Home ›› 31 Jul 2022 ›› Opinion
Just before the appearance of the novel coronavirus, Bangladesh’s economy was moving fast, maintaining an appreciable GDP growth rate. Among the South Asian economies, Bangladesh’s position was impressive in respect of macroeconomic stability. Bangladesh also made a strong economic recovery from the Covid-19 pandemic, unlike many other countries. It is essential to know that the world’s developed countries lost growth pace in face of the raging pandemic situation. As a least developed country, Bangladesh was able to recover fast from the virus-impacted situation. In this respect, the incumbent government deserves appreciation.
When the post pandemic Bangladesh started to redesign its economic goals to fulfil targets set earlier, the Ukraine-Russia war emerged as a major obstacle. The war between two European nations, which started in February of this year, sent economic shockwaves across the world and Bangladesh was no exception. As a result of the war, the countries that rely on Russia and Ukraine in respect of oil, gas and food grains are in the midst of an ever-worsening situation.
As Russia is a key supplier of energy globally, energy importing countries are facing tough times. Europe depends on Russia for about a quarter of its oil supplies and a third of its gas. Now, a barrel of crude oil is being sold at over US$ 100 resulting in increasing import costs. As an energy importer country, Bangladesh is in a precarious situation counting high energy import costs like other countries.
Currently, Bangladesh is experiencing multiple complexities related to various macroeconomic indicators. The economy has already been suffering greatly because of the high inflation rate, trade deficit and current account deficit.
According to newspaper reports, the price level peaked at 7.56 per cent, the highest in nine years. The foreign remittance inflow dropped by 15.12 per cent, the lowest in 30 years. The trade deficit recorded US$ 3,081 crore coupled with a current account deficit of US$ 1,723.30, the highest in 50 years.
The current account is the sum of the balance of trade (net trade), net earnings on cross-border investment and net transfer payments. Due to the Russia-Ukraine war, import expenses grew by about 44 per cent. The overall import cost was registered at US$ 61.52 billion in the July-March period against US$ 42.77 billion in the same period a year before. Bangladesh right now faces a relatively low volume of foreign remittance alongside high import costs.
At the moment, the situation in the balance of payments condition looks worrisome. The balance of payments summarise the economic transactions of an economy with the rest of the world. These transactions include exports and imports of goods, services and financial assets, along with transfer payments like foreign aid. The BOP comprises the current account balance, the capital account balance and the financial account balance. It is essential to know that between 1980 and 2021, Bangladesh achieved a current account surplus for 14 years and a deficit for 28 years. The worsening balance of payments situation impacts many areas.
Protection of foreign exchange reserves has become an urgent matter considering the current context of Bangladesh’s economy. As of July 20, the foreign exchange reserves stands at US$ 39.67 billion from $ 45.5 billion a year earlier. The current reserve covers import payments for five months. Due to ever increasing import costs, the forex reserves have been declining sharply. Besides, to stabilize the foreign exchange market, Bangladesh Bank is seen to push international currency in the market. In the first couple of weeks of this fiscal year (2022-23), Bangladesh Bank injected forex reserve amounting to US$ 808 million in the market to keep it stable.
India’s foreign exchange reserves also dropped by US$ 7.5 billion to US$ 572 billion during the week ended July 1, the Reserve of Bank India ( RBI) sources said. India had been facing a volatile foreign exchange market that needed huge international currency to meet the demand.
Observing the falling trend of forex reserve, the central bank in Bangladesh toughened its rules on the import of luxury goods in addition to revising policies related to foreign exchange reserves.
Did the government take any precautionary measures when the reserve stood close to US$ 50 billion? Some time back, the International Monetary Fund ( IMF) gave warnings regarding the issue of forex reserve. The warning from the IMF came because of the decreasing inflow of foreign remittance and foreign direct investment and an increase in import expenditure. Despite IMF’s cautionary note, the government continued with its policies of utilizing forex reserve for various purposes.
The government formed Bangladesh Infrastructure Development Fund (BIDF) with forex reserves intending to lend the development projects apart from planning to implement a US$ 370.96 million power transmission project by using forex reserves. The government gave approval to use 524.56 million euros from the reserve for a development project. According to the finance ministry, BIDF was scheduled to use up to US$ 2 billion forex reserve on the condition of holding reserve for a 6-month import payment.
Some countries including China use forex reserves for development activities. China, the world’s second-biggest economy holds the highest amount of forex reserves in the world. Bangladesh is hardly comparable to China in respect of holding foreign currency. In an article this writer urged the government to use the forex reserves judiciously soon after seeing the approval of loans to Sri Lanka from the reserve.
Many developed economies hold forex reserves for 14 -16 months of import payments keeping in mind the possibility of an unusual economic situation. International currency is used not only for import payments. Foreign exchange reserve is also used for keeping the value of respective currencies at a stable rate. The reserves help to maintain liquidity management during crisis moments (such as the Russia-Ukraine war) and helps instill confidence among foreign investors.
Without finding any alternative ways to protect the forex reserve, Bangladesh Bank imposed restrictions on importing 27 types of goods. Are these decisions right for an import-oriented economy like Bangladesh? Concerns regarding the matter have been expressed by prominent economists
Recently the national and international media were flooded with news of Bangladesh seeking US$ 4.5 billion as a loan from the International Monetary Fund. It has been reported that the IMF has expressed dissatisfaction over forex reserve calculation by Bangladesh.
It should be said that IMF stands by countries that fall into economic crisis. Now, Sri Lanka, a country having negligible forex reserve, completely relies on IMF’s support. If the war in Europe continues for a longer period the economy is set to worsen further. Let us give emphasize on utilizing the forex reserve judiciously, anticipating the possible tough situation ahead.
The writer is an economic affairs analyst. He can be reached at mazadul1985@gmail.com
