After the fall of Sheikh Hasina's brutal autocratic regime on August 5, thanks to student-people's mass upspring and scarifies of hundreds of lives, the country has entered an unchartered territory. The details of the economic damage done by the ousted regime through bad governance have now started to surface on a big canvas. Though some were not unknown, such as the plundering of money from the banks by manipulating the rules and allowing irregularities, the severity now becomes clearer. The interim government, headed by Nobel laureate Dr Muhammad Yunus, thus is facing a monumental challenge to fix the economy and restore normalcy. At this moment, at least three immediate key challenges are there, and they require urgent and tough measures to overcome within a short period of time. These are containing inflation, resetting the financial sector, and balancing foreign credit.
The annual average inflation rate reached 9.90 per cent in July last, when monthly food inflation stood at 14.10 per cent, the highest in the previous 13 years and four months. The persistent surge in inflation for the last two years has seriously eroded the real income of most people, and their cost of living has increased significantly. The Hasina government's unchecked corruption was a prime driver of inflation, and the situation deteriorated further due to reckless borrowing from the banking system last year. The government borrowed some Tk 940 billion in the last fiscal year (FY24) from the banking system, of which around three-fourths was direct borrowing from Bangladesh Bank, which indicates that money was printed. Printing money means the injection of fresh banknotes in circulation, and that leads to a rise in the money supply. As according to the central bank, the money multiplier was 5.47 in May last. It simply means if the central bank raises the monetary base by TK 100 only, the money supply rises by Tk 547.00 or more than five times. It ultimately increases inflation.
Again, illegal toll collection by various groups at various stages of the supply chain increases the prices of products by five to six times at the retail market, causing consumers to pay higher prices. It also fuels inflation. Moreover, over the years, there was a practice of distorting and manipulating data of production, supply and demand, leading to a significant mismatch between supply and demand. The mismatch ultimately sparked inflation. So, the big question now is how the interim government will be able to cool down the inflation by the end of the year. There is no magic wand, as the interim government took charge less than three weeks ago. One has to wait for a couple of months to see the outcome of the measures taken by the current government, which is working hard to devise some effective tools to curb inflation.
The sudden flash flood, unleashed by heavy rains and an onrush of water from upstream in India, tore through the country's eastern, southeastern, and northeastern districts, making the economic recovery even more challenging. Already, around 4.5 million people are seriously affected by the flood, and thousands of fish farms, poultry farms, aman seedbeds, and vegetable fields have been damaged in these districts.
The banking sector has become vulnerable due to gross irregularities over the last 15 years. The amount of default loans in the total banking system stood at Tk 1.82 trillion at the end of March this year, which was around 11 per cent of the total loans distributed during the period under review. And around Tk 920 billion was plundered from the sector during 2008-2023 through two dozen bank scams, according to an estimate revealed by the Centre for Policy Dialogue (CPD). The amount was equivalent to 2 per cent of the country's GDP and 12 per cent of FY24 national budget.
Over the years, some oligarchs have emerged in the country backed by the government's political and legal protection and took control of the banking sector. Oligarchs are the individuals who 'through private acquisition of state assets amassed great wealth that is stored especially in foreign accounts and properties and who typically maintain close links to the highest government circles.' The interim government is trying to clamp down on some of the oligarchs by freezing their bank assets and removing them and their proxies from the different banks' boards. It is, however, a very challenging task as they own some big conglomerates of the country and control many businesses and trading. Recovering the default loans and retaining some plundered money is hard.
The interim government has also decided to form a banking commission, which will provide recommendations to reform the banks and fix the problems in the coming days. This proactive step demonstrates the government's commitment to addressing the economic challenges and restoring stability.
A large amount of foreign and domestic debt becomes a big liability for the country. Shortly, the pressure to repay primarily foreign debts, will increase. Currently, the amount of outstanding foreign debt is US$ 70 billion, which has to be repaid in the coming days in various instalments. For instance, the repayment of US$12 billion borrowed from Russia to construct the Rooppur Nuclear Power Plant is scheduled to start in 2027. An effort is, however, there to delay the payment by rescheduling, which requires hectic negotiations.
As foreign debt has to be repaid in the US dollar, it creates pressure on foreign exchange reserves. The reserve has also been depleted for the last two years due to higher import bills and regular repayments of foreign debts. Over the years, the forex reserve was shown by inflating the figure. There was also a manipulation to inflate the statistics of export earnings. As the gross manipulation of two key indicators of the external sector has been detected recently, and the actual figures are less than the manipulated figures, the national economic statistics also come under question. The policy measures, adopted based on manipulated data, ultimately provided a distorted picture. So, the problems in the economy compounded, and the list is long.
The interim government has thus started a 'mission tougher' if not 'mission impossible' to address the country's economic problems. However, one needs to keep in mind here that there is no quick fix.
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