Economic Challenges: Perspectives for Recovery & Growth (Part I)

 

1. Like several other Developing Countries, the economy of Bangladesh is currently faced with some challenges,but certainly it bears strong potentials and strengths to move ahead.The issues raised by the recent International Monetary Fund (IMF) mission are not new and similar recommendations had been put on the table in the past. However the Ukraine war and the post-Covid scenario has triggered structural imbalances and deficiencies - reflected mainly through uncertainties in food supply and sharp decline in energy production and increased costs.

2. In the past, Bangladesh received IMF assistance for easing trade deficits,and to withstand the impact of external financial challenges. Due to Covid-19, global trade and business sharply slided down, resulting in reduced exports and services,and eroded competitiveness.However,since 2021, imports substantially increased resulting in high import costs.Till October this year,import costs exceeded US$ 80 billion while Export earnings US$ 47 billion ( reflecting a net trade deficit of US$ 33 billion)

Earnings from exports of Readymade Garments and remittances ( the key drivers of growth) reduced significantly. Around mid 2022,both exports and remittances had moderate increases,but the economy faced challenges in restoring exports and remittances to pre-covid levels.The Ukraine war caused severe disruption in energy and food supplies.The unstable supply and high prices of Liquified Natural Gas (LNG)  and high imports costs, created severe pressure on foreign exchange reserve levels.

3. For Bangladesh,the current challenges are reflected through the following: Recurring trade deficits mainly due to high import costs and lower exports earnings remains a key challenge. Based on recent trends, exports fell by 6.25% during January - October this year (to US $ 3.9 billion, while remittances dropped by 11% (to 1.54 billion) for the same period.Challenges may persist in increasing earnings from exports due to high inflation and recession in our key export destinations.This may continue to impede expansion of our exports in the short-term to medium-term. Export-GDP ratio declined from 19% (2012) to 12% (2019). On the other hand,import payments rose to US$ 20.69 billion, reflecting an increase of  26.5% (year-on-year) from January to June in the current fiscal year. Current account deficit as of now stands at US$ 19 billion (which is significantly higher than the current account deficit in the previous year).The current account deficit is linked to several factors - inadequate revenue,lingering low Tax-GDP ratio that remains at 7.6% on average ( one of the lowest in the world), downward trend and fluctuations in earnings from exports and remittances,and interest rate caps.

4. Foreign exchange reserves declined significantly in the past year. Net reserves stood at US$ 28 billion in September this year ( that scaled down by 21.25% as compared to the same period in the previous year).Due to decline in exports and remittances,and rise in import payments, the reserves continue to face further pressure. These factors hovers around an unstable financial sector, with growing non-performing loans,incoherence in flow of credit that has to be addressed through monetary policy adjustments,weak management and declining governance in the private and public banks.

5. The sharp decline in Foreign exchange reserves resulted in major depreciation of the local currency.The For instance,exchange rate stood at Tk.107.5 per dollar ( in 29 September this year) down by 25.7% year-on-year.The reduced value of Taka will negatively impact domestic demand,and curtail domestic consumption and purchasing power.In such situations effective monetary policy interventions and credit adjustments would be required to keep inflation under control. Bangladesh Bank took some urgent initiatives  through support to local banks to ensure the value of taka does not slide further down.Imports should be reduced substantially to ensure there is no further pressure on the reserves.

6. Bangladesh's economy has demonstrated credible resilience in ensuring overall macroeconomic stability. Key factors that reflect the country's economic strengths  include - well-managed external debt which is currently at reasonably low and acceptable levels ( debt-GDP ratio being 6%), five months of reserves,and stable macro indicators supported by strengthened domestic resilience to cushion external shocks.Per UNDP's recent Human Development Indicators, Bangladesh's ranking has shifted upwards to 129 in comparison to 133 in the previous year.

7. Given that global economic uncertainty looms large and priority interventions are warranted,the Government's consultations with the IMF focused mainly on overcoming the current pressure on reserves,and ensuring  recovery and stabilization.The proposed IMF support mainly seeks to give budgetary and balance of payments support,enhance fiscal sustainability and strengthen resilience to cushion external shocks. IMF views related mainly to adjusting pricing,minimizing subsidies,boosting revenues and strengthening governance in the financial sector. As in previous consultations under IMF's Article IV mechanism,the recent IMF mission also suggested adjustments in monetary policy to control inflation and promote climate-resilient growth. IMF's proposed US 4.5  billion loan that includes US$ 3.2 billion from Extended Financial Facility (ECF) and US$ 1.3 billion from the Resilience Sustainability Facility, will be given in seven tranches ( once in every six months) and the therefore overall disbursement will take 42 months.To have a faster impact the loan could have been given in two or three tranches within a year.In addition to the two categories within which the assistance would be given, subsequent consultations may discuss supplementary support under IMF's emerging windows of support to Food Security & Reducing trade deficits

8. The Government  ensured effective policy interventions both in the short and medium-term,to carry forward the growth trajectory.Based on these,exports and remittances are expected to increase moderately by mid 2024,should the Ukraine war end and global recession recedes. Bangladesh's Eight Five Year Plan and Perspective Plan have emphasized on carrying GDP growth to higher levels through diversifying the sources of growth.Despite the current challenges,the policy thrusts should also be geared towards smooth transition in meeting the post-LDC Graduation requirements.In addition to the IMF loan,budgetary support from key multilateral partners as World Bank,Asian Development Bank,ASEAN Infrastructure Bank etc) should not only aim at addressing impact of current deficits, but also support the Government's efforts on achieving higher inclusive growth through further efficiency in sector productivity and increased competitiveness. In the medium-term, it should be possible to substantially increase exports and remittances and stimulate added sources of growth. Performance-driven and Results-based allocation and expenditure ( to be aligned with the Budget and Annual Development Program) should be useful in this regard.

 
Dr. Mohammed Parvez
Imdad is a senior economist, governance specialist
and policy analyst