Originally posted in Dhaka Tribune on 31 December 2022
H2’22 saw Bangladesh economy in a freefall
Several economic indicators are suggesting little hope by the end of 2022, although there is some optimism for 2023
Beginning with an economic turnaround from Covid-19, 2022 was supposed to be the year economies recovered.
However, the pressure on the country’s macroeconomics began to intensify in the second half (H2) of the year as a result of the Russia-Ukraine war, international economic pressure on the supply chain and a few internal sluggish decisions.
However, despite the fact that a number of economic indicators are suggesting little hope for the end of the year, there is some optimism for 2023, which many international economic organizations anticipate will be a year of recession.
According to economists, the last calendar year was primarily marked by intense inflationary pressure, a sharp currency gain, and greater import payments, requiring prudent recovery.
Although the economy had nearly recovered from the pandemic losses at the beginning of the year, maintaining stronger economic indicators, economic turmoil started as the world’s food and oil prices spiked as a result of the start of the Russia-Ukraine war.
Mustafizur Rahman, a distinguished fellow of CPD told Dhaka Tribune: “The way the year started was about overcoming the shock of Covid-19, which reels again in the second phase (H2) of the year. Especially in the first quarter of the second half (July-September). After that, it continued in the second quarter (October-December) but the benefits of various decisions came. And we’ve seen a lot of economic indicators which are back on track in the last quarter of the year.”
Analyzing the problem of 2022 he added that the problem was mixed with several internal weaknesses including import tightening, high inflation and exchange rate appreciation.
In particular, the reduction in imports is having a major impact on production and investment at the same time.
Zahid Hussain, lead economist consultant of the World Bank, said that Bangladesh started 2022 with higher inflation and it intensified following the Ukraine war.
Amid the cost-of-living crisis, the dollar crisis emerged, however in July, the government unveiled some steps aimed at fiscal austerity.
These were the steps in the right direction.
“One of them is the multiple exchange rates. This has massively hurt the inflow of foreign currencies through formal channels since September,” he added.
However economic data analysis shows that severe inflationary pressure coupled with higher import payments hit the consumers hard as it is eating up a major share of the monthly income of individuals for higher spending against food and daily necessities, according to latest economic analyses.
Point-to-point inflation jumped to 9.52% in August, an 11-year high, although it was staying within a 7% rate in the entire H1 of 2022.
The twelve-month average headline inflation swelled to 7.48% in November from 7.23% in October last year, Bangladesh Bureau of Statistics (BBS) data showed.
Meanwhile, the US dollar rate has passed a fickle road over the entire calendar year as its exchange rate against Taka reached a maximum of Tk116.
Although this calendar year started with an exchange rate of Tk85.8 per USD, it stood at Tk105 against a USD in the end, central bank data showed.
The massive USD appreciation made Bangladesh’s growing imports more costly in the H2 for which the government was forced to check the imports from overseas markets.
On December 29, the foreign-exchange reserves came down to $33.83 billion from $45.80 billion a year ago on December 28, 2021.
Even in the middle of this calendar year (June), the amount was $41.82 billion, central bank statistics showed.
Remittance also started falling in the H2 in lockstep with lower export-earning growth, which threw the country’s foreign-exchange reserves into a weaker trajectory.
The other macroeconomic catalysts like foreign aid inflow, consumption, private-sector credit flow, capital machinery and raw material imports are also showing weaker trends in recent months, which narrowed down the country’s economic-growth prospect further.
Local analysts forecast that Bangladesh’s Gross Domestic Product (GDP) growth is likely to be slower than last year’s due to several troubles on the growth pillars.
The country’s development partners and global financial institutions had already forecast lower GDP growth for Bangladesh in the current FY23 amid the local and global economic shocks.
The Asian Development Bank (ADB) in September, downgraded Bangladesh’s GDP-growth forecast to 6.6% for the current FY23 from its April projection of 7.1%.
The World Bank in October revised down the country’s GDP growth forecast to 6.1% for the current fiscal from 6.7% made in April and June this year.
Meanwhile, the country’s banking-sector scams and financial mismanagement had affected the overall financial sector, affecting the liquidity as well as credit flow to the customers.
Non-performing loans (NPLs) buildup and lack of governance created mistrust among the customers, making the country’s banking and non-banking financial institutions a big challenge, say, economists.
Bangladesh Bank (BB) data showed total liquid assets of scheduled banks declined by 5.92% to Tk415,000 crore in October compared to that of June 2022.
Massive budget deficit amid lower revenue-collection growth had prompted public-sector credit to grow by 30.99% year on year till October 2022.
Domestic resource mobilization was also not satisfactory amid the huge budget deficit as the National Board of Revenue (NBR) collected Tk90,902 crore in the July-October period of the current year, against the target of Tk97,307 crore.
The government has been searching for budgetary support from overseas development partners, including the International Monetary Fund, WB, ADB, Japan, and AIIB, to bankroll the deficit financing.
The country’s merchandise-export growth during the H2 (July-November) of 2022 was lower than that in the H1.
The overseas workers’ remittances had also taken a similar path as the rate of the forex earnings was lower in the H2 than that in the H1.
Also, the current-account deficit widened to $4.50 billion from July to October.
In the H2 of the outgoing calendar year, the foreign-aid inflow to Bangladesh was maintaining a lower trend as the assistance fell by 21% in five months through November compared to the same period last year, official data showed.
However, regarding the 2023 challenge to our policymakers, Mustafiz said: “Now the big challenge for our policymakers is to keep the trend of the end of 2022 intact and bring the macroeconomy back to a better state. But at the same time, the balance of low growth in 2023 also has to be accepted.”
In response to the question of what should happen to the macroeconomy, his suggestion was: “Our economy is growing very fast. Now we need to enhance the capacity to meet the challenges in the second generation as well. For example, the challenge of the first generation in the education sector was to increase the rate of literacy but now the challenge of the second generation is to increase its value. This is the same in most of all indicators.”
Regarding the decision, Zahid said that in some cases, the country took measures in the wrong direction that intensified the crisis in 2022. In some cases, the steps that were required but have not been taken, and the most notable is the cap on lending rates.
It was not withdrawn although it is needed to fight inflation and ease the dollar crisis.