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Bangladesh had been performing exceptionally well before the Covid-19 pandemic. The economy expanded, the per capita Gross Domestic Product (GDP) increased, reserve of dollar grew, inflation was low and poverty levels were decreasing. Bangladesh's economy also started to recover well from the Covid-19 economic shock, and the economy had gradually returned to its pre-Covid path in 2021. However, since the middle of 2021, global commodity prices, particularly energy prices, have begun to rise. This was intensified by the Russia-Ukraine war, which has disrupted the global supply chain, as well as rising commodity prices worldwide. Bangladesh, as a major energy importer, has faced a number of challenges. Now, in Bangladesh the price of essential commodities is rising, foreign currency reserve is declining, the value of Taka is weakening, current account deficit is increasing, load shedding is getting worse, and people's misery is deepening. This has caused widespread concern throughout the society. How it happened, or what went wrong within just a short time span? Are we heading toward a recession or will the economy soon recover?
The current economic crisis in Bangladesh is largely driven by the global economic and political crises. After Covid-19 economic recovery, global commodity market becomes volatile. Particularly after the Russia-Ukraine war the international commodity market became unstable. The ongoing war and trade embargoes and financial sanctions against Russia has disrupted the global supply chains and increased the price of many essential commodities as well as the cost of shipping commodities. Food, fuel, and feed prices have risen significantly in the global market. As a result, the cost of imports in Bangladesh has increased significantly in recent years while earnings from exports have increased just moderately. In FY22, the expenditure on imports increased by 36 per cent, compared to 20 per cent in FY21. The high import cost is due in part to increased demand for imported goods and in part to higher import prices on the global market. While the prices of imported goods (such as wheat, edible oils, and fuel) have risen significantly, the prices of Bangladesh's exports have only increased slightly. As a result, the terms of trade has gone against Bangladesh. During 2021-22, the import-price index increased by 5.06 per cent, while the export-price index increased by 3.23 per cent. This adversely affected the current account balance. In FY22, the current account balance reported a greater deficit of US$ 18.70 billion compared to FY21's deficit of US$ 4.57 billion (Table 1).
The current account deficit in Bangladesh is generally met by worker remittances from abroad. Remittances have also decreased significantly in FY22. Remittances fell by 14 per cent in FY22, following a 36 per cent increase in FY21. This has affected the balance of payments, foreign currency reserves, and weakened Taka against USD.
Despite adjusting the exchange rate to match market demand, the Bangladesh Bank continued to sell dollars from reserves to keep the Taka stable. As a result, reserves fell further, and the dollar crisis began. Foreign currency reserves fell to US$ 39.77 billion on July 14, 2022, from US$ 46.39 billion on July 14, 2021. Despite receiving relatively large remittances from expatriates in July 2022, Taka's value against dollar is deteriorating. Foreign exchange reserve is not only critical for maintaining exchange rate of domestic currency but it also contributes significantly to increased capital investment and long-term economic growth.
In order to retain Taka's value, Government of Bangladesh and Bangladesh Bank have taken various measures to reduce imports and increase the flow of dollars. The government has discouraged import of luxury items. The ongoing depreciation of Taka compelled the government to seek loan from the International Monetary Fund (IMF). Just one year ago, Bangladesh supported Sri Lanka with US$ 250 million, and after one year, Bangladesh approached IMF for loan to support its budget.
The weakening of Taka against dollar not only makes imports more expensive, but also raises domestic prices of imported goods and other non-imported goods due to the substitution effect. That makes inflation situation further worse. Inflation had been fairly under control over the past few years in Bangladesh, but it began to increase in 2021 and has now risen to 7.56 per cent according to official accounts, even though the actual rate is thought to be much higher. The prices of rice, wheat, edible oil and other essential commodities are rising and inflation rate has climbed to 9-year high. While the income of the poor remained same, the increasing prices has put common people in extreme hardship. A number of studies indicate that low-income people are struggling to cope-up with the high prices of essential commodities and compromising on their food and nutrition.
To reduce current account deficits and balance of payments imbalances, the government recently raised urea fertilizer and fuel oil prices significantly without taking any serious measures to improve energy sector management, reduce inefficiency, and system loss in the energy sector. When the government is unable to import an adequate amount of fuel to generate electricity, it has to pay large amount of money as capacity charges to quick rental power plants while keeping them mostly idle. The government could have avoided the massive loss if it had planned ahead of time and cancelled some of the contracts earlier.
High fuel prices come at a time when people are already struggling to keep up with rising food prices. This has further increased the costs of transportation of goods and fueled the prices of almost all essential consumer goods. As the price of fuel rises, it contributes to cost-push inflation and the cost of daily commodities including transportation will rise, causing misery for the common people. Moreover, millions of farmers use diesel for irrigation. As such, the increased price of diesel will have an adverse impact on all sectors of the economy including agriculture and food security. The increased diesel price will increase irrigation costs even further and may affect food security if we do not take necessary measures to support farmers.
The rationing of electricity and frequent load shedding have further worsened the suffering of people. Electricity is essential for productive activities that support a country's economic growth. In Bangladesh, the recent frequent power outages, both announced and unannounced, caused by load-shedding have severely hampered production and business activities. While large industries have their own generators, the majority of small and micro industries can not afford to purchase backup generators. As a result, when load-shedding occurs, their operations are halted, which lowers productivity, sometimes damages equipment, and even degrades production quality.
Given the high inflation, low foreign currency reserves, weakening Taka, tightening imports, and higher fuel and fertiliser prices, manufacturing and agriculture productivity may suffer. Additionally, a volatile global market, especially the current recessionary trends, may dampen demand for Bangladesh export items, posing a number of potential downside risks to the economy. Together, the current situation indicates that if we do not act strategically, the economy may suffer from slow growth in coming years and fail to return to pre-Covid growth path in the near future. A slower economic growth could have adverse effect on job market and increase unemployment of the youth.
Strategic planning and decisive action are required to ensure power supply and improve energy sector management, eliminate expensive rental power systems, and gradually reduce dependency on external sources. Energy and food price increases will disproportionately affect low-income households, exacerbating already-growing inequalities. Social protection measures need to be strengthened further to protect the poor from high inflation. Exports are crucial to reduce trade deficit and build up foreign exchange reserves, which in turn will help to manage exchange rates and weakening Taka. To cope with the current economic crisis and managing balance of payments, it is important to continue the existing restriction on imports of luxury goods and accelerate promotion of exports. However, when tightening imports, we must be careful not to restrict imports of raw materials and intermediary goods, as Bangladesh's exports rely heavily on imported inputs. Special attention must be paid to increasing remittances and foreign direct investment and preventing capital flight from the country.
Golam Rasul, PhD is Professor, Department of Economics, International University of Business Agriculture and Technology, Dhaka, Bangladesh.