Home ›› 06 Nov 2022 ›› Opinion
Amidst worldwide economic trauma, the economies hit hard by the ongoing war in Europe and virus are finding economic recovery tough going. The Western economies, that are considered totally developed, are set to fall in troubles facing the looming economic crisis. Currently, lower and middle-income countries are experiencing some very unpleasant results of the war. Bangladesh, as a lower-income group country, was able to bring resilience in the area of macroeconomics management shortly after the pandemic neared its end. Among South Asian nations, Bangladesh showed better performance in respect of economic growth during virus time. But, the economy is stumbling in the face of the Ukraine-Russia war situation.
Bangladesh economy, in the meantime, has come under attack in the macroeconomics front due to the war taking place between Ukraine and Russia. Balance of Payment ( BoP) comprising of current account, capital account and financial account is in bad shape at the moment. Current account deficit widened to $ 3.6 billion during July-September quarter of the current fiscal year. The impact of current account deficit falls on Balance of Payment which showed deficit worth $ 3.45 billion during the period.
Ultimately, foreign exchange reserve is adversely impacted with Balance of Payment having deficit. Now, the forex reserve situation in Bangladesh is in falling trend. Insignificant volume of export earnings and poor inflow of foreign remittance, FDI, foreign loans and aid are accountable for going down of forex reserve. The reserve position now below $ 36 billion which was $ 46 billion a year ago. Inflow of foreign remittance compared to outflow of Bangladeshi expatriates in recent time is not satisfactory. Due the rapidly fluctuating dollar rates, the remitters are preferring illegal channels with the aim of getting extra rate. Monetary policy revealed by the central bank is not working up to the expectation. Inflation rate has already recorded a twelve-year high. We have observed a good deal of criticism regarding fiscal policy also. Bangladesh is in one of the lowest position in the area of Tax to GDP ratio in the world.
Bangladesh may have to witness unforeseen challenges concerning the economy and businesses in the days to come. The country has to repay a good chunk of foreign loans from the year 2024. Bangladesh has to face the challenges related to LDC graduation in a number of ways. With increasingly uncertain revenue earnings, it would be next to impossible for the economic growth to be sustainable. With a view to increasing competitiveness of local industries, there is no alternative to reduce tariff rates right now. The economy turns into ailing situation due to rise in Non-Performing Loans (NPL). Bangladesh’s NPL amount has already exceeded internationally accepted limits. If NPL remains 3 per cent it is called international standard. Bangladesh’s NPL is close to reaching 9 per cent. The country’s apparel sector accounts for 80 per cent of total exports. Bangladesh has to diversify export baskets instead of relying on a single exportable item.
The national budget for the fiscal year 2022-23 was announced keeping 5.5 per cent deficit which is scheduled to be financed from domestic and external sources. As a budgetary support, the government sought financial assistance from the International Monetary Fund (IMF). The loan amount sought from the IMF has been set at $ 4.5 billion. When Bangladesh sought IMF loan support, some international media outlets reported the news stating that “Bangladesh is the third nation in South Asia that is seeking IMF assistance next to Sri Lanka and Pakistan”.
Prior to sanctioning any sort of loan, the IMF management does assessment on the country’s macroeconomics stability. As part of IMF routine works, an IMF delegation is supervising the current macroeconomic indicators of Bangladesh. The visiting delegation is discussing relevant issues with concerned ministries’ officials.
After overseeing many issues, the IMF team expressed dissatisfaction about the overall situation mostly related to tax and banking affairs. Besides, the issues concerning calculating method of forex reserve, fixed exchange rate, autonomy of the central bank, quarterly GDP report publishing, removal of lending cap, national savings certificate programme, bureaucratic complexities in state-owned financiers drew attention of the IMF delegation. The IMF has puts emphasis on reforming the tax policy and implementing VAT law for greater interest of Bangladesh economy. Tariff rationalization is important in view of IMF’s views about competitiveness of local industries.
The IMF loans will be helpful for forex reserve, no doubt. The IMF is expected to supply loans from its three category funds- 1. Enhanced Credit Facility ( ECF) 2. Enhanced Funding Facility ( EFF) and 3. Resilience and Sustainability Fund ( RSF). Each will potentially provide $ 1.5 billion. For qualifying for the loans amount, Bangladesh has to do reform works stated above. The reform in economy is a timely demand.
Bangladesh, which is under stress in economic front, should take reform decision in IMF quoted arenas. Bangladesh’s tariff rate and tax to GDP ratio is not up to the mark and ideally should be matched with peer economies. If Bangladesh pays heed to IMF advice, the flexibility in fiscal arena is bound to come. The government will have to get the chance to expend more in social safety net programs after tax to GDP ratio rises.
Private sectors are facing immense suffering due to getting less than expected amount of loans from the locally based lenders. If defaulted loan amount is not decreased to a significant level, the banking world turns into falling industry resulting during vulnerable economic condition. The Washington-based global lender gave away loans to Bangladesh 12 times since the country became a member in 1972. Bangladesh first took loans from the IMF in 1974 for reconstructing its war-ravaged economy.
Some time back, the IMF advised to form a Financial Stability Council in view of the ailing condition in financial sector in Bangladesh. Possibly, Bangladesh is yet to move to form the council. In 2012, VAT law in Bangladesh was introduced following IMF pressure. But, unfortunately, Bangladesh could not move from the implementation stage of VAT law. Besides, formation of National Real Estate Task Force was supposed to form in light of IMF advice given in 2020. Now, Bangladesh needs zero-interest and low-interest rate loans.
IMF’s newly created Resilience and Sustainability Fund (RSF) is completely low-interest rate scheme that was launched for the economies facing financial challenges. Right now, IMF loans will be beneficial to forex reserve also. IMF pre-conditions would be blessing for Bangladesh if Bangladesh pays heed to IMF advice as conditions of getting loans.
The writer is an economic affairs analyst. He can be contacted at: [email protected]
