Bangladesh's economy is going through difficult times as multiple crises bite. High inflation, a fuel crisis, a fragile banking sector, a trade deficit and depleting foreign exchange reserves have weakened the macroeconomic stability of the country.
Inflation reached 8.9 per cent in October 2022, compared to 5.7 per cent in October 2021. This is higher than the 5.6 per cent projected by the government for the 2022-23 fiscal year. [Annual average inflation stood at 7.70 per cent in 2022 which was 5.54 per cent in 2021.] Bangladeshi policymakers raised petrol prices by 51.2 per cent and diesel prices by 42.5 per cent in August 2022, adding to the existing struggles of low- and fixed-income households. On 21 November 2022, the Bangladesh Energy Regulatory Commission (BERC) also increased the bulk electricity tariff by 19.9 per cent. This hike is likely to exacerbate the cost of living crisis.
The external sector is experiencing deficits due to a gap between export and import incomes. Exports grew by 34.4 per cent, while imports grew by 35.9 per cent and remittances decreased by 15.1 per cent in the 2021-22 financial year.
Between July and October 2022, exports grew by 7 per cent while remittances grew 2 per cent. Imports grew by 11.7 per cent between July and September 2022. High import growth combined with low remittance growth has resulted in a current account deficit that reached US$3.6 billion in the July-September quarter, compared to US$2.5 billion in July-September 2021. [Current account deficit, however, stood at $5.67 billion in July-November period.]
Foreign exchange reserves declined from US$41.8 billion in June 2022 to US$33.8 billion by 30 November 2022. But according to the International Monetary Fund (IMF), Bangladesh's depleting foreign exchange reserves are still overestimated by about US$7.2 billion.
The domestic economy has limited fiscal space, with a tax-to-GDP ratio of only 8.5 per cent in the 2021-22 financial year. Bangladesh is losing a huge volume of earnings due to illicit financial flows. Due to trade misinvoicing, Bangladesh lost US$8.27 billion between 2009 and 2018.
The economy's weakness manifests through a vulnerable financial sector burdened with a large amount of non-performing loans. As of September 2022, non-performing loans comprised 9.3 per cent of the total outstanding loans in the banking sector. A culture of letting bank defaulters off scot-free and providing them with endless flexibility encourages wilful loan defaults.
This has resulted in several scams over the past decade where depositors' money has been swindled, which were supposed to be loans for businesses. Recent reports on loans amounting to 300 billion taka (US$2.9 billion) that were disbursed to one business group from a commercial bank, has once again raised alarm over the governance of the banking sector. This case vindicates how a bank could be destroyed by a combination of powerful interest groups and lack of oversight.
Bangladesh's policymakers have taken a few measures to tackle the current economic situation. The government has prioritised infrastructure initiatives and postponed implementing non-urgent projects. Foreign travel of government officials has been limited. Banks' office hours have been reduced to save electricity. To increase foreign exchange reserves, the central bank has increased the letter of credit margin and instituted mandatory reporting for all foreign exchange transactions made by banks.
The government offers a 2.5 per cent cash incentive to remitters who directly transfer remittances through banks. But remitters still prefer to use informal channels to transfer money, finding those more efficient than banks.
The shortage of US dollars in the economy has led to a freefall of the Bangladeshi taka. Several commercial banks are unable to open lines of credit for importers. Policymakers kept the taka artificially stronger against the US dollar for some time by injecting US dollars into the market.
Meanwhile, several competing countries - including China, India and Vietnam - have devalued their currencies. The real effective exchange rate of the Bangladeshi taka was consistently higher than Bangladesh's competitors. This made Bangladesh's exports less competitive and disincentivised remitters from sending money through formal channels. Although the Bangladesh Bank, the central bank, has allowed the market to determine the exchange rate since September 2022, the taka's valuation is yet to be corrected.
In light of its declining foreign exchange reserves, Bangladesh has sought IMF loans of US$4.5 billion. But to qualify for an IMF loan, Bangladesh must improve its governance and efficiency. From 26 October to 9 November 2022, an IMF team visited Bangladesh to discuss support and a comprehensive economic reform agenda. Key elements of the IMF loan programme to Bangladesh will include creating additional fiscal space, containing inflation, modernising monetary policy, strengthening the financial sector, boosting growth potential and building climate resilience.
Given the importance of these reform measures, Bangladeshi policymakers should have taken these initiatives on its own. The consequences of all previous governments' refusal to undertake reforms has been the weakening of public institutions and unabated corruption. Reforms should be designed and implemented by the country itself, since reforms under the directives of external agencies could limit the policy space and often ignore a country's context and reality.
Bangladesh's economic challenges are partly due to the Covid-19 pandemic and the Russia-Ukraine war. But the core problems of Bangladesh's economy are rooted in the country's long-neglected governance. While the government should deal with the immediate challenges of containing the consumer price index, increasing supplies of goods and providing support to low-income families, it must also carry out medium-term reform measures.
Dr Fahmida Khatun is Executive Director of the Centre for Policy Dialogue, Bangladesh and non-resident Fellow at the Atlantic Council. The piece is excerpted from www.eastasiaforum.org