A quick overview of the Bangladeshi economy
Economic headwinds and an upcoming election: where do we stand?
It seems a distant memory now, but only 18 months or so ago, there was a plethora of op-eds and essays about Bangladesh’s remarkable economic progress in recent decades.
Were those articles correct? Or were vulnerabilities building up in the economy even before the pandemic? Of course, the economy has been in doldrums for over a year now. The government blames external factors for the difficulties. Is that correct? Or did the policymakers bungle their response? Will the IMF program, if properly implemented, help improve things?
The answers to all these questions, in fact, are yes.
From an inauspicious beginning in the aftermath of a devastating war in one of the poorest parts of the world, Bangladesh did experience strong economic growth and rising standards of living in the past few decades. The ‘Bangladesh miracle’ stories that abounded in the country’s 50th year were not wrong.
Some of the better articles, and more in depth studies, however noted the vulnerabilities and imbalances that had been building up in recent years.
Bangladesh is excessively reliant on remittances and the export of readymade garments. The country has one of the lowest tax-to-GDP ratios in the world. Inequality has been rising for over a decade now. The banking sector has been a mess for years, and the electricity sector is rife with sweetheart deals that leave the taxpayers carrying a heavy future burden.
All of these vulnerabilities were known, if not as vocally articulated during the boom years. Any of them could have created economic difficulties. However, it is also correct that when troubles came, they were in the form of external shocks.
Inflation in the advanced economies started rising towards the end of 2021 on the back of loose fiscal and monetary policy as well as supply chain disruptions in the aftermath of the pandemic. Russia’s invasion of Ukraine aggravated the inflationary pressure, leading to a spike in food and energy prices in the first half of 2022. The American Federal Reserve and other advanced economy central bankers responded by raising interest rates more sharply than has been witnessed in decades. This saw the US dollar appreciating sharply in mid-2022.
Like many other oil importing developing countries, Bangladesh was hit hard. The bill for oil and related imports in the 2021-22 financial year alone came in at around $9 billion more than previously expected. Reflecting both the widening trade deficit as well as the stronger dollar, like many other developing country currencies, taka too faced a strong depreciation pressure in mid-2022. Policy responses in Bangladesh, however, were different from those developing countries that handled these shocks better.
Food and energy prices shocks and depreciation pressures present vexing policy challenges for oil and food importing developing economies. Depreciation of the currency can exacerbate the inflationary shock. The poorer and more marginalised sections of the society can be particularly hurt. So, it is understandable why Bangladeshi authorities baulked at allowing the exchange rate to fall.
But their policy steps were neither effective nor equitable, and ultimately made things worse.
Buffeted by the external shocks, the government’s response was strict demand management —through import controls and rise in the administered price of energy — to reduce the demand for dollars. These steps hit the poor hard. And their impact on import demand was offset by caps on interest rates. With borrowing rates lower than inflation, credit was effectively free for those with access to loans. Meanwhile, opacity around the stock of foreign reserves and confusions around parallel exchange rates added to speculations of further depreciation.
This dissuaded remitters from using formal channels, which reduced supply of dollars. The net result of all this was that reserves kept depleting, inflation remained high, and both inequality and informality in the economy increased.
That is —the policymakers bungled is perhaps an understatement!
Against that backdrop, the IMF program asked for: interest and exchange rates that were more commensurate with an economy adjusting to an inflation shock; rationalisation and eventual removal of energy subsidies; higher revenue mobilisation and spending on the poor; more transparent national and fiscal accounts; and banking reforms.
If the program is properly implemented, it should help the economy adjust to inflation in the near term by slowing demand while cushioning the poor. Over the longer term, the economy ought to become more resilient.
By all accounts, the government has started the process of implementing the program, albeit unevenly. There are grounds for cautious optimism that the worst may be behind us. Global inflation pressures are subsiding. Remittances are recovering and exports are steady. Even the exchange rate might be stabilising.
On the other hand, the more difficult policy steps —from a political economy perspective —such as those around the energy or banking sectors are yet to be seriously taken. Meanwhile, the country is heading into an election.
That is, while the external conditions improve, domestically generated turmoil could well lie ahead for the economy.
A slightly different version of this was published by the Bangladeshi Journalists in International Media in their quarterly magazine.
With the bulk of the Bangladeshi media coerced by (or being active collaborators of) the authoritarian regime, these journalists have stood true to their profession.
RESPECT.
Further reading
রাষ্ট্রীয় পৃষ্ঠপোষকতা পেয়েও ‘চেবল’ হয়নি সামিট গ্রুপ
মেহেদী হাসান রাহাত, 5 Mar 2023
আরাফাতের উত্তর দিতে না পারা প্রশ্নের উত্তর- ডিসফাংশানাল বাজারের বিকল্প গুলো - পর্ব ২
Zia Hassan, 24 Mar 2023
Tracking the global dollar cycle
Maurice Obstfeld and Haonan Zhou
29 Mar 2023
দেশে ডলারের তিন দর: ব্যাংকে ১০৭, খুচরা বাজারে ১১৩ আর হুন্ডিতে ১১৯ টাকা
হাছান আদনান, 3 April 2023
Exchange rate volatility and monetary policy
Ethan Ilzetzki, Carmen Reinhart, Kenneth Rogoff
4 Apr 2023
Liquidations surge as Covid, war cost SMEs dearly
Rezaul Karim, 9 April 2023
Zahid Hussain, 3 June 2023
ইসমাইল আলী, 10 June 2023
Andres Velasco, 23 June 2023
Here’s a tale of economic ‘resilience’ — but it’s not the one you think
Ruchir Sharma, 2 July 2023
২০২৩ সালের প্রথম ছয় মাস: দেশে গাড়ি নিবন্ধন কমেছে ৩৮ শতাংশ
শামীম রাহমান, 16 Jul 2023
রাশেদ আল মাহমুদ তিতুমীর, 16 July 2023