Bangladesh economic crisis set to deepen, prolong

Prothom Alo illustration

There is no sign of the ongoing financial crisis to be resolved any soon. Rather, it is being deepened and prolonged. Several financial indicators have weakened further. The power and energy crisis has intensified further.

The risk of a food crisis is looming large all over the world, including Bangladesh. The prime minister herself has mentioned about a possible famine.

The foreign reserve has dwindled by more than 11 billion dollars in the current year. The income from remittance and exports has slowed down. The transaction deficit has reached a new record now due to low foreign exchange earnings.

The biggest problem for the common people now is inflation. It has increased the living cost and decreased the actual income of people. The big problems for the entrepreneurs are the power and energy crises. The production has declined. The Bangladesh Bank is still struggling with the rate of dollars. The government income is also low. As a result, it is not possible to increase the allocation for subsidies.

The global economy is showing no good signs either. The central bank of the USA has aggressively increased the policy interest rate six times in the current fiscal. Despite that, the inflation is not slowing down. As a result, the risk of global recession is increasing. The International Monetary Fund (IMF) says bad times are yet to come. Global growth will slow further and the inflation rate will increase. In other words, the year 2023 will not go well.

While speaking about the financial situation, state minister for planning Shamsul Alam told Prothom Alo, “There is some kind of pressure in the economy. However, there is nothing to be panicked. There is nothing to be frustrated with current levels of the economic indicators.”

“Once the electricity supply is regularised, the production will return to normal. And then it will be possible to control the inflation. If we get assistance from the International Monetary Fund (IMF) and World Bank, we will be able to resolve the dollar crisis. There are talks about the food crisis. But we have achieved a bumper Aman production this year. We are preparing for a bumper Boro production. We are very cautious about the agricultural production this year.”

Almost all the indicators showing bad signs

The current inflation rate in the country is the highest in almost 12 years. The inflation rate is 9.1 per cent. According to the IMF forecast, the average inflation in Bangladesh will be 9.1pc in 2023. In other word, there is no sign of any good news in terms of inflation rate in future either.

The Bangladesh Bank had maintained the value of taka artificially till last year. However, as the import cost increased and foreign exchange earnings dwindled, the central bank started depreciation of taka gradually. In the end it was forced to leave the dollar exchange rate on the market to some extent. As a result, the rate of the dollar increased to Tk 107. At the same time, Bangladesh Bank started selling dollars from the reserve to maintain the supply in the market. Therefore, the reserve of $ 48 billion has decreased to $ 34.33 billion now, which will cover four months’ import expenditure. Even a few months ago, it was possible to cover seven months’ export cost with the same reserve.

However, according to the IMF this estimation is not complete as some 7.2 billion dollars has been given as loan and there is no guarantee of getting the full amount back. As such, the usable reserves is a bit more $27 billion at the moment.

Besides, the ratio of the overall earning and expenditures of the government has become mostly imbalanced. The government is not being able to meet the targeted income; however, the expenditure is rising.

The deficit in the earning of the National Board of Revenue (NBR) in the first three months of the current fiscal (July-September) was $ 55 billion. On the other hand, the government subsidy in fuel and fertilisers is rising due to the rise of its prices in the international market. However, the government is not being able to increase the allocation in this sector. Therefore, the price of fuel had been raised once more. Now the pressure is mounting to increase the price of fertilisers and power.

Concerns even over reliable indices

Exports and expatriates' income, the main sources of foreign currencies in Bangladesh, have been declining for the last two months. The Export Promotion Bureau (EPB) said the country’s earnings from exports dropped by 8 per cent in October, compared to the corresponding month of last year. The earnings earlier fell by 6.25 per cent in September, snapping a 13-month gaining streak.

In total, the country registered a 7 per cent growth in export earnings in the first four months of the current fiscal, which was recorded at 22.62 per cent in the previous year’s corresponding months. The exporters feared the income to fall further in the coming days due to the decline in purchase orders.

Meanwhile, the inward remittance fell to an eight-month low in October. There is a 2 per cent growth in remittance if all four months of the current fiscal are taken into account. More than 900,000 workers went abroad in the current fiscal year. The remittance is expected to improve once they start to remit their income to their families.

Here, it is crucial to fix a market-based exchange rate for the greenback. Otherwise, the hundi business will expand further. But the experts find no visible step by the government to contain the money laundering.

Uncoordinated planning

The inflationary pressures intensified globally after the commencement of the Russia-Ukraine war. Against such a backdrop, Bangladesh welcomed inflation by raising the fuel prices up to 52 per cent. When the other central banks were struggling to deal with the high price of dollars, the Bangladesh Bank launched an investigation into the dollar selling methods of the commercial banks and the amounts of profits bagged by them through dollar trading.

The situation became more complex when the central bank took an initiative to punish the top officials of some major banks. It was forced to move away from the initiative. The authorities introduced a managed floating exchange rate, but still maintain multiple exchange rates. Also, there is no sign for the hundi business to abate. New decisions are still being made about exchange rates, and they are being revised frequently. The situation is not being stable in the aftermath.

The government has chosen the method of import control to relax the pressure on dollars. The banks turn a deaf ear to the applications for opening letters of credit (LCs) if the importers do not have export earnings. Many traders are failing to open LCs, which eventually has created a commodity crisis. Also, the import of food commodities decreased to a large extent. The facts are responsible for the recent instability in sugar market.

Mega threats await

Turkish-born American economist Nouriel Roubini has a global reputation for accurate economic forecasting. He wrote in the The Guardian on Monday, “In our partisan political world, where we kick the can down the road – we are biased towards short-term planning and leave thinking about the future to others – these threats are something different. Left to grow, they will make life worse for people across the world.”

He identified some economic mega threats as the spectre of inflation and recession at the same time and the historic rise in private and public debt ratios.

The World Economic Forum (WEF) said in a survey recently that high inflation, loan repayment crisis and rising cost of living are the biggest threats for the next two years. Especially, as the developed countries are raising interest rates to rein in inflation, recession is assumed to be inevitable.

All are predicting that the global economic crisis would not go away in the next year. Bangladesh will also take heat from the crisis. The prices of fuel oil, coal and LNG in the world market will not decrease soon and the crisis in the power sector will not fade away. Rather, the crisis is reducing production in the private sector.

The consumer demand subsided in the market due to the high inflation, so did the sale. Some big companies are counting losses. The economy, on the whole, has slowed down.

In such a situation, the IMF delegation is now in Dhaka to discuss the terms for a proposed USD 4.5 billion loan. The fate of the loan depends on what conditions the lender places and how far Bangladesh complies with it.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, believes that there are risks for Bangladesh from both sides - internal and global. He said, “The internal situation is getting critical gradually. There have been slowdown in export and remittance income and disruption in production due to gas and power crisis. Factories are unable to produce even if there is demand.

“The import of fuel oils, including diesel, was reined in to save dollars. There have been power cuts as a consequence. The agriculture (croplands) cannot be irrigated due to load shedding. Again the production in the industry is decreasing,” he added, suggesting that the government should fix the priority first.