Uncertainty looms as economy plunges into deep crisis
The country's economy is facing a challenging period, starting off the new financial year on a grim note. The persistent dollar crisis is casting a long shadow, affecting various sectors profoundly.
Inflation, remittance, foreign exchange reserves, defaulted loans, exports, and revenue—all of these key indicators are far from promising. Almost every economic index, which once stood strong, has shown a significant decline over the past year and a half.
Unfortunately, in the first quarter of the current financial year (July-September), most of these economic indicators have further worsened. All in all, the overall stability of the macroeconomy is now seriously at risk.
In the months of October to December, the nation gears up for the upcoming national elections, and with it comes a surge in political unrest. During election periods, business activities tend to slow down, further exacerbated by various uncertainties that arise.
Economists are unanimous in their view that there's little hope for a rapid improvement in the dire state of the economy. Over the past two years, countries worldwide have aggressively increased interest rates to stave off rising inflation and reduce currency supply.
Bangladesh, however, began implementing similar measures after a year and a half. Now, the Bangladesh Bank is seeking advice from economists. However, experts believe that due to the delayed decision-making, it's unlikely to effectively resolve the crisis.
The State Minister for Planning, Shamsul Alam, identifies inflation control as the primary challenge facing the current economy. In an interview with Prothom Alo, he stated, "At present, the most significant challenge for the economy is managing inflation. The government is placing the highest priority on controlling inflation, even from a political standpoint. Inflation slightly decreased in the month of September due to various proactive measures. This indicates that our implemented initiatives are yielding positive results. We anticipate a further decrease in inflation during October-November."
Shamsul Alam also highlighted the numerous initiatives undertaken to stabilise the dollar price. However, due to the high dollar prices in the open market, the inflow of remittances through unofficial channels (hundi) has surged.
According to him, it will take some time to address and stabilise the reserves. The increase in reserves is contingent on a boost in export income and the extent to which remittances come through legitimate channels.
Food inflation new menace
Inflation has been a pressing issue for the common people for over a year. Despite taking various initiatives, the government has struggled to control inflation. In fact, food inflation has seen a sudden and concerning increase. Inflation-adjusted costs for individuals have surged by over 9 percent in the past year.
Food inflation exceeded 12 per cent in both August and September. In August, food price inflation hit its highest point in 11 years and 7 months, reaching 12.54 per cent. A rise in food inflation will exacerbate the suffering of those in the lower- and middle-income brackets.
For the first quarter of the current financial year, the overall inflation rate stands at over 9.5 per cent. This level of inflation, exceeding 9.5 per cent in a single quarter, is unprecedented in the past.
Meanwhile, wage growth has lagged behind inflation for a year, with wages seeing an average increase of 7 to 7.5 per cent. This effectively means a decrease in people's real income. Those with limited incomes are forced to cut corners to cope with these challenging times. Several countries, including the United States, United Kingdom, India, and Sri Lanka, have managed to bring inflation under control, but Bangladesh has been struggling on this front.
An analysis of Bangladesh's economy outlined in the recently published 'Bangladesh Development Update' report by the World Bank has identified four reasons for the surge in inflation. These reasons include the rise in fuel oil prices in the country's market, weak monetary policies, currency devaluation, supply disruptions, and stringent import controls.
Remittances fell for three months
The backbone of the country's economy lies in remittances, but unfortunately, there's no positive news in this regard either. Over the first three months of the fiscal year, remittances have shown a consistent decline each month. In July, expatriate Bangladeshis sent 1.97 billion dollars, which decreased to 1.6 billion dollars in the following month.
The remittance further dropped to 1.34 billion dollars in the last month of September, marking the lowest expatriate income in a month over the last 41 months. For context, in April 2020, the remittance was at 1.09 billion dollars.
Remittance plays a vital role in supplying the necessary dollars to mitigate the reserve crisis. However, in comparison to the increasing number of people going abroad over the past year, the inflow of remittance is not proportionate.
According to sources from the Ministry of Expatriate Welfare and Overseas Employment, a total of 1.07 million workers went to different countries during the fiscal year 2022-23, marking the highest number in the last five years.
One of the reasons behind the decline in remittances is the disparity in the dollar's value between the formal and informal sectors. Presently, sending remittances through banking channels yields Tk 110 for 1 dollar. However, if expatriate earnings are sent via Hundi, expatriates receive Tk 116-117 per dollar. Additionally, past data indicates that money laundering tends to increase during election years.
There are allegations of remittance being used for money laundering purposes. Dollars are collected from expatriate workers abroad, and these funds are then transferred to the worker's relatives in the country. Consequently, fewer dollars are flowing into the country, leading to a decrease in reserves.
Less hope in export earnings
When it comes to export earnings, there isn't much positive news as well. Although there's been some growth in export earnings in the months of July, August, and September, the situation isn't particularly encouraging. This is especially true considering that, among the top five export products, all but ready-made garments have shown negative growth in the last month of September.
Moreover, the figures for export income show fluctuations on a month-to-month basis. For instance, in July, export income stood at 4.59 billion dollars, later increasing to 4.78 billion dollars. However, it declined again to 4.31 billion dollars in the last month of September.
Over the last year and a half, the dollar has appreciated by 26 per cent against the taka. This has provided some benefit to exporters.
Reserves fell by 4.46 billion dollars in three months
Bangladesh Bank is facing challenges in preventing the decline of foreign currency reserves. Various factors, including the dollar crisis and the rise in global commodity prices, have contributed to the decrease in reserves while meeting import expenses. In the first three months of the current financial year, reserves have depleted by 4.46 billion dollars.
According to sources from the Bangladesh Bank, the reserve amount was 31.20 billion dollars on 30 June. However, as of 3 October, it had decreased to 26.74 billion dollars. Nevertheless, according to the International Monetary Fund (IMF) accounting system, the reserves currently stand at 20.9 billion dollars. The actual reserves are even lower, slightly exceeding 17 billion dollars.
Revenue collection low, loan repayment high
The National Board of Revenue (NBR) has not released revenue collection data for the last three months. Balancing the pressure from domestic resource supply and meeting International Monetary Fund (IMF) conditions has made it challenging for NBR to achieve the tax collection targets.
According to NBR data, there is a revenue collection deficit of over Tk 40 billion in the first two months (July-August) of the current fiscal. For this fiscal, NBR has set a tax collection target of Tk 4.3 trillion.
Meanwhile, the pressure to repay foreign loans is also intensifying, compounded by the reduction in foreign aid exemptions. According to sources from the Economic Relations Division(ERD), foreign loans received in the last July-August amounted to 740 million dollars, a decrease from 860 million dollars during the same period last year.
In the first two months of this fiscal year, foreign loan repayments increased by nearly 60 per cent compared to the corresponding period last year. During this time, foreign loans amounting to 436.6 million dollars had to be repaid. In contrast, during the first two months of the previous financial year, the loan repayment amount was 273.1 million dollars.
The way out
Zahid Hossain, the former Chief Economist of the World Bank's Dhaka office, expressed to Prothom Alo, "Despite seeing the storm on the horizon, we are heading in the wrong direction. The policies implemented by policymakers to manage the economy over the last year and a half have not borne fruit; instead, the opposite has occurred. The desired outcomes were not achieved. Reserves have dwindled, remittances have declined, and inflation is on the rise. Moreover, we are facing impending election-centric political uncertainty, which will exacerbate the economic challenges. It wouldn't be accurate to attribute these issues solely to political uncertainty. Correct policies need to be implemented starting now."
He believes that policymakers should first acknowledge the ongoing issues in the economy. He further stated, “We could have seen a glimmer of hope if policymakers had identified the problem early and taken the right initiatives. Policymakers must recognize the economic challenges at hand.”
Zahid Hossain recommended several reforms and emphasised that monetary policy needs restructuring. Raising interest rates can effectively help control inflation. Additionally, exchange rates should be market-based. The printing of money has been halted for the last three months, and efforts to cease money printing should be sustained.
He said, despite allowing loan rescheduling with a 50 per cent one-time payment facility, defaulted loans have surged by Tk 250 billion. Permitting such malpractices must come to an end. Overall, significant reforms are needed in financial and revenue management.
*This report, originally published in Prothom Alo print edition, has been rewritten in English by Farjana Liakat