The question conveyed by the heading should appear as superfluous because, unarguably, all the economies in the world have been facing crises in the wake of the two-year long Covid-19 pandemic, now made worse by the on-going war in Ukraine. The dislocations in supply chains that resulted from the Covid pandemic have now been magnified by the war between Russia and Ukraine for the simple reason that, together, they account for over 40 per cent of wheat, 45 per cent of sunflower oil in the world market and that Russia alone exports 40 per cent of oil and gas to Europe. Such dislocations in the supply of essential items to the global market in quick succession have never happened before and all economies have to bear the brunt of these unprecedented shocks at the same time. Therefore, it is not a question of whether Bangladesh economy is facing headwinds now but rather what is the magnitude of the turbulence and what measures are required for the economy to weather this without serious ravages as aftermath and grave consequences for future.
It goes without saying that economic challenges resulting from the shocks are not of the same degree for all countries and do not call for the same coping capacity in terms of resilience and policy making. The first step required, therefore, is to identify the areas where the Bangladesh economy is hurting from exogenous shocks and to have some idea about the dimensions of the challenges thrown up by the shocks. In the course of this exercise it should also be enquired if any of the headwinds faced by Bangladesh economy is endogenous in origin and what should be done about them. On the basis of this overview policy measures can be suggested to modify existing strategies that are being used or to adopt new ones keeping in view the exigency of the situation. At this point it has to be added that pragmatic policy making requires both optimism and feelings of concern, if not alarm, about the prospects of the economy in weathering the crises in the near and the medium terms.
On the positive side, recovery from the shocks caused by the pandemic have, more or less, been overcome by Bangladesh economy in terms of regaining productivity and growth. This has been corroborated by encouraging estimates of growth rate of Gross Domestic Product (GDP) from multi-lateral financial institutions like the World Bank, the Asian Development Bank (ADB) and the International Monetary Fund (IMF). All the projections made by these institutions place the GDP growth rate above 6 per cent, robust figures considering the measly 3.5 per cent rate to which growth had plummeted at the nadir of the pandemic- induced economic shock in fiscal year 2020-2021 (FY21). It is too early for the war in Ukraine to degrade the momentum gained by the recovery of the Bangladesh economy. The forces of resilience can be said to have been mobilised and pressed into service without much confusion and significant delay. Being battle-hardened, so to say, both the economy and the macroeconomic policy regime are in their best forms, discounting occasional hiccups. The continuance of prudent macro- economic management will, however, not happen in an environment of complacency and routine-bound procedure that underpin weather- beaten strategies. There should not be any doubt about the gravity of the situation resulting from the Ukraine war, a Black Swan that appears rarely but wreaks havoc when it does. Therefore, there is no room for hesitation and dilly-dallying in taking necessary actions on urgent basis. There should be no illusion that Bangladesh economy, like all the other economies in the world, has no sooner weathering a shock than has received another one of equal complexity. The policymakers need to realise that the stage of remaining alert is well past and the time is now for moving full throttle with adequate policy measures.
Looking at the headline news in national dailies in the months after the winding down of the Covid pandemic, beginning at the end of 2021, the following economic challenges became apparent: (i) decline in GDP growth rate; (ii) increase in poverty and growing inequality; (iii) rising inflationary pressure; (iv) debt burden; ( v) adverse balance of payment due to current account deficit; and ( vi) turmoil in foreign currency market, particularly over taka's exchange rate with dollar.
Though the problems were highlighted by newspapers in the above order, most of those overlapped and continue to cascade in a group at present. Being interlinked in varying degrees, these call for cognisance simultaneously for proper perspectives.
From the macroeconomic point of view, the growth rate of GDP claims prior attention, notwithstanding the fact that all the issues mentioned above are macro-economic in nature. It is the primus inter pares-- the first among equals in macroeconomic discourse. According to the Bangladesh Bureau of Statistics (BBS), the GDP growth, that precipitously declined to 3.5 per cent at the worst phase of the pandemic, has now regained most of the lost ground, with the growth rate for FY22 fiscal estimated at 7.25 per cent. As has been mentioned earlier, the estimates by the World Bank, the ADB and the IMF corroborate this growth momentum, placing their figures above 6 per cent for the current fiscal. To sustain this uptick in GDP growth, it is crucial to increase the investment-GDP ratio well above the present 30 per cent. Since, in the absence of adequate revenue earnings, public sector investment involves debt financing, internal and foreign, emphasis should shift from public to the private sector except in the unavoidable case of urgently needed 'common good'. The private sector-led investment strategy, however, may be frustrated by spiralling inflation unless it is kept under tight leash. More discussion on this later.
The second challenge that appeared quite early on during the peak of the pandemic and the winding down that followed is the growing incidence of poverty and its allied curse of widening inequality. According to a survey by the Brac Institute of Governance and Development (BIGD), additional 22.9 per cent of the population became poor due to the adverse impact of the pandemic on income and employment. The survey estimates show that old and newly poor now comprise 43 per cent of the total population. According to the think-tank Centre for Policy Development (CPD), the poverty rate has risen to 35 per cent of the population, following the economic impact of the pandemic. The South Asian Network on Economic Modelling (SANEM), another Bangladeshi think tank, has estimated that poverty incidence doubled during and after the pandemic, accounting for 42 per cent of the population. Since most of the new cases of poor are due to unemployment and shrinking of self-employment opportunities, employment generation has to be an integral part of the growth process now underway. This will require placing capital- intensive projects of long gestation on hold for a couple of years, unless absolutely necessary, and prioritising employment enhancing ones.
At the same time, the coverage of social safety net programme should be expanded to include those who are unable to participate in the labour market for old age and other adverse conditions.
Considering the trade-off between growth and inequality and the present urgency of keeping up the growth momentum that has set in, not much can be done in respect of significant reduction of income inequality in the short run. But a conscious policy goal should be fixed and a strategy adopted so as not to allow the situation from worsening. Wealth tax imposed on the top income group above a certain income level can be the first step to achieve this goal. In the next budget (FY23), there should be a reflection of this policy. Inequity in income distribution is not only morally wrong, it may also adversely affect growth of the economy in the long term.
Supply disruptions and sharp increase in transportation costs during and after the widespread incidence of Covid pandemic caused Inflationary pressure in global economy, affecting every country in varying degrees. This ballooned after the deceleration of the pandemic as economies started picking up gradually and has now assumed a crisis proportion. Central banks in developed countries have raised basic rates of interest and reversed quantitative easing by stopping injection of money into their economies through purchase of treasury bonds from banks and instead selling bonds to banks to soak up excess money. Economies like Bangladesh have also experienced inflationary pressure for the same reasons of supply chain disruptions and higher costs of imports. It came as no surprise that the targeted rate of inflation fixed at 5.5 per cent has been overshot by increase of food and non-food items taking inflation well above 6 per cent, according to BBS. Unofficial estimate place the figure higher. What is of greater concern is that the war in Ukraine has stoked the global inflationary situation further and the full impact is yet to be seen. The problem of inflation originating outside, there is not much that policy makers in Bangladesh can do to stop it. But its impact can be reduced by curtailing imports, which the government has done, and by eschewing expansionary monetary and fiscal policies. It remains to be seen if the policy makers have taken this into consideration and reflected in the budget proposal. A non-expansionary monetary policy should follow suit, albeit independently. Having said this it should be admitted that this will be an uphill task, the present inflationary situation being global in origin and spread out through trade.
Concern has been expressed by economists about the growing debt burden on the economy, particularly after the Sri Lanka economic melt down. Sri Lanka's international debt crisis has drawn attention to Bangladesh's debt-GDP ratio, using the south Asian country's case of falling into 'debt trap' as a cautionary tale. Though it is always useful to take lessons from other developing countries' experiences in macroeconomic management, the Sri Lankan case bears no comparison to Bangladesh in respect of foreign debt. Bangladesh's debt-GDP ratio of little over 20 per cent is way bellow Sri Lanka's 40 per cent above. In addition to annual average foreign exchange earnings of above US dollar 75 billion (50 billion from exports and 25 billion from remittance), Bangladesh has US$45 billion in reserve, adequate to meet six months' import bills and servicing foreign debt in the short to medium term. But living in an age of globalisation that entails risks of unpredictable external shocks (war, pandemic) it makes great sense being cautious and keeping eyes open to detect signs of storm clouds gathering. The present comfortable debt-GDP ratio and the foreign reserve position sustained by garment exports and wage earners' remittance should not lull the policymakers into complacency, paving the way (or smoothing it over when already paved) for a binge on foreign borrowing either for development purposes or as budgetary support. The World Bank has done a good turn to Bangladesh economy by approving only half of the amount of US dollar 500 million applied by the country for budgetary support in the wake of the pandemic. But rare is the case where the creditor, particularly supply credit dispenser, does not ' whet' the appetite of the borrower.
At present it is not external debt that threatens to become unsustainable, throwing macroeconomic management into chaos and uncertainty. Rather, the problem lies with domestic public debt which is on the rise, almost exponentially. If revenue income rose correspondingly, it would not be a matter of concern but it is lagging much behind. However, much flogged before annual budget, the indolent horse of revenue collection is not even cantering, not to speak of galloping. The result: burgeoning domestic debt financed by banks. While sovereign debt repayment default explodes all on a sudden due to unforeseen events or as the cumulative result of reckless borrowing, chronic and rising volume of domestic debt not only becomes unsustainable in the absence of robust revenue earnings, it also hollows out the growth process by stealth. Inflation that stems from chronic deficit financing undermines real income and causes disincentives for savings and investment. The policy makers should keep this foremost in their minds while finalising the budget for FY23 fiscal. Being wary of only growing external debt and ignoring the need to restrain domestic debt is acting like the one- eyed deer in Aesop' s fable which came to grief for lack of an all- round view.
The crisis that has hogged the headlines in recent weeks and stayed on there is the turmoil in the foreign exchange market, particularly in respect of Taka's exchange rate with US Dollar. Mis-match between supply and demand for dollar that surfaced over requirements by importers, partly due to higher import prices, have led to refixing the managed exchange rate four times in recent weeks by Bangladesh Bank. Even after these tweaking of the managed rate, the divergence between the official rate and the rate in the market has remained wide, from Tk 89 to Tk 100 respectively. Though the exchange rate is 'managed' and not 'floating', the dollar available goes through the interaction of supply and demand in the market, resulting in divergence at times of mismatch, as is the case now. Given this reality, there are two choices before the Bangladesh Bank: making the managed rate of taka-dollar exchange align with the market rate through official devaluation or making additional dollar available in the market from the reserve to stabilise volatility. Each of this policy choice comes with a price tag of advantages and disadvantages. The policy makers should weigh these carefully and realistically. What is evident is that muddling through, as at present, by tinkering the managed rate for fine- tuning has not produced the desired result. Something out of the conventional is required to cope with the abnormal situation.
Bangladesh economy has come a long way from dire circumstances to become a 'model of development'. There was no magic behind this 'miracle'. Policy decisions were made timely and prudently for the management of the economy within the framework of free market. There is no reason why this combination of 'nudge' through policy and market forces will not or cannot work now that Bangladesh economy is facing challenges in more than one front.