Bangladesh’s economy is doing well, and the inflation is still lower now compared to that of 2009 – the year Awami League assumed power. This is what Finance minister AHM Mustafa Kamal said recently about the country’s economic state.
“People, who are saying the country’s economy is not doing well, do not have sufficient understanding of the subject,” he had pointed out.
Despite this assurance, publically available government data tell a different story. Major macroeconomic indicators show that the country's economy headed into even more headwinds in the first two months (July-August) of FY24, when compared to year on year.
In terms of inflation, which is now a major headache for the country, Bangladesh is now at a worse position than Pakistan among the South Asian Nations. Sri Lanka performed best in the region.
At the same time, Bangladesh’s key USD sources underperformed, evident by the low export income growth, and reduced remittance inflow. Besides, the opening of letters of credit (LCs) fell, depreciation of taka increased, and the foreign exchange reserves continued to bleed.
During the period, the only good indicators are the implementation of Annual Development Project (ADP), and revenue income. These factors were however achieved due to soaring inflationary pressure and depreciation of taka.
Another positive sign was the government's repayment of loans to the central bank. It has now turned to borrowing from the scheduled banks, but the move was made possible by a sharp decline in private sector credit growth to a single digit in July after 21 months.
This move is supposed to help the government mitigate printing of money and borrowing from the scheduled banks, which in turn could help contain inflation.
However, the decline in private sector credit growth indicates low investment demand in the economy, which may increase unemployment further amid such a high inflationary pressure.
Speaking to The Business Post, Center for Policy Dialogue (CPD) Distinguished Fellow Prof Mustafizur Rahman said, “Pressure from multiple angles has put Bangladesh’s economy under duress. Pressure on macroeconomic and external sectors is now impacting public lives.
“The government should focus on tackling these issues, or the situation will continue to get worse.”
USD income & forex reserves
A USD crisis began in Bangladesh in FY22, after the country paid $89.16 billion for imports, which was around 36 per cent higher year-on-year. Global market became volatile as commodity and energy prices rose due to the Russia-Ukraine war.
The crisis is steadily getting worse as the depreciation of taka increases. This chain of events fueled high inflationary pressure in Bangladesh.
At a time when the country is struggling to tackle the steady decline in forex reserves, export earnings growth dipped.
According to the Export Promotion Bureau (EPB), Bangladesh exports grew by 15.26 per cent in July and 3.8 per cent in August of FY24, compared to 14.70 per cent in July and 36.18 per cent in August last FY.
Another source of the country’s USD income is remittance, which has been in a continuous decline in July and August compared year on year. Remittances reached $1.97 billion in July and $1.59 billion in August – a year-on-year decline of 5.74 per cent and 22.05 per cent respectively.
As the government is trying to cut imports to save USD, payments in July declined by 14.84 per cent to $4.99 billion. Though August’s figure is yet to be released, in that month, opening of LCs declined by 23 per cent to $4.96 billion compared to year-on-year.
Under such circumstances, there is little the government can do to protect the reserves from depletion. Central bank data show that the forex reserves declined to $23 billion this August, compared to $39 billion recorded during the same month last FY.
The country’s dwindling reserves are impacting the domestic price of USD. The greenback price rose by 15.2 per cent to Tk 109.5 in August this year, from Tk 95 a year ago. This high price of USD is fuelling inflationary pressure in the country, which has reached its highest in a decade.
Addressing the issue, Prof Mustafizur said, “Inflation is a macroeconomic factor. Dwindling reserves increase foreign exchange rate, while a reduction in the amount of LC openings create a gap between supply and demand.
“There is mismanagement in the market as well. These are the reasons why inflation is going up.”
Inflation key challenge
Bangladesh faced high inflationary pressure in FY11, after that inflation gradually declined to 6.15 per cent in FY22. But it again rose to 9.02 per cent in FY23.
In July and August of FY24, inflation in the country was 9.69 per cent and 9.92 per cent respectively, and these numbers are higher than that of India and Sri Lanka. Bangladesh also witnessed 12.5 per cent food inflation in August this year – highest in a decade.
An analysis of publicly available data shows that Bangladesh has the highest inflation after Pakistan among the South Asian nations. This year, Bangladesh saw the highest inflation of 9.94 per cent in May. In the same month, Pakistan also had its highest inflation of 38 per cent.
Pakistan’s inflation came down to 27.4 per cent in August, while Bangladesh's inflation is on the rise again. However, according to the IMF conditions, inflation is expected to increase in Pakistan due to the recent increase in fuel prices.
Sri Lanka is showing determination in bringing down inflation. The country's inflation dropped from 53 per cent from January to 4.6 per cent in July this year.
Meanwhile, inflation rose due to floods in India during August. Inflation was 6.5 per cent in January. The figure then dropped to 4.87 per cent in June, but again rose to 7.44 per cent in July.
Speaking to The Business Post, Bangladesh Institute of Development Studies (BIDS) Senior Research Fellow Dr Monzur Hossain said, “A lack of proper market management seems to be the key reason behind high inflation in the country.
“Moreover, a section of traders is increasing the prices of goods to make a profit. So market management needs to be fixed along with the supply mechanism.”
Revenue & ADP implementation
The country’s revenue collection and expenditure have surged significantly in the first month of FY24. Data for the month of August is not yet published.
The National Board of Revenue (NBR) achieved a remarkable milestone by collecting Tk 20,561 crore in revenue during the first month of FY24 – an increase of over 15 per cent when compared year-on-year.
Due to a rise in import costs and inflation, Value Added Tax (VAT) and Customs duty showed a 21.51 per cent and 14 per cent growth respectively this July, compared year-on-year. The August data is not yet available publically.
Such a growth helped increase government spending. During the initial month of FY24, spending on projects under the Annual Development Programme (ADP) rose by 1.27 per cent, reflecting a significantly accelerated pace compared to the same period last year.
Bank borrowing
In FY23, the government took Tk 1,01,826.90 crore in loans from the banking sector to meet the budget deficit and implement ADP. Of the figure, Tk 98,000 crore was taken directly from the Bangladesh Bank. This move equals printing money.
If the government’s revenue collection fails to meet the target for FY24, and if it decides not to cut expenditures, it will continue to borrow heavily from the banking sector and directly from the people through saving certificates.
The target of government borrowing from the banking system has been set at Tk 1,32,395 crore in the national budget for FY24.
During the July-August period, the government's scheduled bank borrowing stood at Tk 18,805 crore.
However, net credit to the government from the banking sector was negative Tk 3,282 crore as the government repaid loans to the central bank, which was borrowed in the previous fiscal year.
In the first two month of FY24, the government repaid Tk 22,088 crore to the central bank, in a bid to rely less on this particular source.
