Originally posted in Daily Sun on 1 August 2023
Bangladesh economy under stress despite hopes
The country’s economy is grappling with a growing dollar crisis and rampant inflation, with no clear resolution in sight.
This dual financial strain is exacerbated by the nation’s first bout of economic pressure due to geopolitical conflicts, as indicated by a recent Bangladesh Bank quarterly report.
According to the central bank, the key stressors on macroeconomic indicators include the hike in commodity prices, disruptions in the supply chain due to the Russia-Ukraine war, ensuing global economic slowdown, financial sector instability, and external shocks.
Economic analysts warn that the country’s foreign currency reserves are now in a precarious “red zone”. Despite the central bank’s efforts to safeguard reserve money through import control measures, these have produced negative market impacts.
However, the growth in Ready-Made Garments (RMG) exports and inward remittances provides a glimmer of hope amidst the financial gloom.
In FY23, the foreign currency reserve endured a significant blow, losing nearly US$11 billion. From over $41 billion in June 2022, the reserves plummeted to $31 billion by June 2023, and have further dwindled to $29 billion currently.
Applying the IMF’s Balance of Payment and International Investment Position (BPM-6) guidelines, the country’s Gross International Reserve (GIR) currently stands at $23.57 billion. The Net International Reserve (NIR) has slipped to $20 billion, a figure the central bank had earlier stated it would not disclose.
Research Director at the Centre for Policy Dialogue (CPD), Dr Khondaker Golam Moazzem, said the reserve has entered a “red zone’ andit would be alarming for the economy if it slips further.
“People will see a ray of hope if the government can gradually improve the reserve from this situation. Otherwise, it will be a matter of grave concern,” he said.
Former Lead Economist at the World Bank’s Dhaka office, Dr Zahid Hussain, thinks that Bangladesh now has a reserve to meet three months’ import bills.
“Even though it is said that the country has a reserve of $23 billion, the amount of the net reserve won’t exceed $19 or $20 billion. It can suffice for three months’ import bills.”
“In this context, it is urgent to initiate raising the reserve. The main area of concern is that the reserve is depleting daily,” Dr Zahid noted.
Inflation
Inflation remains a major concern for the economy as high inflation has burdened limited-income individuals with high commodity prices.
Bangladesh ended the 2022-23 fiscal year with 9.02 percent average inflation, the highest in an era.
The state statistics agency, BBS, said people have not endured such high inflation in the last decade, although inflation remained high in the previous 2021-22 fiscal year as well. Low-income individuals are the worst sufferers of high inflation.
Imports
The rise in imports, especially industrial raw materials and capital machinery, is believed to boost industrial production, create jobs, and increase exports.
But total exports dropped by nearly 10 percent to $79 billion in FY23, and it declined 4 percent in volume after the government imposed import restrictions due to an unprecedented dollar crisis.
A year earlier, the country’s total imports surged by as much as 35.9 percent to $87.64 billion, despite import restrictions.
Import data from custom houses and duty stations show that Bangladesh imported 13.31 crore tonnes of goods in FY23 against 13.82 crore tonnes in FY22.
Businesspeople struggled to open letters of credit (LCs) last fiscal, while commodity prices skyrocketed in the local market due to global price spikes and high dollar prices in Bangladesh.
The fall in the taka-dollar exchange rate, coupled with the dollar crisis, also led to a deficit in the balance of payment (BoP), high cost of foreign loan repayment, and an energy crisis that disrupted industrial production as well.
Capital machinery and spare parts imports slipped by 9 percent to $11.98 billion in FY23 compared to $13.13 billion
in the 2021-22 fiscal year when the Bangladesh economy was showing signs of recovery from COVID-19.
Exports
Even though most macroeconomic indicators are under stress, the export data were optimistic as the country’s exports rose by 6.67 percent to $55.56 billion, driven by 10.27 percent growth in RMG shipments.
The 31.38 percent rise in apparel exports in the non-traditional market, with exports reaching the $1 billion mark in new destinations like India, Japan, and Australia, is good news for the country.
Their share in total apparel exports also surged to 17.82 percent, which was 14.96 percent a year earlier. However, export diversification has not advanced much, with exports confined to five key traditional items.
Remittances
It was also good news for the economy that inward remittances bounced back to $21.61 billion in the just-concluded fiscal year and have maintained a positive trend in FY24 so far.
Last fiscal’s remittance earnings grew by 3 percent over $15.2 billion remittance inflow in the 2021-22 fiscal year. In June of FY23, Bangladesh fetched nearly $2.20 billion, which was the highest in 35 months.
Credit flow to the private sector
Private sector credit is seen to enhance investment and employment and to support industrialization.
But the banking sector failed to achieve the targeted 14.10 percent growth in private credit disbursement due to the liquidity crunch.
Private sector experts say the squeeze in capital machinery imports due to import restrictions on the back of the dollar crisis shrank business expansion and job creation.
Additionally, the lack of a favorable investment climate dampened demand for credit in the private sector, they added.
Revenues
The National Board of Revenue (NBR) saw an 8.12 percent growth in its Tk 3,252.72 billion revenue earnings in FY23, which was the lowest in a decade.
There was a Tk 450 billion deficit from the yearly revenue target. Bangladesh achieved a 10 percent growth in the following five years since the 2013-14 fiscal year.
The International Monetary Fund (IMF) had set a target of mobilizing Tk 3,456 billion for FY23, which has not been achieved.
However, it has asked NBR to collect an additional 0.5 percent of GDP’s revenues in FY24.