to the upward trend in the prices of major commodities. On the other hand, despite the boom in export earnings, Bangladesh's export items are limited. The readymade garments sector is certainly the largest sector for earning foreign currency. However, the value added of the readymade garments sector is not that high. Therefore, to get all the benefits from the ready-made garment sector, the country can emphasise on setting up backward and forward linkage industries.

Remittance remains a noteworthy and stable source of foreign currency for the country. However, a large number of expatriate Bangladeshis returned to the country during and following the pandemic. As a result, foreign remittance inflow dwindled significantly. Compared to 2020, the expatriate income has increased by only 2.2 per cent in 2021, amounting to US$22 billion. Moreover, monthly remittance inflows have been declining since the beginning of 2022, except for the month of Ramadan, which usually experiences an influx of remittance during the festive month.

All these point to the fact that the payment of dollar exceeds the receipt, leading to a negative current account balance. This circumstance has forced the central bank to release dollars in the local market from its reserve to stabilise the exchange rate. As a result, dollar reserves at the central bank dropped from 48.2 billion in August 2021 to US$42 billion in May 2022. This amount is enough to meet the payment of import for five months. According to the International Monetary Fund, a country can be said to be immune from immediate risk if it possesses the capacity to defray import payment for 3-5 months in a stable economic condition but needs to be able to meet 8 to 12 months of import costs in an economically unstable situation.

These suggest that the government of Bangladesh must seek ways to replenish the foreign exchange reserves by increasing the inflow of dollars. To attract more remittance, the government currently provides incentives at a rate of 2.5 per cent on remittances. This is certainly a commendable initiative. However, more steps need to be taken to increase the flow of remittance. Informal markets, such as hundi, attempt to tap expatriates for remittance collection by offering favourable exchange rates compared to exchange houses or banks. So, expatriates sometimes are reluctant to use formal channel to remit their hard-earned currency at a lower exchange rate. In this case, the government must take appropriate steps to stop these illegal markets or make the exchange rate free-floating instead of currently managed floating system.

Bangladesh achieved a marvelous GDP growth in the past few years. The country also deserves complement for successfully tackling the adverse impact of Covid-19. However, the challenges that have resurfaced at present may tarnish the achievement if timely steps are not taken to ameliorate them. The economic woes of Sri Lanka and Pakistan add more worries to other countries in the region like Bangladesh. Only credible steps from the government can make reference of Sri Lanka irrelevant to Bangladesh.

Kabir Hasan is Professor of Finance, University of New Orleans,

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Dr. Mohammad Dulal Miah is Associate Professor of Finance, University of Nizwa.

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