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Pandemic apart, economy now confronts unforeseen challenges

S M Jahangir | December 07, 2022 00:00:00

After bearing the brunt of the Covid-19 pandemic since March 2020, Bangladesh economy, like that of many other countries across the globe, now confronts some unforeseen challenges. Such challenges are attributed to both external and internal factors. The external shocks have arisen mainly out of the Russia-Ukraine war.

The Russia-Ukraine conflict that began late February this year continues to take its toll on the global economy. It caused a catastrophic impact on the supplies of energy, foods, other consumer products and services around the world. As a result, sustained and rising inflationary pressures pushed up the overall cost of living in many economies.

Reports by global agencies, including the International Monetary Fund (IMF), predict that inflation could pick up by the end of 2022 and continue for a longer- than-expected period.

The IMF in its report said, "Global inflation is forecast to rise from 4.7 per cent in 2021 to 8.8 percent in 2022 but to decline to 6.5 per cent in 2023 and to 4.1 percent by 2024." In its report titled 'Countering the Cost-Of-Living Crisis' in October 2022, the IMF said prices in Europe surged four times since 2021 with Russia cutting the supply to 20 per cent as compared to 2021 levels.

Apart from energy, supply disruptions of food-grains, consumer products, especially wheat, from Russia and Ukraine -- the major growers of the staple -- also surged its price. As a result, Bangladesh, along with many other countries, bear the brunt of the price spirals.

The persistent higher global inflation, especially soaring prices of energy and other consumer items, pushed Bangladesh's import costs significantly up in recent past, thus putting immense pressure on its foreign-exchange reserves. Increased import payments and lower export growth coupled with less-than-expected remittance inflow eroded the country's forex reserves. Usually, a country needs to hold a comfortable amount of foreign-currency reserves for dealing with purposes like making payments of import bills and servicing overseas debts etc. So a strong reserve is considered major economic base and financing strengths of a country, especially for coping with any possible untoward and emergency situation.

In August 2021, Bangladesh's foreign-exchange reserves crossed $48-billion mark, giving a sigh of relief. But the coffers dipped below US$34 billion recently, causing a big concern for the people of all strata. Besides, recent economic crisis in Sri Lanka and subsequent public protests over there caused anxiety among many.

However, according to the IMF, the country's forex reserves were to be $26.3 billion if an 8.0-billion-dollar worth of fund, which was used for the export-development fund, is excluded from the reserves.

Due to the declining forex reserves and the prevailing global crisis, Prime Minister Sheikh Hasina herself urged the countrymen to make all-out efforts so that Bangladesh can avert any situation like famines and food scarcity owing to prolonged Russia-Ukraine conflict and the ongoing spell of Covid-19 pandemic. While virtually addressing a programme organised to hand over Bangabandhu Jatiya Krishi Puroshkar recently, the premier suggested necessary initiatives to face any untoward situation of the sort. She also called for boosting domestic food production. Over again, the prime minister, at her meeting with secretaries on November 27, reiterated her call for taking preparatory measures to avert any possible famine amid the prolonged global crisis, caused by the two-pronged disaster.

The PM's observations and clarion call came in the wake of the prevailing foreign-currency crunch, for which the country found it difficult to cope with growing import payments. Such scarcity of foreign currency also gave a big push to the dollar prices both in the banking channel and on the kerb market in Bangladesh. The price of a US dollar hit a record high of Tk112 on the kerb market while the rate was Tk 5.0 to Tk6.0 less in the banking system than that on the open market.

As a result, the country's most commercial banks found themselves in difficult situation to settle import-payment obligations. As such, the relevant banks had to delay making import payment.

Such an unprecedented situation reportedly forced some banks to refuse to open LCs (letter of credit), as they didn't have sufficient dollars in the vault. Businesses, however, had alleged that many banks were showing reluctance in opening LCs. Moreover, they lessened financing or importing unnecessary products and rationed the opening of LCs, it was learnt.

The government also found it difficult to import required volume of energy, especially LNG, for want of necessary foreign currency.

Following an unrelenting fall in the country's foreign-exchange reserves, the government had to search for increased assistance from its development partners, namely the IMF. It sought a US$4.5-billion financing support from the IMF to help mitigate its ongoing crunch. An IMF team had recently paid a visit to discuss, among others, Bangladesh's proposed credit support. After a series of meetings with concerned government agencies and private think-tanks, the IMF team gave a positive note regarding its financing support with some conditions tagged to it.

Government policymakers and economists, however, say the IMF support, if available, would come as a relief for the government to cope with the prevailing situation. Apart from making the regular import payments, Bangladesh is in dire need of additional foreign exchange for servicing its debts against its loans for some megaprojects, which will fall due from 2023.

Keeping in view the ongoing crisis, the country's top business leaders gathered in a city hotel a couple of months back to discuss the prevailing energy crunch. The prime minister's energy adviser, Dr Tawfiq-e-Elahi Chowdhury, was present on the occasion. The traders/industrialists expressed their concerns over the supply scarcity of energy as their production/business was badly hit because of it. Leading businesses observed that they might require to cut their workforce unless they were able to run their factories properly for want of energy/electricity.

Considering the situation, the business leaders, especially the garment and textile operators, expressed their readiness to even pay increased price of energy for their survival. They expressed their worries when the country witnessed the worst-ever power outages in a decade since a blackout occurred on October 4 last. The response to the businesses' urge was rather frustrating. The energy adviser expressed government's inability to afford to import spot-market gas for forex constraint. He, however, urged examining the possibility of shunning daytime power use.

Taking the foreign-exchange crunch into account, the government and the central bank of Bangladesh took some austerity measures. Those include pulling restrictions on foreign trips for employees and officials of government, semi-government and autonomous bodies, discouraging imports of less-important, luxury items.

Such austerity measures coupled with banks' less participation in the opening of LCS gave a sort of dividend -- the country's overall import payments saw a downtrend in recent times.

According to the central bank data, import orders dropped by 12 per cent in the first quarter (Q1) of the current fiscal year (FY 2022-23) over the corresponding period of last FY. The value of LCs (letters of credit) opened for import fell to US$18.39 billion in the July-September quarter compared to $ 20.90 billion in the same period of FY 2021-22. In September alone, the import orders registered worth $ 5.70 billion - down 31.16 per cent from $ 8.28 billion in the same month a year ago.

Banking sources say some regulatory measures, taken by the central bank in the backdrop of the country's falling foreign-exchange reserves, helped curb overall import orders.

Meanwhile, a fresh issue of 'looming liquidity crisis' in the banking system came in the spotlight, especially on the social media, creating panic among the depositors. However, the central bank ruled out such allegation, saying there was no liquidity crisis in banks and that deposits were completely safe. Since the banking system of Bangladesh is in a strong position, such 'misleading information' is being spread on different social-media platforms to provoke people to withdraw their deposits from banks, a central- bank source said.

Subsequently, the apex body of top executives of the country's banks -- the Association of Bankers, Bangladesh (ABB) -- also ruled out the 'rumours' about a liquidity crisis in the banking system of Bangladesh. The association chairman, Selim RF Hussain, recently said such unfounded comments appear to be particularly targeted at the Bangladeshi expatriate diaspora to discourage them from remitting their savings to Bangladesh through legal banking channels. "It's completely false rumour -- there is no ground for anybody to be scared about Bangladeshi banks being unable to meet their obligation, particularly local-currency obligation," Mr Hussain, also Managing Director (MD) and Chief Executive Officer (CEO) of the BRAC Bank Limited, told The Financial Express.

According to analysts and media reports, financial health of some of the banks, operating in the country, is not in a good shape. Some of the banks have been reportedly identified as 'problematic' ones.

Whatever the situation, it is the issue of governance. Ever-rising non-performing loans (NPLs), embezzlement of depositors' money and other unethical practices in the country's banking system have long been discussed. According to the central-bank source, the volume of such bad loans is now estimated to be nearly 10 per cent, or Tk1.40 trillion, of the total outstanding loans in the banking system.

Given the prevailing situation, one can draw the conclusion that the emerging problems of the present forex crunch and the liquidity shortage, if any, are not only the result of the external shocks but some internal factors are seen responsible also.

Tens of thousands of expatriate Bangladeshis send home their hard-earned foreign currencies and millions of workers, especially in the apparel sector, contribute largely to the country's foreign- currency reserves. But a significant amount of foreign currency is laundered from the country every year through various channels. According to Global Financial Integrity (GFI) reports, more than US$49.65 billion was siphoned off from Bangladesh through trade-based illicit financial flows (IFFs) only in six years (between 2009 and 2015).

Although the government has offered an offshore-money- whitening opportunity this year for the first time to bring back laundered money to the country with payment of 7.0-percent tax, no positive response to this effect has yet been noticed.

Considering the overall situation, there is an urgent need for persistent precautionary measures to cope with the looming external and internal shocks. To address the internal problems, prudent steps have to be taken to ensure good governance both in the financial sector and the government administrations in order to check corrupt and unethical practices. It is alleged that a large amount of the public funds is embezzled every year on account of execution of public-works projects and such issues must be dealt with strictly.

The writer is Chief Reporter, The Financial Express

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