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Sunday, December 4, 2022

Bangladesh’s economic crisis: A pall of gloom or shining lights ahead?

Despite being the fastest-growing economy in Asia, Bangladesh has experienced challenging economic times. With 7-8% GDP in the pre-Covid era, it was praised for its great economic growth story. The GDP increased to USD 416 billion, and the per capita GDP was higher than that of neighboring India.

But the nation is currently having trouble controlling the harm brought on by the ongoing Covid pandemic and the Ukraine War. In addition to external issues, domestic forces have also fueled the financial crisis. Three nations in the sub-continent are experiencing severe economic turmoil, with Bangladesh requesting multilateral financial assistance from abroad.

Bangladesh has joined Pakistan and Sri Lanka in asking the IMF for bailouts. It is asking the IMF for a loan of USD 4.5 billion, along with fiscal restraints to reduce foreign exchange spending.

The IMF’s willingness to provide Bangladesh with a rescue package for the next three years is a blatant admission of the catastrophe facing the nation’s economy. Bangladesh has also pleaded with the World Bank for a $1 billion loan, and it has asked for USD 2.5 to 3 billion from other multilateral organizations and donors including Japan.

Why the crisis? 

Bangladesh imports food and energy. Because both Russia and Ukraine are fertilizer exporters, agriculture depends on imported fertilizers, whose price has increased. To lessen the financial strain caused by subsidies, fuel prices have been increased by 50%. Other austerity measures include limiting the number of government vehicles that can be purchased, restricting the purchase of government vehicles, and banning non-essential and luxury goods. The increase in fuel prices will fan the flames of inflation, which has been at above 7% since July of this year.

In August this year, Bangladesh’s foreign exchange reserves had come down from an all-time high of USD 48 billion to USD 45 billion and then to USD 39 billion, which can sustain 5-months of imports. The government has pleaded that its hands are tied, and it had no other option. 

The action also takes into account the anticipated terms that the IMF will apply before issuing any loan. The administration has come under fire from the opposition for raising fuel prices, something they have previously been criticizing the government for before the general election next year. The economic crisis has provided the disgruntled opposition with a fresh platform to criticize the ruling party.

As import costs have increased, high oil and food prices have caused a decline in foreign exchange reserves. The majority of Bangladeshi analysts think that the economic issue may not be resolved anytime soon. Bangladesh’s export markets have been damaged by the slowdown in the world economy. Ready Made Garments (RMG) account for 80% of Bangladesh’s exports, and RMG companies have received significantly less orders as a result of the weak consumer demand in both developed and developing economies.

NRBs, or remittances from Bangladeshis working abroad, have also decreased, causing foreign reserves to decrease. The amount of remittances received peaked at USD 24.77 billion and is at USD 21 billion. In the market, the Bangladeshi Taka [BDT] dropped precipitously in value relative to the US dollar, reaching BDT 112 per dollar. The trade imbalance for Bangladesh is increasing. Despite the fact that exports reached USD 52 billion, imports also increased, creating a USD 33 billion deficit.

The poor track record Bangladesh has in preventing trade-based money laundering adds to these economic stressors. Bangladesh is losing an estimated USD 7 billion as a result of overbilling for imports and underbilling for exports. The Swiss National Bank estimates that residents of Bangladesh have hidden away almost USD 917 billion in Swiss banks. The treasury is under growing pressure due to debt service. On loans taken for significant infrastructure projects, foreign debt totaling USD 90 billion has accrued.

Dorothy Neufeld

Around USD 43 billion is owed to China, Japan and Russia. Some major infrastructure projects are being shelved. The country’s finance minister has warned that BRI infrastructure loans from China require far more scrutiny to establish their financial feasibility.

The case against the mounting worries

Washington based economist Dr Akter Mahmood however thinks that it is normal that countries will face economic challenges, even a bit of turmoil, from time to time. He said, this is particularly true in a globalized world where countries are continuously exposed to developments elsewhere in the globe.

“In this highly-connected world, developments in far-off countries can affect us quite seriously at times. If we want to benefit from a globalized world, we must be prepared to face fluctuations,” he said.

He said he is not too troubled by periodic fluctuations in economic variables and would like to do is go beyond the short-term movements in key variables and examine the long-term movements as well as to take a disaggregated look at important variables.

“Let me give two examples. Many people are concerned about the recent drop in Bangladesh’s foreign exchange reserves. But if you look at the long-term trend, it is a steadily increasing one with some fluctuations around the trend. So, it is not unexpected that reserves will sometimes go over trend as happened in Fy21 and in some years go below trend, as happened in Fy22. I would have been worried if there was a long-term decline in total reserves,” he said.

On the importance of disaggregating data, he said he would give the example of the significant rise in import payments in Fy22 which is a major cause of the decrease in reserves in Fy22.

“Incidentally, you will notice something interesting if you look at disaggregated import data. You will see that the biggest percentage of jump in imports has been in imports of raw material for garments. This means that an important part of the big rise in import payments in Fy22 is actually being converted to export earnings, assuming that there is no serious decline in garment demand in the western world.”

“On export potential, slowdown in growth in the western markets may reduce demand for our garment exports. But we have seen during past episodes of growth slowdown in western markets, especially USA, that consumers often shift to relatively inexpensive garments (the so-called Walmart effect) when disposable income falls. This benefits Bangladesh since we produce more of the lower-end garments than our competitors do.”

Govt takes austerity measures. Will those work?

However the government’s austerity measures have led to public protests and allegations of mismanagement and corruption against the government. Critics have blamed the government and the ruling Awami League [AL] for increasing dependence on fuel imports for power plants to increase power production and not investing in oil and gas exploration. 

While Bangladesh has celebrated the opening of the bridge on the Padma river and claimed it is self-financed, several billions of dollars have been borrowed from major development partners and multilateral institutions for budgetary support. 

Even though Bangladesh’s reserves have come down, the stocks are still high enough to cover four to five months of prospective imports

The economic picture was not as rosy as proclaimed by the government. Inflated costs of infrastructure projects, non-performing assets and loan defaults have caused a crisis in the banking sector, mainly owing to crony capitalism. Vanity projects like the Roopur Nuclear Power Plant and mega projects like the Dhaka Metro Rail, Karnaphuli Tunnel and several other projects have put pressure on the country’s finances, as costs have soared because of overpricing and corruption.

The public alert sounded by Bangladesh’s finance minister about China’s BRI debt-trap policy towards developing and less developed countries is a significant comment on China’s role in capturing physical assets like the Hambantota Port in Sri Lanka via financing fiscally unsustainable vanity projects that are obtained through high-level political bribery.

The widespread public protests in Sri Lanka, which forced its president to flee the country, have sent shock waves across the region. India’s neighbors, barring Bhutan, have all joined China’s BRI programme, and the Sri Lankan case is a lesson for all these countries.

Bangladeshs-economic-crisis

Is there any chance of becoming next “Srilanka”?

After Sri Lanka’s economy collapsed, focus shifted to Bangladesh as the nation looked to prevent the financial crisis that broke out in the island nation. Concerns about the nation’s economic health arose as Dhaka sought the IMF for a bailout package and amid an increase in fuel costs. However, a senior executive from the Washington-based global lender dispelled such dire predictions.

Bangladesh is not in a crisis situation and its external position is “very different from several countries in the region,” said Rahul Anand, division chief in the IMF’s Asia and Pacific Department, according to the country’s premier English daily. Over reports of country’s $40 billion reserve a pointer of an “impending doom” for Bangladesh, the economist explained, “Even though Bangladesh’s reserves have come down, the stocks are still high enough to cover four to five months of prospective imports”.

There was speculation that the recent record fuel price hike by the government was a precondition set by the IMF. However, the claims were rubbished by the IMF official, who said, “The fuel price hike to bring parity with the global price has no relation to the IMF support programme sought (by Dhaka). Bangladesh’s external debt is relatively low, close to 14 per cent of GDP.”

A Financial Times op-ed this week described Bangladesh’s economic resurgence as a template for third world development, a lesson that can be replicated for a host of African nations . It said Bangladesh is now where South Korea was in 1975, but argued that developing nations better follow the Bangladesh model to wriggle free of hopelessness into growth.

Charlie Robertson, chief economist at Renaissance Capital, told the Financial Times that Bangladesh’s phenomenal growth owed to three factors– literacy, electricity and fertility– adding that this is where the African nations are still behind Bangladesh.

Where Bangladesh differs from Sri Lanka and Pakistan is that in the thirteen years that Sheikh Hasina has led the country, Dhaka has gone big on infrastructure development, but focused only on projects with immediate economic spin-offs.

Compare Sri Lanka’s Hambantota port, which attracted hardly any shipping after being built at huge cost, with the bridge on River Padma which has brought millions immediately once it was opened to traffic. So, while the Rajapaksas had to lease out Hambantota to the Chinese once they failed to pay up, Hasina was courageous enough to scrap the China-proposed Sonadia deep sea port and offered the project to the Japanese at a nearby location.

Be it with multilateral agencies like World Bank or countries like China or Japan, Bangladesh has a track record of driving very hard bargains on terms of repayment and other conditionalities. “That we are so far ahead of Pakistan in all respects gives us a special cause for happiness. They left us in blood and tears in 1971, but see where they are and where we are,” says a former Bangladesh minister.

Economist Dr Mahmood also said he doesn’t see this as a race against time to avoid being a Sri Lanka. “It is more about taking timely and prudent actions needed during challenging economic times. And, as I mentioned at the beginning, periodic economic challenges are a way of life in a highly-connected, complex, globalized world.”

I also said that Bangladesh is not facing an external debt crisis now, and it is unlikely that it will face it in the future. “Thanks to a long tradition of conservative macroeconomic management by successive governments, our debt/GDP ratios and debt service/export earnings ratios are substantially below the threshold that is considered problematic. These ratios may go up a bit in the near future but a recent debt-sustainability assessment by IMF (in March 2022) showed that even under pessimistic scenarios, our external debt servicing situation will be quite sustainable.”

“However, as I said before, this does not mean that public expenditures can be inefficient. Inefficiency of public expenditures should be controlled at all times irrespective of what your reserve or debt situation is.”

He said he would like to make two other important points. “First, all countries need to have a wide range of economic policy tools especially given the globalized world that we live in. This is particularly true during challenging economic times. Unfortunately by following a somewhat rigid exchange rate policy and a very rigid interest rate policy, the government has essentially deprived itself of two very important macroeconomic policy tools. Rigidity means you are not using these tools to deal with the situation.”

“Secondly, if you look at the exchange rate policy over time, you will see a behavior that may be termed gradualism, ie small adjustments from time to time. This has normally worked well for us but the extraordinary events of recent times, such as what is happening in the forex market, have shown that sometimes gradualism is not the right approach.”

“The Bangladesh government needs to learn how to move away from gradualism and take really bold actions when needed. This requires building a strong analytic capacity in government, a culture of regular and effective consultation with experts and other stakeholders, and being transparent about economic movements because transparency is important for influencing market place expectations in the right direction. I think we are falling short on all these fronts,” he said.

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