Economy in the wrong direction due to wrong decisions, lack of coordination

Bangladesh has ended a financial year with the highest deficit in the financial accounts of the country’s history. In other words, the 2022-23 fiscal saw the biggest gap between foreign currency income and expenditure. That is why Bangladesh Bank is unable to halt the decrease in reserves. Due to this highest deficit in financial accounts, there was also a record imbalance in the overall balance of payments.

Even for the common people, last financial year was a year of extreme pressure. In his budget speech for last fiscal, finance minister AHM Mustafa Kamal had promised that the inflation would be kept within 5.6 per cent. But in fact inflation during that time had been 9.2 per cent on average. That indicator alone was enough to crush people under the burden of commodity prices.

The government had failed to control the market. There had also been a lack of coordination and accountability. That is why in the many surveys that were run, the people’s contention was that the country’s economy was going in the wrong direction.

Russia launched its attack on Ukraine on 24 February 2022. Just as the impact of Covid-19 was diminishing and the economy was picking up, Russia attacked Ukraine. This led to a global economic crisis and most countries took all sorts of measures including cutting monetary transactions. But Bangladesh took the opposite track.

Most of the decisions taken by the government at the time did not work. In fact, many of the decisions had quite the opposite effect. For example, fixing the interest rate at 9 per cent, artificially keeping up the taka’s value against the dollar, determining four rates for the dollar, fixing a high GDP target, raising fuel prices, relaxing rules on default loans, making the energy sector dependent on imports, etc. The biggest blunder in the 2022-23 financial year was trying to increase currency flow without increasing interest rates. It is because of all these mistakes in economic management that the government is still unable to bring the economy under control.

Two months of the new 2023-24 fiscal have already passed. The situation has hardly improved. The dollar crisis remains the same. In fact, the rates have gone up even higher. The reserve is below USD 30 billion. According to the calculation methods of the International Monetary Fund (IMF), this will actually be around USD 23 billion. Inflation has dropped a fraction. Exports were good in the first month of the financial year, but remittance fell.

The revenue income target in the last fiscal’s budget was Tk 4.33 trillion (Tk 433,000 crore). Of this, the National Board of Revenue (NBR)’s part was Tk 370,000. While presenting the current financial year’s budget, the finance minister did not bring about any changes to the revenue earnings. Yet NBR’s deficit alone was Tk 38,000 crore. The overall deficit is much higher.

Even so, the budget target will remain 5.5 per cent lower than the GDP because the Annual Development Programme (ADP) implementation is around Tk 470 billion (Tk 47,000 crore) less. That is why the government also had to take loans lower than the target. In other words, due to the failure to implement the ADP, the government could remain relieved concerning budget deficit. This was the only target achieved last fiscal.

According to economic theory, balance of payment is the measure of monetary transactions between a country’s people and the rest of the world. Basically it reveals the flow of money in a country and how well those funds are used. It even helps to understand whether there is actually economic growth in a country. In the immediate past financial year, this balance of payment was the best in Bangladesh’s history. There are basically three components of balance of payment. These are financial account, capital account and current account.

Bangladesh has always had a higher import expenditure than export income. This imbalance is basically covered by remittance. This is current account balance. Import expenditure was high in the 2022-23 fiscal and remittance was less. This created a current account deficit of around USD 18.64 billion (USD 1863 crore 90 lakh), the highest current account balance deficit in the country’s history. The highest deficit earlier had been around USD 1.69 billion (USD 168 crore 60 lakh) in 2010-11.

With imports being curbed, it had been possible to decrease the current account deficit in the just past financial year. However, the financial account deficit hit a new record. This totaled USD 2.14 billion (USD 214 crore 20 lakh). The previous highest financial account deficit had been USD 825 million (USD 82.5 crore). This deficit has emerged due to foreign investment and credit flow falling, and an increase in repaying loans including to the private sector.

Deficit in the financial account is not common. This has occurred only five times in Bangladesh’s history. This deficit is a major reason behind Bangladesh Bank’s floundering under falling foreign exchange reserves. The basic reason is higher expenditure of foreign currency that earning foreign exchange. That is why in the last financial year here was a deficit of USD 8.22 billion (USD 822 crore 20 lakh) in payments. This too was a new record.

Imports saw a nearly 36 per cent growth in 2021-22 fiscal. This put Bangladesh Bank in a fix and reserves plummeted. Bangladesh Bank then put a cap on imports. It called for a cut in the import of non-essential and costly commodities. Imports dropped. Last fiscal imports saw negative growth, 15.81 per cent. Bangladesh Bank data shows that last fiscal import of essential commodities fell by only 2.2 per cent. Import of sugar fell the most, by 19 per cent. Food grain imports increased by around 1.5 per cent. Of this, rice import went up by almost 34 per cent, wheat imports fell by 5 per cent but the biggest decrease was in the import of intermediate product and capital machinery.

Among intermediate products, the import of fuel oil fell by around 33 per cent, raw cotton by around 4 per cent, garment and textile sector products by 20 per cent and capital machinery imports by 20 per cent. Slump in private investments is the main reason behind this drastic fall in imports. This is evident in the last financial year the investment rate as part of the GDP was 24.52 per cent.

In his budget speech last fiscal, the finance minister said that the government was determined to control inflation by closing the gap between demand and supply. He also said that Bangladesh Bank was keeping up the currency flow so that inflation could be kept in control and there was steady credit flow in the private sector. He hoped this would keep inflation below 6 per cent.

In accordance to the finance minister’s statement, Bangladesh Bank did not use the monetary policy over the entire year to stem the currency flow. On the contrary, it spoke in favour of the government’s political decision to fix the interest rate on loans at 9 per cent. Yet all over the world interest rates have been aggressively increased so as to deal with inflation. And this has yielded positive results in many countries too. Their inflation has dropped. Yet Bangladesh remains submerged in high inflation.

Bangladesh Bank was finally obliged to bring changes to the monetary policy. Conditions set by the International Monetary Fund (IMF) are the main reasons behind this. Bangladesh Bank has announced an increase in interest rates and a decrease in currency supply. This has come into effect from the current fiscal. But is already too late. It will take time for these actions to have an impact on the economy.

The country’s policymakers do not talk about the economy anywhere anymore. While announcing the monetary policy last June, the Bangladesh Bank governor faced the media and last week he held a meeting with the bank’s chief executives. The various crises were discussed at that meeting, according to sources. It had been said, for example, last fiscal people’s cash in hand had increased by around 14 per cent.

The increase of cash in people’s hands outside of the banking system could not be seen as a positive trend. This happens when there is a lack of confidence in the banks. This is also an effect of negative interest rates on deposits due to high inflation. These figures also indicate that last fiscal people broke into their saving to meet their living costs.

The matter of hundi was also discussed at the meeting. It was said that 30 cents was being sent to import goods of 1 dollar, the remaining amount transferred by hundi. In other words, on one hand default loans are piling up in the banking sector and on the other hand, money laundering is on a rise too. Last fiscal, the Islamic sharia banks saw an extreme liquidity crisis. One of the main reasons was loans taken surreptitiously under various names. Also, last year Bangladesh Bank sold around USD 13,58 billion (USD 1,358 crore) from the reserves. As a result, Tk 1.29 trillion (Tk1,29,000 crore) went from these banks to the central bank. This also made liquidity management difficult for many of the banks.

Last fiscal Bangladesh received USD 476.27 million (USD 47 crore 62 lakh 70 thousand) as first tranche of the IMF loan. Discussions on the second installment of the USD 4.7 billion (USD 470 crore) IMF loan will take place at a meeting in September. But Bangladesh is unable to meet the conditions attached to the second tranche. These include increasing the net reserves to USD 24.46 billion and increasing revenue earnings by a specific amount. The government is negotiating with issues with IMF at the moment. And so the crisis continues.

* The report, originally published in the online edition of Prothom Alo, has been rewritten in English by Ayesha Kabir