Home ›› 19 Jul 2022 ›› Front
At a time when Bangladesh is struggling to recover from the Covid-19 economic fallout, declining remittances and reserves, soaring global and domestic inflation as well as the US dollar crisis have emerged as new challenges, creating severe pressure on the macro economy.
In addition, the appreciation of the USD against several currencies of Bangladesh’s export destinations and countries where Bangladeshi workers live, mostly in Europe and the Middle East, will pose further threats.
These may worsen the dollar crisis, which will make the exchange rate more volatile, cause forex reserves to fall, and increase inflation.
To mitigate these challenges, economists have suggested taking loans from the International Monetary Fund (IMF) and accepting the IMF’s reform conditions.
However, they also recommended not accepting any condition that will inhibit export growth and go against mass people’s interests.
The Bangladesh government has already sought funds from the IMF and the World Bank to stabilise foreign exchange reserves.
Although Bangladesh has already taken some major steps to face the upcoming challenges, economists and businessmen say many important measures are yet to be implemented.
They suggested the government reform the macroeconomic policy in line with the reality of the global economic crisis.
“These challenges are global and not new for Bangladesh, but I do not see proper government initiatives to tackle them,” Zahid Hussain, former lead economist of the World Bank’s Dhaka office, told The Business Post.
“The government is seeking IMF funds, which is needed, but the international lender will definitely impose many conditions. The government may negotiate to ease the conditions but should not reject the funds.”
Research and Policy Integration for Development (RAPID) Chairman Mohammad Abdur Razzaque told The Business Post the government should reform the macroeconomic policy
to prevent the situation from worsening further.
Reserve pressure
Bangladesh is facing a dollar crisis, coupled with higher import costs and lower remittances, despite record export earnings. The country’s foreign exchange reserves declined from $48 billion to $39 billion between August last year and July this year.
To tackle this, the government has sought a $4.5 billion loan from the IMF.
“There is nothing we can do about the US dollar getting stronger in the international market. But we have to reduce imports to overcome the domestic dollar crisis,” Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue, told The Business Post. “That is why the Bangladeshi currency’s devaluation should continue.”
Bangladesh’s latest IMF borrowing was $987 million in budget support in the fiscal year 2011-12 to stabilise the economy. The loan was given under the IMF’s Extended Credit Facility.
The government has to accept many conditions to get IMF loans. The IMF usually asks to reduce subsidies and unnecessary expenditures as well as widen the tax net to increase earnings.
Zahid said the government was providing the agriculture and energy sectors with huge subsidies. He said the government had allocated Tk 83,000 crore for subsidies in FY23 and the IMF would definitely ask to reduce it.
“A huge amount of money is paid to the quick rental power plants in capacity charge every fiscal year even though they do not generate electricity. The government should reduce capacity charges instead of taking money from the public by hiking power prices. If necessary, the government may change the law to stop subsidising such plants,” said the economist.
“We have to understand that we are passing a critical moment and need money,” he added.
The World Bank approved on March 31 this year a $250 million fund for Bangladesh to strengthen policies for sustaining growth following the pandemic and enhancing resilience against future shocks.
Later on July 16, it approved a $500 million fund to help Bangladesh improve disaster preparedness against inland flooding in 14 flood-prone districts that would benefit over 1.25 million people.
Food, fuel price hikes
Zahid and Razzaque said Bangladesh has to spend more to import food and fuel due to price hikes, adding the government can do nothing about it as it is a global crisis.
But there is hope as fuel prices are decreasing, with per barrel now costing below $100, Zahid said.
High inflation in US, EU
Despite the US and the European Union (EU) facing over 8.5 per cent inflation, they have to import mineral resources at higher prices. Economists say most Western countries are likely to face a rescission.
“Their purchase capacity will decline, and our earnings are also likely to fall due to slow economic growth and high inflation,” Razzaque told The Business Post.
Bangladeshi exporters fear this will cause export earnings to fall.
Fazlee Shamim Ehsan, vice-president of the Bangladesh Knitwear Manufacturers and Exporters Association, said, “Western consumers have to spend more due to high inflation as well as the devaluation of euro and pound, which will reduce their purchasing capacity. That is why buyers have reduced work orders.”
Esrat Jahan Chowdhury, director of the Bangladesh Jute Goods Exporters Association, said she had returned from Europe on July 13 and her buyers had pressured her to reduce prices. “They also said work orders were likely to decrease.”
Per euro equalled $1.18 last year, but they have levelled now.
The currencies of Bangladesh’s main remittance sources and export destinations, such as the EU, the UK, Saudi Arabia, and Kuwait, have become weaker against the USD.
The Bangladesh Bank data shows more than $3.5 billion came from Europe in remittances in the last fiscal year. Of this, $2.04 billion came from the UK and $1.64 billion from the EU.
Besides, remittances of $4.54 billion came from Saudi Arabia while $1.7 billion came from Kuwait in that fiscal year.
Bangladeshi expatriates earn in local currencies but remit in USD. But as the currencies of these countries have become weaker against the USD, Bangladesh will receive less money.
As a result, remittances are likely to decline further. Remittances declined by 15.1 per cent to $21.03 billion in FY22.
Mustafizur said, “Since dollar is getting stronger, it will negatively impact remittance earnings, which will put more pressure on reserves.”
Bangladesh for the first time joined the $50 billion export club and earned $52.08 billion in FY22. Around 82 per cent of this income came from readymade garment and 78 per cent from Western countries.
To handle the declining trend in foreign reserves, there is no alternative but to try to maintain export growth and remittance earnings and discourage the imports of luxury goods.
Economists and businessmen said the government was yet to devalue taka considering the reality of the global economy. It would have to pay the price for such a wrong decision, they said.
Razzaque said Bangladesh had forcefully appreciated taka while the EU, the UK, Japan, and other developed countries had devalued their currencies considering the situation.
He said even China had devalued its currency to increase exports.
“Now we see huge differences in the exchange rates set by the central bank, commercial banks, and the kerb market. If the government does not adjust these, our export sector will be less competitive in the global market while remittances will fall more,” he added.
The expert also said the government should lift the interest rate cap on loans and deposits to prevent further inflation.
“The government claimed it had fixed the rate to encourage investment. But the real picture is that the investment rate is almost the same as before,” Razzak said.
Mustafizur said the interest rate being below inflation means depositors were losing money.
