Economic uncertainty: The Bangladesh context

Currently, uncertainty pervades worldwide in economic, geopolitical, and environmental contexts. The world economy is in a spree of inflation syndrome, and the central bank is in a sequel to raise the interest rate to tame inflationary pressure but this strategy is not functioning as inflation is propelled by supply-side constraints and not infused by effective demand. The dollar is gaining among the few hard currencies, and many European countries are rationing fuel use. Japan, with the historical deflationary syndrome, is experiencing inflationary pressure. Inflation in Japan hit 2.8 per cent in August, the highest level since 2014, mainly due to soaring energy prices.

However, the central bank, the Bank of Japan is sticking to the interest rates on the presumption that the current price increase is temporary and linked to exceptional events such as the war in Ukraine that caused the yen to drop, reaching a decade-low level against the dollar. When we look into the Bangladesh economy on the canvas of several macro and micro variables, we observe uncertainty and ambivalence in many contexts. The critical macro variables are remittance flows, exchange rate gyration, the level of foreign exchange reserves, fuel price, and inflation. On the micro front, the cost of many daily necessities is in the grip of the market manipulators.

Often, it is difficult to find a meaningful clue about the price hike of certain essential commodities such as the recent price rise of eggs and chilllies. The price hike of rice and edible oil is often justified by the plea for price increases in the international market. One can write episodes on the price hike of many items and the distress of middle-income families. Consumers are already cash-strapped and facing a difficult time with an increase in the prices of essential items. The cost of eggs spiraled upwards from August 9 and peaked on August 13. Intervention by the Directorate of National Consumer Rights Protection [DNCRP] between August 18 to 24 soothed the market when the price is restored to the average level. The uncertainty reappears during the second and third weeks of September 2022. The increased fuel price or the cost of poultry feed is considered the cause of the price hike. Yet, a report by the DNCRP manifests that producers in collusion raised the wholesale price by Tk. 2.70 per egg from the benchmark of 20 paisa. Thus the per dozen egg was sold in the market at Tk.160 instead of Tk.120. The typical consumer basket, in many instances, is now devoid of essential proteins such as beef, egg, and broiler chicken.

Among the macro variables, the exchange rate is now the most vulnerable animal, akin to the windsock in an uncertain direction with the imprecise policy of the government. Change in the interest rate is a driver in exchange rate movement; a higher interest rate results in appreciation in the currency. Again exchange rate often helps or hinders export earnings, and may cause severe disruption in the trade balance because of burdensome import costs owing to the depreciation of the local currency. The ambivalence in the trade balance during the last six months represents the weakness in policy measures and monitoring of the list of importable.

The depreciation of the exchange rate can cause severe concern in servicing debt when the country fails to mobilize enough foreign exchange. It is more problematic when sovereign debt is denominated in an appreciated currency, causing the excess provision of domestic currency in servicing the debt. The period is critical here. The loan disbursement at a par value of Tk.70 is different when the loan needs to be repaid at the per value of above Tk. 110. Moreover, a country may harbor problems if the remittance and the export receipts may not cope with debt servicing when earnings from the completed projects are in local currency. This may happen in the case of bilateral commercial loans. Bangladesh financed many mega projects through bilateral loans. Thus debt servicing may be a problem in the face of a lean flow of remittance and a drop in export earnings if the developed world experience recession in 2023, as predicted by the World Bank and the International Monetary Fund.

The switching from managed floating to clean floating in mid-September, 2022 caused overshooting of per value from Tk. 96 hitting Tk. 106.15 per USD. Nevertheless, the Bangladesh Bank is intervening in the market selling USD in banks from its forex foreign exchange reserves. Again any discretion in the use of multiple exchange rates for different sectors of the economy can create havoc in the foreign exchange market and may lead to syndication in the foreign exchange market. The Bangladesh Bank is following the example of Japan in sticking to 9 per cent and 6 per cent interest rates respectively for lending and deposits in the banking sector. The liquidity crunch in the banking sector is more intense than last year and depositors will shy away from banks if they get returns as low as six per cent when inflation is about 8 per cent. Market-determined interest rate works as a bonanza in currency per value assignment.

The depreciation of the currency is boosting the remittance inflow and export. The country received over USD 1 billion during the first 15 days of September. Given a stable global economic condition, remittance flow could boost foreign exchange reserves with over 0.2 million workers in FY 22 as reported by the Bureau of Manpower of Employment and training.

The GDP growth projection of 7.1 per cent in FY 22 is slashed by a few points [6.6 per cent] in the recent forecast by the Asian Development Bank. The current projection is based on the reduced household purchasing power, uncertainty in export earnings, and remittance flow. Bangladesh will be behind India and Vietnam in the revised GDP growth. The projection by ADB for various actors is mixed; export earnings may grow by 30 per cent; less than 8 per cent from the previous year and remittance inflow may grow by 9 per cent. The current account may be comfortable with an increased flow of remittance.

“ The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine is facing an increasing gloomy and uncertain outlook. Many of the downside risks flagged in the World Economic Outlook have begun to materialize.”

The writer, is a former Member, Directing Staff, Development and Economics Division, Bangladesh Public Administration Training Center at Savar, Dhaka. He may be contacted at mirobaidurr7@ gmail.com