An overview is made below of the prevailing macroeconomic situation that gave rise to the negative speculation and grim forecast made about a year ago. This will be followed by a summary statement about what measures were taken by the government and Bangladesh Bank to cope with the situation. Thirdly, this write up will go through some of the macroeconomic indicators that have been published by print media, quoting authoritative sources. Finally, some of the problems constraining growth of the economy and welfare of the people like power generation and inflation will be discussed to conclude about the state of the economy in the context of multiple challenges since the Covid pandemic.
Riding on the back of growing volume of remittances made by wage earners and steady growth of exports, particularly for readymade garments (RMG), Bangladesh had a record amount of US$47.50 billion of foreign exchange reserves in August of fiscal year 2020-2021 (FY21). Due to sudden surge of imports following the economic recovery after the end of the Covid pandemic the demand on reserves suddenly increased leading to its steady depletion. Increase in international prices of goods imported, including freight and slow recovery in the export sector aggravated the serious balance of payments situation. As a result the reserves came down to $41.82 billion dollar in June, 2021; $31.20 in June, 2022; and $29.73 billion in July, 2023. Adjusted according to IMF calculation based on Balance of Payments and International Investment Position Manual (BPM6), the figures are reduced significantly. For instance, in July, 2023, the forex reserve amount was $23.38 billion as per BPM6 and not $29.73 billion. Again in November, 2023 reserves declined precipitously and stood at $19.30 billion measured in BPM6, according to the statistics available with the central bank. The precarious situation has been salvaged almost by a miracle or by a rare coincidence. The financial sector got into a tight liquidity situation as banks’ cash stocks dipped and cashable credits in vaults remained under great pressure amid a crunch. According to Bangladesh Bank, excess liquidity in commercial banks dropped to Tk 1.58 trillion in October, 2023 from Tk 1.64 trillion in the previous month. In August the surplus of cash was Tk 1.74 trillion. To provide liquidity support, Bangladesh Bank gave Tk 1.33 trillion in July 2023 at the enhanced repo rate of 7.75 per cent. The liquidity support policy of the central bank is continuing. In February this year Bangladesh Bank introduced currency swap trading under which banks can sell their forex to the central bank at the spot rate which is now Tk 110 per dollar. According to Bangladesh Bank, some 15 cash starved commercial banks received Tk 103.51 billion in dollar so far under the currency swap policy. As a result of this policy Bangladesh’ s foreign currency reserves have shown a robust rebound as evidenced by the fact that in just seven days the reserves have gone up by $1 billion. As a result of the new policy the total value of gross foreign reserves now stood at $ 26.17 billion on March 05. According to the IMF metric of BPM6, the reserves rose to $20.98 billion on Tuesday (05 March) from the February estimate of $19.97 billion. The new policy has been possible because the commercial banks had over-bought foreign exchange and are now facing liquidity crunch for local currency. The rate of 2.7 per cent at which the banks can exchange dollar for taka being far lower of 7.8 per cent of repo rate the banks feel encouraged to participate in the trade-off. They can get their foreign currencies back again at a future date when the deal will be settled applying the same exchange rate with swap point based on the interest rate differential considering prevailing benchmark rate of exchange and the policy rate of Bangladesh Bank.
Apart from the currency swap, foreign exchange reserves have also benefited from lesser demand on account of import bills as a result of quantitative ban on imports imposed by the government. According to a news report, payment on import during the first four months of the current fiscal year (FY24) has been $20.27 billion against $25.51 billion during the same period of the previous fiscal. The amount of reduction in import has been by 20.54 per cent. This has been reflected in the balance of payments deficit for the first four months of the current fiscal year which was $3.81 billion against $9.62 billion in the same period of the past fiscal year. This in turn has also been reflected in the current account balance. In October last, there was $0.23 billion surplus in current account whereas it was at a deficit of $4.49 billion in the same period of the last fiscal year. There has, however, been increase of deficit in the financial account relating to private sector external borrowing and repatriation of invested fund in portfolio investment.
The other demand on foreign exchange reserves is on account of debt servicing and debt repayment by the government to creditors. Bangladesh’s debt-GDP ratio at present is 22 per cent which cannot be said to be very high. The present volume of Bangladesh external debt is well within the IMF-World Bank parameters of sustainability and medium term debt servicing capacity. Debt Sustainability Analysis recently done by IMF-World Bank showed Bangladesh as financially safe and secure. But the government is not complacent and has decided to go slow about taking up new mega projects.
Anticipating pressure on foreign exchange reserves the government took prompt action in applying for loans from the IMF. After due study and analysis IMF approved a loan package of $4.7 billion and the first tranche of it has been received. Besides funds received from other multilateral institutions like World Bank, Asian Development Bank (ADB), Islamic Development Bank (IsDB) and Asian Infrastructure Bank (AIB), Bangladesh has received funds as loan and grant from various bi-lateral sources all of which have contributed significantly to the foreign exchange reserves.
Bangladesh’s foreign exchange reserves, on the supply side, mainly depend on exports and remittances sent by wage earners abroad. News on these fronts is quite encouraging. According to a recent news report, exports in goods from Bangladesh during the first eight months (July-February) of the current fiscal year crossed $38 billion. In terms of percentage increase this is 3.71 per cent more than the amount received during the same period last year. The export items at the top are RMG, jute products, leather goods, agricultural products and home textiles. These constituted 91.87 per cent of the total exports made during that period. Most encouraging is the news that RMG exports increased by 4.77 per cent. About 85 per cent of exports is accounted for by RMG. Dependence on a single item of export has long been a matter of concern. Though diversification has been talked about for a long time not much has been achieved in this regard.
On the remittance front, the other major source of our foreign exchange earnings, there is good news to cheer us up. There has been a remittance rebound of late, it has been reported. In December last, Bangladeshi workers sent a record amount of $1.40 billion, higher than the amount sent in the corresponding period last fiscal (The Financial Express, December 25, 2023). The total amount received through remittance is $12.9 billion in seven months of the current fiscal year. Appreciation of dollar against taka has been a contributory factor as has been the provision of incentive payment when money is sent through banks.
Accretions to foreign exchange reserves can take place through foreign direct investment (FDI) and portfolio investment. The performance of Bangladesh in these respects is lacklustre. Even the ten Export Processing Zones under BEPZA have failed to attract direct foreign investment to the degree that it was expected to. According to recent estimate, only Taka 300 million have been invested in 12 years since its establishment in 2012. An economic success story should be able to attract foreign capital but that is not happening. For this the greatest stumbling block is red tapism and its obverse, corruption. Intermittent political unrest also plays some part in creating disenchantment for the foreign investors. Unless the factors that lead to these negative impressions are addressed in earnest nothing much can be expected from slogans, such as ‘one stop service’ etc.
There are prospects of receiving loans under new agreements in the near and medium terms. According to a news report, projects worth $10 billion from eight development partners are in the pipeline. Alongside this, commitments have been made for additional project financing, marking an uptick of 300 per cent (March 7, Jai Jai Din). Maximum commitments have been made by ADB during the current fiscal amounting to $ 4.3 billion dollar. Japan, in the second position as donor/creditor, has committed $20.20 billion. The commitments from World Bank amount to $14.18 billion. Delay in release of funds is often caused by delay in the implementation of funded projects. According to a news item the execution of projects under annual development plan (ADP) has been at a 24-year low this fiscal (The Financial Express, February 28). Unless more efficiency is shown in project implementation the inflow of funds committed by development partners will be hampered greatly. At a time when foreign exchange reserves are under strain, ADP implementation cannot be ‘business as usual’. All told, the foreign exchange reserves situation remains dicey and can deteriorate if all feasible measures are not taken on emergency basis. The balance of depletion from and accretion to the reserves does not give any feeling of comfort and there is no scope for complacent.
Among the economic developments that have both impeded economic growth and people’s welfare inflation ranks first. For almost a year headline inflation has remained above 9.0 per cent showing signs of miniscule decline recently, but still remaining above 9.0 per cent. The causes of inflation remaining stubborn are well-known. Government borrowing to meet budget deficit has persisted and shows no sign of abetting. This has continued even after announcement of a contractionary monetary policy by Bangladesh Bank. It is learnt that 77 per cent of money borrowed by government during the last fiscal was from central bank and that the amount borrowed was thrice the amount given by the central bank the previous year. The amount borrowed from central bank, through printing, increases money circulation by five times through multiplier effect. Of late the central bank is resorting to printing money rather than borrowing from commercial banks through sale of binds. Though increases in prices of imported goods have contributed to inflationary pressure, it is lending government by printing money that has been the main contributory factor behind this. As long as public borrowing remains not only high but also goes ballooning no amount of contractionary monetary policy can make a dent in headline inflation. This has been the greatest failure of the government in macroeconomic management. There is not much that the government can do about exogenous factors like supply chain problems and international price increases that have caused inflation. But it can and should address the problem of its own creation viz. borrowing. Firstly, it can tighten its belt adopting austerity measures that have teeth. Secondly, it can make a heroic attempt at increasing the revenue-GDP ratio from its present abysmal range of 8- 9 per cent. It is reported that a medium and long term revenue strategy is on the anvil and is meant to chart a pathway to enhance revenue collection over the next five years. Let it not be another protestation of wishful thinking.
The goal of economic development has always been the improvement of standard of living of the population, particularly those belonging to middle and lower income groups. The report on Household Income and Expenditure Survey (HIES), 2022 recently published has shown that overall poverty came down to 18.7 per cent in 2022 from 24.3 per cent in 2016. The hard core poor have been shown to have declined to 5.6 per cent. These figures are too good to be true. But the more credible result of the HIES is regarding the yawning income gaps between lower and upper strata of society The Gini coefficient, measuring on a scale of 0 to 1, increased to 0.499 in 2022 from 0.482 in the previous survey period in 2016 and 0.458 in 2010. The Bangladesh Bureau of Statistics (BBS) for the first time surveyed the food insecurity based on the perception of the population. The HIES, 2022 has revealed that 21.11 per cent of the population feel insecure about availability of food. This figure unwittingly for BBS shows the reality about the poverty situation prevailing in the country.
To sum up, Bangladesh economy faced with multiple problems is still holding its ground but seems to be now in a vulnerable position. The space for making policy mistakes, through omission or commission, is very limited. Policy makers at the helm of affairs must be astute and weather-beaten.
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