Originally posted in The Daily Star on 7 August 2022
Bangladesh has been confronting a major economic crisis for several months.
Macroeconomic stability has weakened, owing to the volatility in the global energy and commodity markets for a rise in demand during the post-Covid recovery period and the sanctions over Russia’s energy and commodity trade since the Ukraine war started in February.
This economic crisis is characteristically different from those Bangladesh faced in earlier decades: first, the crisis owing to the global financial and economic crisis during 2008-09, and second, the covid-related economic crisis during 2020-22.
Bangladesh has successfully overcome the previous crises either because of its less integration with the global economy or because of prudent measures. How well would Bangladesh be able to overcome the crisis this time? Will the measures that have been undertaken appropriately address the crisis-related concerns? Will the measures undertaken during the previous crisis be effective in addressing the present crisis? A simple answer is: No.
Previous crises had adverse impacts mainly on the micro and meso levels of the economy. On the other hand, the present crisis has an adverse impact mainly at the macro level and partly at the meso level. Hence, the measures that were taken up earlier to address the micro and meso levels are likely to have a limited positive impact in addressing the adversity of the present crisis.
Bangladesh should target both stabilising the forex market and undertaking reform measures responsible for weakening the forex reserves. This is mainly related to the energy market where medium to long-term reform measures are essential
A major area of focus of policy and operational measures during this time should be to ensure macroeconomic stability, which has been affected due to the crises in the foreign currency reserves.
GLOBAL FINANCIAL AND ECONOMIC CRISIS IN 2008-09
During the global financial and economic crisis in 2008-09, Bangladesh’s economy had been adversely affected in the external sector, mainly export and remittances. Due to the limited integration with the global market, the impact was rather limited mainly in the case of loss of employment and income in selected export-oriented sectors and there was lower demand for migrant workers.
Both micro and meso levels of the economy were affected, though at a limited scale. Hence, the policy measures that had been undertaken during that time to create new jobs in rural areas, particularly in agriculture, were considered to be timely.
Though fiscal support was announced for the export sector, particularly targeting SMEs, that was not required to use at that time. The macro impact was rather limited and the domestic economy had recovered quickly. Major global economies took individual and collective measures, which lessened the adversity though a few of the major economies needed time to recover fully.
COVID-INDUCED CRISIS IN 2020-22
During the covid-linked crisis in 2020-22, Bangladesh’s economy has been adversely affected both through internally and externally.
The impact was a loss of employment, income, less flow of remittances and export earnings and a slowdown in domestic service and manufacturing activities. This time also global commodity and energy markets have slumped due to demand shortfall and supply chain crisis.
The government has taken fiscal and monetary policy measures, including various stimulus packages, targeting the domestic economy in order to support those who lost their jobs, investment and production. Country-wide vaccination programme against infections at the micro level has been well-appreciated. Despite various shortcomings, the support measures are considered to be effective for the targeted people, sectors and activities.
Global economies either individually or collectively have taken measures to address the crisis. Hence, the recovery phase of the crisis started rather quickly, particularly through the implementation of the vaccination programme successfully across the world. However, the covid-related challenges are still not over.
CURRENT ENERGY-INDUCED MACROECONOMIC CRISIS
The macroeconomic crisis has impacted the world economies adversely mainly at the macroeconomic level, with having destabilising elements. Unlike in the past, a major element of the crisis is the volatile energy market.
Rising commodity prices in the world due to the disruption in the supply chain of raw materials, rising shipment costs, and a spike in demand for finished consumer goods have had an inflationary impact on global economies.
The crisis has impacted the developing economies severely, threatening their macroeconomic stability, while the crisis for the developed economies is, rather of, limited in nature.
In addition, the economies are facing the challenges of inflationary pressure. However, the current macroeconomic instability in developing countries owing to weakening foreign exchange reserves overwhelmed countries’ inflationary concerns. In other words, the crisis-related challenges are largely macro in nature and the measures to be addressed are to be targeted accordingly.
WHAT IS BANGLADESH DOING TO TACKLE CURRENT CRISIS
In Bangladesh, most of the measures that have been undertaken are either micro or meso-level measures. Micro-level measures include discouraging the import of expensive consumer products, nationwide load-shedding and the reduction of export retention quota to enhance the domestic supply of foreign exchanges.
Meso-level measures include discouraging the import by making mandatory prior approval for the import worth of minimum $5 million, discouraging the public sector to purchase vehicles and officials to go abroad for official travel, and planning to ration energy use in the transport sector.
A large part of these measures could address micro and meso level concerns of the present crisis. Moreover, these measures are of short-term in nature unless designed properly.
There is a popular belief that the rise in domestic production through import-substituting measures would significantly contribute to domestic production. It is important to understand whether Bangladesh really has comparative advantages in the production of all kinds of crops.
For example, Bangladesh does not have an adequate comparative advantage in the production of soybean.
Another proposal is to go for the currency swap in order to avoid the use of US dollars. Such measures would not be effective given the volatile exchange rate situation of the currencies. Most importantly, such measures are largely unwelcome during the time of crisis.
We may encourage sectoral measures such as the rise in domestic production in order to reduce the dependence on the global commodity market. However, we need to import some of the essential consumer goods due to a lack of domestic production. Hence, our primary focus should be to ensure a stable forex reserve and take measures accordingly.
Bangladesh should target both stabilising the forex market and undertaking reform measures responsible for weakening the forex reserves. This is mainly related to the energy market where medium to long-term reform measures are essential.
In order to stabilise the forex reserves, a long-term credit support sought from the International Monetary Fund ($4.5 billion), budgetary support from the World Bank ($1 billion), and also from the Asian Development Bank or the Asian Infrastructure Investment Bank. These measures will address the medium-term crisis.
To get the loans, Bangladesh needs to undertake long-term reform measures such as subsidy management, withdraw capacity payment for power production, develop clean energy, and ensure market-based operation in exchange rate and interest rate.
But instead of doing these, the government has increased the price of Urea fertilizer, diesel, petrol and kerosene as part of the subsidy rationalisation. Such measures would partly reduce the subsidy pressure at the expense of the rising cost of production in agriculture, manufacturing, services and power generation and consequent higher inflationary pressure on consumers.
The subsidy rationalisation should be carried out by withdrawing the capacity payment by moving toward the principle of ‘no electricity no pay’. Moreover, power generation using LNG, which is very costly and is likely to be costlier in the coming months, should be discouraged. A significant amount of forex reserves is required to purchase LNG.
Alternatively, the government should go for renewable energy-fueled power generation based on foreign investments or loans.
The author is the research director of the Centre for Policy Dialogue.