Originally posted in The Daily Star on 1 January 2024
The year 2023 was indeed one of the most difficult ones in the recent history of Bangladesh economy, as it exhibited its weaknesses on various fronts. Supply disruptions and the spike in the prices of fuels and other commodities in the global market—caused by global events—pushed up costs worldwide, leading to high inflationary pressure. However, although several countries have now been successful in reining in inflation through appropriate policy measures, Bangladesh is still struggling to do the same. Additionally, the country is now faced with multiple challenges such as a fragile banking sector, financial account deficit, volatility in the exchange rate, and depleting foreign exchange reserves. Due to these challenges, the macroeconomic stability that Bangladesh enjoyed for a long time due to high growth, relatively low inflation rate and strong external sector has been weakened.
Though external factors initially had some contributions to the economic challenges, there was delay in taking corrective measures to control inflation and exchange rate volatility. There are also several structural issues that have been ignored by our policymakers for long. Absence of appropriate and effective policies, poor implementation, and a lack of capacity to implement essential reforms domestically have exacerbated these challenges.
Globally, uncertainties will continue, which will affect growth. The International Monetary Fund (IMF) has projected global growth to be 2.9 percent for 2024. The growth outlook for Bangladesh for the 2023-24 fiscal year by international organisations is projected to be lower than that by the government. Notably, the government ambitiously projected that GDP growth would be 7.5 percent for FY24 even though there were difficulties towards the end of FY23. However, the IMF projected that our GDP growth would be six percent, while the World Bank estimated it would be 5.6 percent in FY24. Given the current realities of the Bangladesh economy, the policymakers should also review the government’s GDP growth target to make it realistic and achievable, given the performance of various sectors of the Bangladesh economy such as agriculture, industry and services.
Inflation has been hurting the common people for more than a year. The monthly average inflation was 9.02 percent as of June 2023. In October 2023, there were significant increases in both food and non-food inflation rates—at 12.56 percent and 8.3 percent, respectively—and the overall inflation stood at 9.93 percent. The consistent rise of inflation rates has substantially increased the cost of living, resulting in a reduction of consumer purchasing power. An analysis of the daily prices of 34 essential items, collected from the Trading Corporation of Bangladesh (TCB), reveals that the price increase for some items was exorbitant. For example, the price of local garlic soared by 400 percent and local onions experienced a spike of 282 percent between January 1, 2019 and December 20, 2023. Paijam rice experienced the lowest increase at nine percent per kilo. Therefore, the average inflation rate fails to capture these details of price movements.
Establishment of economic good governance is also critical as the public institutions are being captured by oligarchs to extract public resources by depriving the common citizens. The policymakers should focus on broad-based and inclusive growth to reduce inequality. But undertaking reform measures is not easy since a certain vested quarter which has been enjoying the benefits of weak institutions will vehemently oppose and resist any change. Therefore, this requires a strong political commitment.
In FY23, the revenue-GDP ratio stood at 8.2 percent, falling short of the targeted 9.8 percent as per the finance ministry data. Notably, this ratio was also lower than the 8.4 percent recorded in the preceding fiscal year. Due to the declining trend in revenue collection, the IMF lowered its target for FY24, reducing it by Tk 55,000 crore. One may recall that, as a condition for its $4.7 billion loan to Bangladesh, the IMF imposed several requirements including quantitative targets on improving revenue collection and forex reserves.
The implementation of Annual Development Programme (ADP) was also not impressive in FY23. The expenditure on ADP as a percentage of GDP decreased from 4.7 percent to 4.3 percent. This decline can be attributed to lower implementation of ADP, which was 77.5 percent in FY23, a decrease from the 82.6 percent observed in FY22.
The banking sector is grappling with a large amount of non-performing loans (NPL), which shows no sign of coming down. As per the Bangladesh Bank’s annual reports, NPLs in the banks amounted to Tk 22,480 crore in 2009. However, in the fourth quarter of FY23, the amount rose to Tk 156,039 crore. The actual NPL amount would be much higher if distressed assets, loans in special mention accounts, loans with court injunctions, and rescheduled loans were included. It may be noted that with distressed assets in banks counted, the amount was nearly Tk 378,000 crore as of December 2022, as per the Financial Stability Report 2022 of Bangladesh Bank. Harmful incidents such as amendment of the banking company law in favour of bank directors, allowing banks to give out loans bypassing existing regulations, letting the wilful bank loan defaulters get away with not paying off their debts, and above all weakening of the Bangladesh Bank’s authority on bank-related matters are some of the reasons behind the accumulated problems in our banking sector.
Over the past few years, the banking industry has witnessed multiple instances of wrongdoings involving various corporate entities and individuals. These transgressions have led to the misappropriation of significant funds from multiple banks, amounting to thousands of crores of taka. The CPD has compiled publicly accessible news reports outlining 24 significant irregularities within the banking sector spanning from 2008 to 2023. The combined impact of these events has resulted in an exceptionally substantial total of Tk 92,261 crore. This is equivalent to two percent of GDP of FY23 and 12 percent of the national budget for FY24. It should be noted that these are only a few instances when the irregularities were unearthed. The actual amount of money taken out of the banking system through frauds and irregularities could be much more.
The major macroeconomic challenge in FY23 came from the external sector. The Bangladesh Bank undertook some measures to enhance the balance of payment and stop the decline in forex reserves. For example, it restricted imports of luxury consumer items to improve the balance of payment and reduce current account deficit. This has improved the trade and current account balances in the later part of 2023 (or early months of FY24). However, this has restricted the imports of capital machinery and intermediate goods, which are essential for production. If this trend continues, lower imports will have cascading negative effects on GDP through low investment, employment and production.
Understandably, policymakers are resorting to this strategy under special circumstances when the forex reserves are declining continuously, and the Bangladesh Bank is under pressure to achieve the forex reserve target set by the IMF in the coming years. One of the challenges of improving the forex reserve situation is low remittance flow. Though the number of migrant workers is increasing, remittances are not. Large remittances are sent through informal channels like hundi despite a 2.5 percent incentive for the remitters through the banking channel. This is because the difference between the formal and informal channels is large. Indeed, the multiple exchange rates have proven to be difficult and unsuccessful in stabilising the exchange rate. A sound exchange rate management through a market determined rate is essential to remove the current confusion.
The challenges observed in the economy of Bangladesh during the last six months of FY23 and first few months of FY24 do not provide much hope that these could be solved by the end of FY24. The initiatives to tame inflation and to streamline the exchange rate are too little, too late. Addressing both the issues requires bold steps. The new year will be politically significant as the country will hold the 12th parliamentary election scheduled for January 7. Though the election outcome is somewhat predictable considering the participants and the absence of a big opposition party, there are uncertainties and apprehensions among the common people on the post-election situation, both politically and economically. Potential investors and economic partners are also observing the situation. The economic outcome is intrinsically related to the political situation. Good economic policies can be successful if those are backed by good politics.
Looking into 2024, our policymakers will have to work towards addressing the immediate issues such as controlling inflation, increasing revenue collection, stabilising exchange rate and improving forex reserves. Without enough fiscal space, the government will not have the flexibility to support the poor and low-income families who are suffering due to high inflation. The government should not borrow from the Bangladesh Bank like it did in 2023 as it will fuel inflation. It should reduce operational and administrative costs and save resources. At the same time, the government must work on structural issues such as improving the efficiency in institutions such as the National Board of Revenue, the Bangladesh Bank, Securities and Exchange Commission, Anti-Corruption Commission, and other regulatory bodies that are critical for the Bangladesh economy.
Establishment of economic good governance is also critical as the public institutions are being captured by oligarchs to extract public resources by depriving the common citizens. The policymakers should focus on broad-based and inclusive growth to reduce inequality. Undertaking reform measures is not easy since a certain vested quarter which has been enjoying the benefits of weak institutions will vehemently oppose and resist any change. Therefore, this requires a strong political commitment. Bangladeshi people are yet to see such unwavering commitment.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD), and non-resident senior fellow at the Atlantic Council.