Bangladesh's current economic situation and way out

In 2021, Bangladesh’s economy had begun to recover well from the pandemic and gradually returned to Bangladeshi economy had been growing at the fastest pace for the last decade. The economy had been returned to pre-Covid track. Only a year ago, Bangladesh had supported Sri Lanka with $250 million. But since mid-2021, global commodity prices, especially of oil, have begun to rise. This was intensified by the Russian invasion of Ukraine in March.

The Bangladesh government set a growth target of 7.5 percent in the budget for FY23 before the crisis of Ukraine war. The International Monetary Fund has cut its GDP growth forecast for Bangladesh in fiscal 2022-23 to 6 percent from its previous projection of 6.7 percent. In its recent global outlook report, the IMF updated its predictions from its previous report in April, bringing it in line with the World Bank, which lowered its forecast for Bangladesh’s economic growth for the current fiscal year by 0.6 percentage points to 6.1 percent. The IMF also projected that consumer prices in the country will rise by 9.1 percent in the ongoing financial year, up from a 6.1 percent rise in 2021-22. Data published by the Bangladesh Bureau of Statistics earlier in the day appeared to back the IMF’s inflation forecast. The BBS said consumer prices rose by 9.10 percent in September after hitting a decade-high 9.52 percent in August.

According to the Bangladesh Bureau of Statistics (BBS), Bangladesh saw a sharp rise in inflation in August 2022 – 9.5 percent – which dropped slightly – 9.1 percent – in September, Earlier in July 2022, the inflation rate was 7.48 percent, compared to 5.36 percent in July 2021. This increase is driven by food inflation in the domestic market, since food makes up about 60 percent of the Consumer Price Index in the country.

The Executive Chairman of the Power and Participation Research Centre (PPRC) was commenting that about 21 lakh people became poor between January and May due to inflation, he said the number is more than 50 lakh as per the estimation by several international organizations. According to the Trading Corporation Bangladesh (TCB), prices of essential commodities have increased by as much as 50 percent compared to last year.

Bangladesh mostly exports ready-made garment (RMG) products. Since the whole world is facing economic slowdown and inflationary pressure, people in the middle-income and lower-income categories will prioritize their spending on food, education, healthcare, housing and other necessities, and cut their expenses on clothes. The lower growth and apprehension of many economies slipping into recession are alarming signs for our export sector.

In the financial year 2022, the expenditure on imports increased by 36 per cent, compared to 20 per cent the previous financial year. The high import cost is due in part to the increased demand for imported goods and in part to the higher import prices on the global market. Bangladesh, as a major energy importer, is facing several challenges. Its foreign currency reserves are declining and the value of its currency, the taka, is weakening. Electricity load shedding has worsened, adding to the woes of citizens.

As a result, the terms of trade have gone against Bangladesh. During 2021-’22, the import-price index increased by 5.06 per cent, while the export-price index increased by 3.23 per cent. This has hurt the current account balance. In the financial year 2022, the current account balance reported a deficit of $18.70 billion compared to the previous year’s deficit of $4.58 billion.

The current account deficit in Bangladesh is generally met by remittances from abroad, which have also decreased significantly in the financial year 2022. Remittances fell by 14 per cent in the financial year 2022, following a 36 per cent increase in the financial year 2021. This has affected the balance of payments, foreign currency reserves, and weakened the taka against the
US dollar.

Despite adjusting the exchange rate to match the market demand, the Bangladesh Bank continued to sell dollars from reserves to keep the taka stable. As a result, reserves declined further. To keep the taka’s value stable, the Bangladesh government and Bangladesh Bank have taken measures to reduce imports and increase the flow of dollars. The government has discouraged the import of luxury items. The honorable PM has predicted that the situation will continue for 2 years and requested the citizen to remain alert.

Monetary policy plays an important role in taming inflationary pressure. Within the monetary policy mechanism, the interest rate is used as an effective tool in such circumstances. Many countries are applying this tool where the rate of interest on bank loans is increased to control money supply in their economies. In Bangladesh, the interest rate regime is controlled by the central bank despite the fact that our economy is largely driven by market economy philosophy.

There should also be targeted support for small and medium enterprises (SMEs). They should be given loans at a lower rate than the large enterprises for their survival and employment generation.

For public finance management, the already introduced austerity measures such as stoppage in vehicle purchase by government entities, reduction in foreign travels by government employees, stoppage in providing honorarium for attending meetings, pause in the implementation of C-category ADP projects (i.e., low priority projects) and reduction in expenditure (by 20–25 per cent) owing to fuel and electricity by government agencies should be continued. The subsidy on fuel, power and agriculture should be continued until the situation become normal.

For the energy sector, necessary forex needs to be arranged for energy import. Depending on imported LNG alone would be too burdensome and would be too uncertain to ensure uninterrupted gas supply for domestic industry and power sector. Also, immediate measures in exploring gas in old gas exploration sites are required. Moreover, the government should realise that renewable energy can play a vital role in energy diversification in the current fossil-fuel based energy crisis.

Bangladesh will still have to import some food to build up the stocks to ensure desired food security. We now have a food stock of about two million metric tons. Ideally, we must aim to raise this stock to three million metric tons through both domestic and external procurement processes.

The import restrictions, austerity measures, power rationing, suspending implementation of less priority projects aimed at checking macroeconomic pressure turned complicated due to the Russia-Ukraine war. There is no alternative to suitable reforms for higher revenue generation, export diversification, reducing inequality, curbing bad loans, checking capital flight and ensuring good governance for restoring macroeconomic stability.

The International Monitory Fund has outlined wider reform measures, including bringing discipline to the financial sector and boosting revenue collection, for Bangladesh to avail the $4.5 billion loan. To increase revenue, the IMF suggested meeting multipronged targets like simplifying the VAT rate structure, modernizing the revenue administration and building compliance risk management capacity through focusing particularly on large taxpayers. Bangladesh should reform the financial management and administration as per suggestion of IMF. A IMF team now in capital to discuss the loan agreement and urgently needed reforms.

In brief, four domestic areas tied to government policies can be identified as sources of the present crisis:

• High cost of infrastructure projects, often described as “mega projects”
• Crisis in the banking sector due to widespread default of loans
• Controlled and different pricing of Dollar to Taka 
• Waste of resources in the energy sector 
• Capital flight 

As to reduce inflation four measures may be taken: 

• The money supply has to be controlled to contain high inflation by increasing the lending rate
• Monetary policy should be made more effective through a market-determined interest rate regime
• Poor households should be provided with support Micro and small businesses should be provided stimulus since most of them could not access the credit support provided during the Covid
• Austerity measures announced by the government should be continued

To reform the public finance management:

• The already introduced austerity measures such as stoppage in vehicle purchase by government entities, reduction in foreign travels by government employees, stoppage in providing honorarium for attending meetings.
• Pause in the implementation of C-category ADP projects (i.e., low priority projects) and reduction in expenditure (by 20-25 per cent) owing to fuel and electricity by government agencies should be continued
• The reform in Customs duty and other rules to avoid the evasion of taxes and emphasis should be on income tax rather than customs duty
• Subsidy on fuel, power and agriculture should be continued until the situation become normal. It must be taken into cognizance that any hike in the administered prices will have adverse impact on inflation 
• Tax evasion should be restrained to generate resources for the priority sectors
• To this end, the NBR should promote electronic-based measures, including e-TDS, e-filing and cross-checking transaction data from multiple sources etc
• Reduction of discretionary authority of the tax officials and reduce corruption

For management of the external sector: 

• Bangladesh Bank should continue it’s four measures, such as halving the dollar holding limit (Net open position- NOP) of banks, monetizing 50 per cent of dollar holdings in Exporter Repatriation Quota (ERQ), halving the deposit limit as ERQ and transferring foreign exchange funds of offshore banking units to domestic banking units While these are positive moves, but these will not dent much into the problem.
• In the short term, tightening the imports should be the main strategy. Priority should be given to the import of essential commodities and inputs for production
• Trade facilitation is a must in order to reduce the cost of import. This measure will make our export competitive in the global market
• Given the current situation, trade mis invoicing should be restrained at any cost
• Bring back laundered money through international co-operation.

Government should give all out support to increase agricultural production and import of food grain to increase the food stock and manage efficient supply and distribution system to avoid crisis in any part of the country.

Such a crisis is not short-term in nature. Therefore, it will not be easy to get rid of the crisis soon and need a national consensus. The crisis and hardship will remain for at least two years as predicted by our Prime Minister.

The writer is Non-Government Adviser, Bangladesh Competition Commission & CEO, Bangla Chemical. He can be contacted at mssiddiqui2035@gmail.com