Home ›› 02 Nov 2022 ›› Front
There is troubled water ahead for Bangladesh as every major economic indicator – especially the export earnings and remittance inflow – has been on the decline for the last two months. This in turn has created a rapidly widening current account balance deficit.
Bangladesh is already under pressure from the country’s short-term foreign debt burdens, both private and public, which is compounding the ongoing dire situation. The forex reserves have been on a downward spiral since last year, and the dip is showing no signs of slowing down.
As Bangladesh struggles to import oil and gas because of the USD shortage, the country’s manufacturing and export-oriented industries face a severe crisis of power and energy, while buyers defer shipments and request a halt in production.
Exporters – mostly apparel makers – are now stuck with readymade garment items worth nearly $1 billion in warehouses. They are getting buried under mountains of Letters of Credit (LCs) liabilities.
Many industry leaders had recently asked the government to import additional LNG from the spot market, citing that they are ready to pay significantly more for the energy as it would help them keep production running uninterrupted.
However, Energy Adviser to the Prime Minister Tawfiq-e-Elahi Chowdhury rejected the proposal citing forex currency shortage.
The government is now trying to borrow foreign currency from the International Monetary Fund (IMF), but it is yet to be confirmed. Bangladesh has already borrowed USD from the World Bank, Asian Development Bank (ADB) and other sources, but the economic crisis still looms.
Former advisor of the caretaker government and noted economist AB Mirza Azizul Islam said, “We are facing a big challenge. Two major sources of foreign currency earnings are in the negative, which is severely impacting our macro economy.
“Foreign debt payments are also hitting our forex reserves. To tackle the crisis, the government should execute short and long term policies, such as the continued restriction on imports of luxury and unnecessary items, boosting skilled labour exports, and expanding to new markets.”
Islam however pointed out that the crises will not end overnight.
The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Faruque Hassan said, “Our new orders are declining, export performance is likely to continue its downward trend at least till November this year.
“Buyers are not accepting deliveries of ready-to-ship goods, and they are yet to clear millions of USD in payments. Under such circumstances, we will fail to meet our export target for this year. It will be very difficult to retain our export growth as well.”
It should be noted that Bangladesh is highly dependent on import of essential commodities, except rice. If the country’s forex reserves crisis deepens further, it will severely impact Bangladesh’s food security.
Export earnings keep sliding
Bangladesh – led by the apparel industry – witnessed tremendous export performance in FY22, earning $52.08 billion. But the good times did not last long.
Although Bangladesh projected an 11.37 per cent export growth to $58 billion in FY23, industry insiders say it is quite difficult to achieve this growth as export performance has been declining since September, and the dip is likely to continue until at least November.
According to the Export Promotion Bureau (EPB), around 83 per cent of the country’s annual export earnings come from the apparel sector, while the apparel and textile sectors hold nearly 88 per cent of the total earnings.
The country’s overall September export earnings declined by 6.25 per cent and apparel sector earnings down by 7.25 per cent, when compared year on year.
Data for the October 1-30 period – collected by the National Board of Revenue (NBR) and compiled by BGMEA – show that the month’s apparel export earnings have dipped by nearly 16 per cent to $2.7 billion year-on-year. It was $3.2 billion in October 2021.
Speaking to The Business Post, BGMEA Vice-President Shahidullah Azim said, “Although the figure will change when the EPB finalises the monthly probationary export data for October, it will not cross $3 billion.
“This means we are around $200 million short of the figure posted in October 2021.”
A number of EPB officials also warned that overall export earnings for the month of October this year could be lower than that of September.
Remittance earnings on downward spiral
Although the country started the first two months of FY23 with tremendous growth in remittance earnings and earned above average $2 billion each month, the figures have slipped in the last two months.
According to central bank data, Bangladesh’s remittance inflow has dropped by 7.35 per cent to $1.52 billion in October when compared year-on-year. The country had received $1.53 billion in remittance in September 2022, which is a decline of around 12 per cent year-on-year.
Economist AB Mirza Azizul Islam said, “While the number of expatriates is increasing day by day, why is the remittance inflow dropping? I think, hundi [an illegal cross border transaction system] has increased, and the government definitely has to take proper initiatives to stop it.”
Zahid Hussain, former lead economist of World Bank Dhaka Office, echoed the same adding, “The new exchange rate is also one of the reasons behind the steady drop in remittance earnings.
“As inflation rose in Bangladesh, expatriates began sending more money to support their families, but the funds are coming through illegal channels.”
From mid-September this year, the Bangladesh Bank agreed to a floating exchange rate. The Bangladesh Foreign Exchange Dealers Association (BAFEDA) fixed Tk 107 for remittance through exchange houses, and the rate is Tk 99 per USD for exports.
The central bank on Sunday decided to set different rates for skilled and unskilled expatriates.
Adding that the situation will create even more hassle for remitters, and further impact the remittance earnings, Zahid Hussain said, “What method will the central bank use for differentiating between skilled and unskilled expatriates?
“The documentation process will create just another obstacle.”
Forex reserves at alarming level
In FY22, Bangladesh imported goods worth $82.5 billion, which means the country spent $6.88 billion on average per month to pay the bills.
When Bangladesh’s forex reserves started declining, the central bank took many initiatives to reduce imports. Despite such measures, the country spent $12.69 billion in the first two months of FY23 to pay import bills.
This means Bangladesh needs more than $6 billion per month for import payments.
As per international standard, when a country is considered to have a stable economy when it has enough USD to cover three months of import payments. But when a country undergoes instability, it needs enough reserves to cover essential imports for more than three months.
Bangladesh currently has $35.85 billion in reserves. If Bangladesh accepts the IMF recommendation on reserve calculation, the figure will slip to $27 billion – which can only cover less than four months import payments.
It should be noted that Bangladesh also has a large foreign debt pressure, and the outstanding amount of such loans is $95.85 billion, and of the figure, $20.64 billion is short-term foreign debt until June this year.
If Bangladesh pays a major portion of the short-term foreign debt, the reserves will decline significantly. In that case, the government will not have the reserves to cover more than three months of import payments.
Economist Mirza Aziz said, “Seeking $4.5 billion in loans from the IMF would be a slight help in easing the ongoing crisis, but Bangladesh needs long term policies to navigate the troubled waters.”
