Bangladesh’s grapple with economic crisis

by Akankshya Mahapatra

Bangladesh’s economic growth has encountered inclement weather, belying its reputation as the fastest growing economy in Asia. It has received awards for its successful history of economic growth with 7-8% GDP in the pre-Covid era. GDP rose to $416 billion and GDP per capita surpassed that of India.

The country is now struggling to deal with the damage caused by the dual impact of the ongoing Covid pandemic and the Ukraine war. Apart from external factors, domestic factors have also contributed to the economic crisis. As Bangladesh seeks external multilateral financial assistance, three of India’s neighbors are mired in deep economic turmoil.

Bangladesh joins Sri Lanka and Pakistan in seeking IMF bailouts. It seeks a $4.5 billion loan from the IMF, accompanied by economic austerity measures to reduce foreign exchange spending.

The IMF’s willingness to help Bangladesh with a rescue package over the next three years is a clear commitment to the country’s economic crisis. Bangladesh has also asked the World Bank for a billion-dollar loan, and US$2.5-3 billion has been requested from other multilateral institutions and donor countries such as Japan.

Bangladesh is an energy and food importer. Agriculture depends on imported fertilizers, costs of which have escalated as both Russia and Ukraine are also fertilizer exporters. Fuel prices have been raised by 50% to reduce the subsidy burden on the treasury. Other austerity measures include electricity rationing, restrictions on foreign travel by government officials, caps on government vehicle purchases, and bans on non-essential and luxury goods. The rise in fuel prices will stoke the fires of inflation, which has been above 7% since July this year.

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

The move also anticipates expected conditions that the IMF will apply to extending loans. The opposition, which has already attacked the government on various issues ahead of next year’s parliamentary elections, has criticized the government for raising fuel prices. The frustrated opposition has found a new point of attack on the government in the economic crisis.

High oil and food prices have caused foreign exchange reserves to fall as import bills have risen. Most analysts in Bangladesh believe the country’s economic crisis may not end soon. The global economic slowdown has impacted Bangladesh’s export markets. 80% of Bangladesh’s exports are ready-made garments [RMG] and weak consumer demand in developed and developing countries has resulted in far fewer orders for RMG companies. Remittances from Bangladeshis [NRBs] working abroad have also declined, depleting foreign exchange reserves. Remittance inflows peaked at $24.77 billion and are now down to $21 billion. The Bangladeshi Taka [BDT] fell sharply against the US Dollar, falling to 112 BDT per Dollar in the market. Bangladesh’s trade deficit is on the rising trajectory. Although exports have reached $52 billion, imports have also increased, leaving a deficit of $33 billion.

Adding to these economic stressors is Bangladesh’s poor record in combating trade-based money laundering. An estimated $7 billion leaves Bangladesh due to over-billing of imports and under-billing of exports. According to the Swiss National Bank, Bangladeshi nationals have deposited around USD 917 billion in Swiss banks. Debt service has placed an increasing burden on the treasury. US$90 billion in foreign debt has accumulated on loans for major infrastructure projects.

Around USD 43 billion is owed to China, Japan and Russia. Some large infrastructure projects are being put on hold. The country’s finance minister has warned that BRI infrastructure loans from China require far more scrutiny to determine their financial viability.

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