AKM Asaduzzaman Patwary, Executive Secretary, R&D, PA of DCCI.
Bangladesh was evolving with glory and reputation until COVID hit. Our economy created some exemplary precedents for many LDCs and developing economies as role models of development. The pandemic consequences were largely eliminated and economy had embraced resurgence with some resilience which was recognised throughout the world. Despite having positive economic trend, the adversity of the geo-economics crisis, frequent geopolitical polarisation and Ukraine and Russia war forced all economies to experience and witness new economic reality featured by deep inflation, unemployment, lower private investment, fall of international trade, weak and expensive supply chain management and lowering foreign exchange reserve with staggering devaluation of local currency, energy supply shortage. These issues are holding back the desired economic growth and aggravating the economic competitiveness and geoeconomic balance. Our economy has been bleak with the unprecedented headwind of the global crises. Bangladesh has become globally an important economic player due to our integration with global trading and value system in the recent decades later 2008 which require huge global intercedence as the sourcing hub many goods and services. As a result, the future of Bangladesh largely depends on global economic dynamics. The war continues and tension mounts for all core stakeholders and aggression of international leaders does not show any clear light at the end of the tunnel to end the warfare. Since our economy is also affected and struggling to overcome this crisis keeping the effects lower and minimum, we need to be strategic, futuristically optimistic and in framing the way-forward and measures to steer our economy in the right direction in the current volatile world economic landscape. Meanwhile, we have seen how many regional economies collapsed due to wrong economic planning and leadership in South Asia and Africa. In this connection, the following context of Bangladesh depicts and clarifies whether economy stays some extent in safe zone or unknowingly going towards the uncertain direction.
Soaring inflation has become a pressing concern for Bangladesh as inflation trend looks incremental and reached around 9.5% highest ever in the recent past years though it is above 5.6% of national target. Witnessing the current economic meltdown and stress, the target of inflation and GDP growth has been revised at 7.5% and 6.5% respectively in the recently announced MPS for H2 of FY2023. And, the global growth target has been revised down to 2.5% for Year 2023 by the IMF.
The frequent surge in energy and commodity price and supply crunch lead to further inflationary stress. OPEC and Russia are not in good terms. OPEC is insisted by the Europe and the USA due to position against Russia in the ongoing war. Consequently, almost all developed countries are undergoing the inflationary stress, low-income capacity and handicapped with the energy crunch which brought in adverse cascading effects on many economies. Food crisis and price hike trend noticed across the world. Bangladesh imports significant amount of daily essential commodities. The local demand hike of the sourcing countries left limited options to smoothen global supply chain of food. In this regard, we must enhance planned and time-bound domestic capacity to reduce the import dependence.
The power tariff hike in bulk electricity price and shortage of fuel supply has also added cost burden and other incidence on businesses and people. Gas supply crunch has also affected our power generation and industrial operation. Predictable tariff policy for gas and electricity for smooth local and foreign investment decision. Considering energy like liquid fuel as the core resource of economic operation, we need alternative sourcing destinations like GCC and OPEC members instead of traditional markets for multiple sourcing for minimum fuel shortage. As the interim way-out, spot market LNG purchase and forward market for long-term supply stability. After the winter, the global primary energy price seems to be soft and downward.
Devaluation of Taka against the USD has become critical concerns for our economy along with declining foreign exchange reserve with extreme volatility in the forex market. Import cost of Bangladesh has increased significantly. The gap of the kerb market rate of Dollar and its official exchange rate against BDT fixed by BB is increasing. Reserve has fallen to $24 billion and multiple rates of foreign exchange to address the foreign exchange shortage have not brought significant improvement in the foreign exchange shortage in Bangladesh. This is very unusual practice The wider gap of REER and NEER in exchange rate is alarming. Instead, it made foreign exchange shortage deeper. Therefore, a uniform currency exchange rate is needed to reduce the discrimination among all stakeholders. Alongside, adoption of market-based exchange rate can somewhat address this on-going volatility. The gap of exchange rate in export and import does not benefit at all the exporters at all. The incentive for remittance and exemption of remittance fee do not improve the state of slim remittance inflow. We need to underscore and prioritise the diverse skilled labour migration to enhance the remittance inflow though it requires huge time ahead.
The foreign currency held by commercial banks plunged by 13.5% in the last quarter, making it harder to open LC, settle import payment. The banks face difficulties in settling import payment. Even though LC of raw materials and capital machinery also declined in the first quarter of FY23 and LC of capital machinery declined by 65% in last quarter of FY2022. Import declined by almost 25% due to stringent foreign exchange policy. The import demand grows as rapid industrialisation and economic expansion is essential to meet growing local consumption and needs. Intermediate products including petrochemical, petroleum products and industrial materials accounts for 40% of total import. Shrinking fuel import and supply has created various concerns and challenges for economy inflating cost of doing business, supply chain cost, inflation and electricity production cost and reduction of power generation. The unstable supply and price trend, controversial roles of OPEC in Brent and crude oil taking into account the Russian and Anti-Russian sentiments above all price cap on Russian Oil price also aggravated the situation. As a consequence, our primary energy gas price has gone up to maximum 179% for the industry users including SMEs and electricity tariff are increased gradually at both bulk and retail level. We feel an interim action plan supported by core stakeholders-Bangladesh Bank, NBR and Commerce and Finance Ministries is needed for priority import mapping to balance the weak foreign exchange reserve and import demand.
The economic fall-out and hyper-inflation in the USA and EU brought massive blow to many economies- dependent on these two heavyweight economies. Our export trend in those destinations tend to decline as RMG exporters are claiming almost double-digit decline in RMG order and export also declined in the third quarter of Year 2022. Though end of war is the ultimate solution to end all global crises including in Bangladesh but the chance of ceasefire is very minimum.
The key implications and repercussions of war experienced by the people and private sector and likely way-out for Bangladesh are as follows:
- The Private-sector credit growth fell to 13.1% and public sector credit increased to 36.3% in December due to soaring and unexpected growth of public borrowing to meet the public administration expenses of Government. For smooth private credit flow, austerity and governance in Government expenditure in development projects, resource and priority mapping are needed until the crisis is contained.
- Liquidity reserve declined to Tk 1.69 trillion till October 2022 from TK.1.89 trillion in June 2022. This decline is not good considering volatile state. The default loan and liquidity crisis need improvement for smooth economic state featured by lower inflation and higher investment. Capital market must be tapped for long-term financing solution. NPL has declined by TK. 13500 corer in last quarter of 2022 which is little inspiring. However, the NPL was TK. 1.34 trillion, the highest ever in the history of Bangladesh despite having many stern and hard measures like reforms in Banking companies act, Companies act and strict mentoring of loan approval ass well relaxation of loan repayment rate for not being eligible of classification. NPL cut trend must continue for adequate disposable fund for easy lending. The savings interest has been increased from 6% and lending rate for personal consumers. On the other hand, the IMF has given the condition for withdrawal of interest cap on lending. If it happens, the local cost of borrowing will be pricier and more expensive adding new challenge of cost of doing business for all.
- Due to tightening global monetary conditions, and inflation control measure, BB has hiked policy interest rate to 5.75%. Higher interest rate may discourage the domestic borrowing.
- Strictness on LC opening margin and settlement including luxury and essential commodities and industrial inputs heavily affected the import stream which in turn affected the smooth supply of essential commodities and production of local and export-oriented industries.
- Alternative import sourcing destinations are essential to minimise the risk and enhance import basket as well currency swap, suppliers’ credit, buyers’ credit and deferred payment options can be harnessed. As planned by the Bangladesh Bank, implementation of the unified exchange rate may be enforced to soften the crisis of the FOREX market as multiple rate enforcement is a rare precedent followed by economies with weak forex balance. Alongside, 4 Special Drawing Right (SDR) currencies like Chinese Yuan (Renminbi), Yen, Euro and Pound may be used to reduce the hiking demand of USD.
- Due to $4.4 billion borrowing form IMF, many unusual and new policy reforms are to be ensured and implemented as the binding conditions like removal of interest cap which may not be very effective in our given economic scenario.
- Demand against Payment, Demand against acceptance and Third country LC for import are used as alternatives as an unusual practice. If needed, we may try these until the economy comes round. Now, we need to be wise and conservative. US Dollar reserve in Nostro account of Bangladesh in the USA and UK are heavily declining.
- It is worth stating that Tax GDP ratio rise by 0.50% in each year through additional Tk. 60K revenue generation in each year including current fiscal year may be very difficult in the given bleak NBR revenue generation stream and world economic context as the aggregate effects of local and global economic state creates clouds in the world economy. We also witnessed the despairs faced by our neighbouring economies which became bankrupt and strong conditions of IMF enfeebled those economies. And, this learning can be a wake-up call for us for macroeconomic management.
While Bangladesh started follow smooth recovery from pandemic stress, the global economic meltdown hampered our post-graduation growth pace. In this given turbulent economic perspective, strategic co-ordination among economists, policy makers and private sectors and Banking sectors is required for smooth nexus of fiscal, monetary, exchange rate, capital market and investment policies and money supply to attain the set target of inflation and economic growth and forecast global dynamics. A steadfast economic leadership can heal the economic wounds towards massive turn-around for our long-cherished visions.