Bangladesh had tightened its import policy as part of austerity measures to curb the steady decline of foreign exchange reserves. A move, which has largely been unsuccessful in saving USD, has instead been disrupting the flow of investments in the country.
When compared year-on-year, the country’s import payments for investment and production related goods dipped around 15 per cent to $69.49 billion in FY23. But during the same period, foreign exchange reserves fell more than $8 billion, show latest data from the central bank.
Of this figure, the import cost of intermediate and capital goods – directly related to investments and production – decreased by 19.8 per cent and 17.4 per cent respectively.
In FY23, import payments on intermediate goods declined by 19.8 per cent to $44.26 billion. On the other hand, capital machinery and goods import payments decreased by 17.4 per cent to $13.58 billion.
The decline in such types of imports is impacting investments in Bangladesh. Finance ministry data shows that private investment as a proportion of GDP was 24.52 per cent in FY22, which later dipped to 23.64 per cent in the last fiscal year.
Speaking to The Business Post, Policy Research Institute (PRI) Executive Director Ahsan H Mansur said, “Investments usually decrease due to economic and political instability. If the imports are reduced, the first impact falls on investments.
“Bangladesh had to take a firm decision to reduce imports because there was no sufficient USD in hand. It is more important to secure supply of fuel and essential commodities, than to focus on investments.”
According to central bank data, the ongoing USD crisis disrupted the import of energy used by the country in power generation. The import payment of petroleum goods had decreased by 27.8 per cent to $5.77 billion in FY23.
On the other hand, the import payment of goods used by Bangladesh’s top export-oriented earner readymade garment (RMG) sector also decreased by 22.2 per cent to $17.31 billion. The import payment of capital goods fell 11.3 per cent to $4.84 billion in FY23.
Executive President of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Mohammad Hatem said, “The latest Bangladesh Bank data on imports heavily imply that the falling trend is impacting investments.
“Aside from the impacts of government restrictions, raw materials imports also declined because of dropping domestic sales due to high inflationary pressure. Besides, imports of RMG related goods fell because export orders declined.”
He added, “Besides, there is uncertainty about what will happen in the future due to the global crisis, and the ongoing political turmoil in Bangladesh. Under such circumstances, the import of capital machineries has decreased.”
Echoing the same, Mansur said, “Investment is a long term decision. It is normal for investments to go down during times of crisis or turmoil.”
It should be noted, private sector credit growth, one of the key indicators of investment, has fallen to 10.57 per cent in FY23, from 13.66 per cent in FY22.
Reserves bleeding steadily
An analysis of Balance of Payment (BoP) data clearly indicates that the government has been mostly unable to curb the steady loss of foreign exchange reserves.
The Bangladesh Bank pumped $8.22 billion of support from the reserves to stabilise the balance of payment in the last FY, which was $6.5 billion in FY22. As a result, gross reserves fell from $41.82 billion to $31.2 billion in FY23.
Calculated under the International Monetary Fund (IMF) method, these reserves would stand at $33.38 billion and $24.75 billion in FY22 and FY23 respectively. The latest position reserves were $23.31 billion on July 26, under the IMF method.
At the end of last FY, Bangladesh had the capacity to cover 4.6 months of import expenses with the reserves. Experts warn that as this figure continues to decrease, it will take down the country’s capacity for essential commodity imports.
This in turn puts Bangladesh into a path of crisis. Under the international standard, a country must have the capacity for at least three months of import payment, and five months capacity denotes a comfort zone.
On the issue, Ahsan Mansur said, “A country must keep at least three months of reserves at hand. Otherwise there will be no confidence in the international trade transactions. So a high amount of reserves should always be maintained.
“But the problem is we have accumulated a lot of liabilities. Which if paid, will further reduce our reserves.”
Taka continues to depreciate against the USD due to depletion of reserves. On June 30, the last day of FY22, the USD price was Tk 93.45, compared to Tk 108.35 at the end of FY23. Since this week, the exchange rate has increased to Tk109.5.
However, due to the high demand of the US greenback, USD is sold at higher prices in the open market and in some banks as the remittance inflow through unofficial channels has increased.
In FY23, Bangladesh exported the highest manpower in history, but remittance did not come to the desired level.
During the period, remittances came in at just $21.61 billion against exports of 11.37 lakh manpower. However, during the period of Covid-19 pandemic, remittances inflow was at $24.77 billion against the export of only 1.33 lakh manpower in FY21.
What’s the way forward?
Economists believe that since Bangladesh has fallen into a USD shortage, eliminating this crisis should be the country’s main objective. They feel that it is also important to see what process the government is following to eliminate this crisis.
Ahsan Mansur said, “Large foreign payments must be requested to be rescheduled. Besides, remittances should be increased through formal channels. However, in this case, effective measures should be taken to stop money laundering. Otherwise, the reserve will not increase.”
Recommending a further increase in exports, he said, “But if the government wants to increase it, they need to boost investments. But Bangladesh is now stuck between a rock and a hard place.”
