Six reasons behind the economic crisis 

The economy has been facing persistent pressure for over a year and a half, marked by considerable volatility in economic indicators since the onset of the Ukraine-Russia war. High inflation has eroded the value of money, and foreign currency reserves are steadily depleting each month. Despite these challenges, policymakers have consistently attributed this economic strain to various external events. This perspective has been echoed by Bangladesh Bank as well. 

However, Bangladesh Bank has now recognised that the country's economic crisis stems not only from the Ukraine-Russia war but also from six internal factors. 

These six factors include weather disturbances such as extreme heat waves, heavy rains, and unexpected floods; unethical business practices involving syndicates; hoarding; price fixing; artificial shortages; and more.

Additionally, poor corporate governance, a culture of willful loan defaults, fuel and electricity price hikes, and instances of over and under-invoicing (involving customs evasion and money laundering through false declarations on imports and exports) all play a significant role in exacerbating the economic challenges. 

Bangladesh Bank, however, also highlighted three external factors. These include the disruption of international supply chains due to the Russia-Ukraine war, an increase in transportation costs, and a rise in prices of various consumables, including fuel oil.

These international developments have been further compounded by the increase in interest rates brought about by the US Federal Reserve's policy, leading to a deficit in Bangladesh's foreign exchange reserves and a significant devaluation of the country's currency in stages. 

According to Bangladesh Bank, the country's economy is grappling with three major challenges due to these internal and external factors. These challenges manifest in the form of instability in exchange rates, high inflation, and a surge in loan defaults.  

This assessment by Bangladesh Bank came recently, a year and a half after the economic crisis began. During this period, most countries across the globe aggressively reduced interest rates to counter the economic crisis and control inflation.

However, Bangladesh took a different approach by reducing interest rates from the outset, increasing fuel prices, and providing significant benefits to loan defaulters. Economists believe that the initiatives implemented by policymakers to address the economic situation, in many cases, have not been effective; rather, they have produced opposite results, deepening the crisis. 

Nonetheless, Bangladesh Bank has now initiated interest rate hikes to tackle the crisis. They have also allowed the market to determine the exchange rate of the dollar and ceased lending money to the government. Additionally, the central bank has commenced seeking advice from economists, conducting three rounds of consultation meetings thus far. Habibur Rahman, the Chief Economist of Bangladesh Bank, is preparing a report for these meetings, presenting an analysis of the reasons behind the crisis. 

Mustafa K. Mujeri, former Chief Economist of Bangladesh Bank, shared with Prothom Alo that the problems identified by Bangladesh Bank are longstanding, having accumulated over time to create today's challenging situation.

He emphasised the necessity for practical and effective measures to address these issues, pinpointing the lack of such initiatives as the real problem. Mujeri stressed that resolving these issues demands unwavering political will. 

Providing an example related to the culture of willful defaulters, the former Director-General of the Bangladesh Institute of Development Studies (BIDS) mentioned that the issue is pervasive.

He highlighted that practically everyone has adopted the mentality of a willful defaulter. In the current scenario, no one defaults without intent because there are clear benefits available to defaulters. Many borrowers aspire to be classified as defaulters, making it an epidemic. 

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Value of the taka fell by 13 per cent 

At the start of the Ukraine-Russia war in 2021, the price of the dollar in the country was approximately Tk 87 per dollar. Over the course of one and a half years, the price of the dollar has surged, and it is currently being traded at Tk 110.

During this time, not only did the prices of goods in the international market rise, but the increase in the value of the dollar also compelled importers to spend additional funds to procure goods. This exerted pressure on the reserves and further contributed to inflation. 

According to Bangladesh Bank's data, at the end of the fiscal 2021-22, the reserve stood at 41.80 billion dollars. However, as of 11 October, the reserve has decreased to 26.84 billion dollars. Notably, according to the International Monetary Fund (IMF) accounting system, the reserve is reported to be even less, at 21.07 billion dollars.

Taking into account the net reserve, it has now fallen below 17 billion dollars. One contributing factor to this decrease in reserves is the negative growth in remittances. Bangladesh Bank estimates suggest that the reserve might increase to 30 billion dollars by the end of the next June. 

In response to this situation, Bangladesh Bank has devalued the taka by 13.35 per cent during the financial year 2022-23. Additionally, they released 13.39 billion dollars to the market from the reserve. Bangladesh Bank has also stated that they have heightened supervision in the banking sector to manage the ongoing economic challenges. 

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Inflation over 9 per cent for a year 

For over a year, the people have been grappling with high inflation. According to the Bangladesh Bureau of Statistics (BBS), the average inflation for the fiscal year 2022-23 stood at 9.02 per cent. In the initial three months of the current financial year (July-September), overall inflation has exceeded 9.5 per cent. 

Furthermore, food inflation has surged to over 12 per cent in the last months of August and September. This substantial increase in food prices has exacerbated the hardships faced by the lower-income and middle-income population. In August of the previous year, food price inflation reached its highest point in 11 years and 7 months, reaching 12.54 per cent. Such levels of food inflation have not been witnessed in over a decade. 

Controlling inflation has emerged as the most significant challenge for the economy. Bangladesh Bank bears a major responsibility in this regard. Presently, Bangladesh Bank is asserting that while the prices of products in the world market have recently decreased, Bangladesh is not reaping the benefits due to a significant devaluation of the currency. 

According to the latest figures of Bangladesh Bank, at the end of last June, the amount of defaulted loans stood at Tk 1.56 trillion. Compared to the previous three months, defaulted loans have increased by about Tk 250 billion. And in seven years, defaulted loans have doubled

Essentially, this means that even though the price of a product has decreased in the world market, it's not feasible to purchase that product by spending the same amount of money (buying dollars) as one-and-a-half years ago. Consequently, despite the reduction in prices in the international market, inflation remains difficult to bring under control. 

Bangladesh Bank further reported, following a review of the price inflation from last August, that compared to a year ago, the prices of fish, meat, and eggs had increased by 23 per cent in August. The price of vegetables had risen by about 25 per cent. Additionally, the price of all types of food had surged by over 14.5 per cent on average. 

Planning Minister MA Mannan shared with Prothom Alo, “Inflation control is currently a major challenge in the economy. Inflation has increased, which is typical, but it has started to decrease and will continue to do so.” According to him, there is an evident growth trend in the economy. However, as demand rises, the supply diminishes correspondingly, leading to increased market pressure.

Mannan stated, “We are implementing measures to address this issue. For instance, open market sales (OMS) via trucks have been extended, and efforts are being made to boost supply by importing products.” Additionally, protective programs have been put in place through the Trading Corporation of Bangladesh (TCB). Mannan emphasised the necessity of a long-term plan to augment production. 

Record defaulted loans 

According to the latest figures of Bangladesh Bank, at the end of last June, the amount of defaulted loans stood at Tk 1.56 trillion. Compared to the previous three months, defaulted loans have increased by about Tk 250 billion. And in seven years, defaulted loans have doubled. 

Bangladesh Bank said in their report on this, 1 out of 10 of the loans distributed in the banking sector have defaulted. And in the state-owned banks, one fourth of the loans have defaulted. 

Bangladesh Bank has claimed to have implemented 12 different initiatives to reduce defaulted loans. These include provisions to take action against willful defaulters under the Bank Companies Act, reducing family influence on bank boards, empowering Bangladesh Bank to dissolve the board of any bank, and asserting control over the bank's subsidiary funds. Additionally, steps have been taken to identify banks with excessive defaulted loans. 

Bangladesh Bank also mentioned that the draft of several laws, including the bankruptcy law, is under scrutiny. Furthermore, agreements have been signed to monitor the performance of four state-owned banks and eight private banks. Bangladesh Bank has been granted the authority to make prompt decisions on various matters, including loan disbursement and acceptance for weak banks, as well as dividend determination. 

However, despite these purported efforts, defaulted loans have continued to increase. 

Why is it not resolved? 

Zahid Hossain, the former Chief Economist of the World Bank's Dhaka office, shared insights with Prothom Alo on why the crisis persists. He pointed out that weak corporate governance, a culture of willful default, and unethical business practices are symptomatic of the economy's underlying problems. These issues have been persistent, and the crisis endures because the initiatives taken by policymakers over the last one-and-a-half years have not yielded the desired outcomes. 

Concerning defaulted loans, Zahid Hossain mentioned that the policy makers' 'generous model' has contributed to the escalation of defaulted loans.

The provision allowing borrowers to be considered non-defaulters if they pay at least 50 per cent of the loan installments has inadvertently fueled the problem. Defaulters now anticipate similar leniency in the future. This lenient approach has exacerbated the issue rather than resolving it.

He recommended moving away from leniency and advocated stricter legal action against all defaulters, including those with significant influence. 

*The report, originally appeared in Prothom Alo print edition, has been rewritten in English by Farjana Liakat