Absorbing macroeconomic shocks

The economy of Bangladesh which grew an average of 7.5 per cent during the 7th Five Year Plan (2016-2019) suddenly slowed down facing the onslaught of novel coronavirus pandemic which resulted in contracting economic growth. From 2016 to 2019, the world’s second-biggest economy – China could not keep pace with Bangladesh in terms of growth rate.

At that time, China experienced a 6.4 per cent growth rate and simultaneously the world’s developing countries saw around 4.1 per cent growth. Amid the mad rush for achieving significant economic growth, Bangladesh appeared as a role model globally. When the economy planned to expand about 8.51 per cent by FY 2025 under the 8th FYP, lots of economic challenges appeared following the onslaughts of Covid-19 coupled with the outbreak of the Russia-Ukraine war. The Bangladesh government announced stimulus packages which hardly worked for the revival of the virus-hit economy. For effective economic recovery, current budgetary support is not good enough, especially against the ongoing debilitating effects of the Ukraine-Russia war.

The world is now experiencing half a dozen crises in the economy. The aftermath situation of the Covid-19 pandemic, the impact of the unending Russia-Ukraine war, inflationary pressure caused by the war, awful food and energy prices. Besides, several economies in the world are under stress because of declining foreign exchange reserves. Bangladesh has already been affected much.

The Manila-based lender, the Asian Development Bank (ADB), came up with a recent observation on economic affairs held globally. The ADB in its September outlook 2022 projected South Asian economies where projection on GDP growth rate was highly outlined. Considering the uncertainty in the economic arena held globally backed by the ongoing Ukraine-Russia war, the ADB carried out its study titled “Softening Growth and A Darkened Global Outlook”.

The study report forecasts that Bangladesh’s approaching with satisfactory GDP growth rate is not possible. The ADB forecast that Bangladesh is set to achieve economic growth of around 6.6 per cent against the 7.5 per cent target set by the government for the FY 2022-2023. But, the ADB’s April 2022 forecast came with 7.1 per cent economic growth for the current fiscal year.

Bangladesh in recent times started to face multiple challenges related to economic affairs. Bangladesh, widely known as a growing economy, had no preparedness for addressing external shocks arising from the ongoing Russia-Ukraine war. The war slowly hurt Bangladesh economy on many fronts. As Bangladesh is an importer of fuel and energy, the fuel cost has already reached skyrocketing that is being carried by both the state coffer and its citizens. Due to the war, supply chain disruption is being observed to a great extent. Freight cost has already been raised manyfold.

As a result of multiple infections seen during the war, the price level globally is on the rise abruptly. The world’s citizens are now facing untold inflationary pressure. Bangladesh is no exception. The ADB outlook also said that inflation has been projected to rise from 6.2 per cent to 6.7 per cent in the current fiscal year. It is important to note that inflation as of June 2022 reached about 7.56 per cent in Bangladesh superseding the government’s projection set earlier.

The Washington-based lender, the World Bank (WB), revealed in its study titled “The Country Economic Memorandum: Change of Fabric” said that Bangladesh’s financial sector is not in a good position. The World Bank indicated that mismanagement in the financial sector, liquidity crisis in the banking sector and the government’s excessive dependency on domestic debt is on the rise. As of June 2022, defaulted loan in the banking sector was calculated at Tk 125,257 crore.

Apart from the worse state of the banking industry in Bangladesh, some indices in macroeconomics are showing as a matter of concern. The current account deficit is widening coupled with an imbalanced situation in Balance of Payment (BoP) among others. The current account deficit was registered at $ 18.7 billion in FY 22 due to an import surge. Excessive energy prices as well as commodity prices have created havoc in Bangladesh’s economy. Bangladesh has so far paid $ 82.49 billion as an import payment in the last fiscal year against earnings of $ 49.2 billion through shipping goods abroad resulting in decreasing foreign exchange reserve. Now, the reserve stood at $ 36.85 billion as of September 21, 2022, which was recorded at $ 46.4 billion in FY 21.

According to a Bangladesh Bank report, Taka depreciated around 20.7 per cent against US currency ($) in the last year. The World Bank has recently outlined that there are three obstacles in respect of reforming Bangladesh’s economy. The obstacles are declining trade competitiveness, a weak and vulnerable financial sector and unbalanced and inadequate urbanization. The World Bank now feels the need for financial stability by improving asset quality, increasing capitalization of banks, and addressing increasing non-performing loans among others.

The assessment of the current macroeconomic situation in Bangladesh was done by the World Bank, the Asian Development Bank, and the International Monetary Fund. Intending to address the problems, the need for economic reform is a must. Vulnerabilities in the macroeconomic arena might have taken place if the Ukraine-Russia war continues. As Bangladesh aims to go next stage of development, reforms in economic policy have become a critical issue. Without massive reform, Bangladesh’s GDP could fall below 4.0 per cent by 2035- a World Bank study said recently.

Bangladesh is considered by the World Bank as one of the 10 fastest-developing countries in the world. But, the current macroeconomic situation forced us to go for reforms. There are lots of challenges lying ahead. Bangladesh has to repay $ 4.0 billion in loans taken from external sources in FY 2024-25. Besides, there is a possibility of decreasing export earnings following LDC graduation. With about 8.6 per cent revenue to GDP ratio (FY22), Bangladesh seldom achieves economic targets in the days ahead.

Right now, the emphasis on export diversification has to be given due importance as it would help reduce the current account deficit. If the projection made by the ADB becomes true in terms of economic growth, it would be tough for Bangladesh to achieve the status of an upper-middle-income country by 2031. Ensuring resilience in macroeconomic indices is a timely demand for the wellbeing of Bangladesh economy hit hard by a lot of internal and external factors.

The writer is an economic affairs analyst. He can be reached at [email protected]