M. Kabir Hassan, PhD:
During the last couple of years, just before the emergence of the pandemic, Bangladesh was perceived as South Asia’s rising star, generating interest among numerous businessmen who dubbed it the “tiger of Asia” due to its dynamic economy. During that time, the Asian country was growing at a good pace, experiencing an 8.13 per cent growth in 2019, primarily attributed to the expansion of the textile industry and foreign capital investment. Nevertheless, the lockdowns due to Covid-19 and the Ukraine War have left the country struggling. Dhaka must now contend with challenges such as geopolitical competition, a shortage of foreign currency, and political unrest.
The first challenge we should address is the issue of foreign exchange reserves. While in September 2021, Bangladesh was enjoying its peak with around $48.09 billion, it dropped to $32.7 billion in January 2023. In addition, wemust discount around $8.5 billion that has been assigned to the Export Development Fund (EDF), loans that the country gave to Maldives and Sri Lanka. Adding these numbers, we can see how the government only has to use around $24.2 billion. However, a portion of that US dollar reserve is in the form of investments in U.S. Treasury bonds and gold reserves, which leads us to think that Bangladesh’s forex crisis is real.
Because of the decrease in US dollar reserves, the government decided to reduce imports to prevent this issue from escalating further. This way, they could control the number of US dollars the country was getting rid of. Additionally, Bangladesh has witnessed its local currency, the Bangladeshi taka, losing around 25 per cent of its value compared to the US dollar in just six months, with inflation levels rising by 8.6 per cent.
Bangladesh’s inflation is notorious in many different areas. For instance, we can see how fuel prices have increased by more than 50 percent, and gas prices have risen by more than 150 percent for industries. To counter inflation, the board meeting of the International Monetary Fund (IMF) approved a loan of $4.7 billion for Bangladesh last January, to be disbursed in seven different installments over 42 months. However, that loan was not unconditional; Bangladesh would have to commit to reducing subsidies, which would contribute to halting inflation. Besides that, the Bangladesh Bank spokesperson Mezbaul Haque said they have the idea to review the whole banking sector, and modifications to the banking and finance laws will come soon.
Another aspect hitting the Asian country is the velocity of its external foreign debt is rising. In February, we saw how that value peaked, surpassing the $100 billion. That is especially concerning for the coming years, between 2024 and 2026, when the country must pay back loans owed to foreign creditors for 20 mega projects. The government fostered those mega projects to promote the country’s development in the long run.
The example of debt is just one of the multiple issues with the politics in the country. Since democracy was restored in Bangladesh in 1991, two political parties have alternated in power: the Bangladesh Nationalist Party (BNP) and the Awami League (AL). There have been questions about the past two elections in 2014 and 2018. Among other incidents, there have been questions of human rights abuses, forced disappearances, extra-judicial killings, and marginalisation of the political opposition. This has provoked the United States to impose sanctions on Bangladesh’s Rapid Action Battalion officials.
The current economic crisis in Bangladesh has done nothing but intensify the opposition of the alternative political party, which has called on its supporters to mobilise against the present AL government through strikes and rallies to win future elections in December 2023. On top of that, Bangladesh is not receiving the expected support from some of its development partners, such as the United States, Japan, China, and Russia. Instead, they are accusing each other of interfering in Bangladesh’s internal affairs. The bottom line is that even though Bangladesh is in a severe economic and political crisis, its partners are not providing much help, which could prolong the country’s recovery.
Just when things appeared to have hit rock bottom, Moody’s, the credit rating agency, lowered Bangladesh’s banking sector outlook from “stable” to “negative.” This development is regarded as one of the most significant setbacks for the Bangladesh economy, which is already grappling with challenges such as a weakening currency, high inflation, and depleting foreign reserves resulting from the Ukraine war’s fallout. Given the country’s heavy reliance on imports, this downgrade could influence other nations to exercise caution when engaging in financial transactions with Bangladesh. Moreover, several foreign institutions have already scaled back credit limits for Bangladeshi banks.
The potential consequences of this downgrade can be compared to the case of Sri Lanka, which entered a severe economic and political crisis after experiencing a downgrade. The negative outlook could serve as a wake-up call for the Bangladeshi banking sector, which conceals many cases of scams, corruption allegations, and non-performing loans that accounted for 8.16 per cent of the total loans disbursed as of December 2022. It is essential to mention that even before the downgrade, the dollar crisis had already halted new credit arrangements and payments. The downgrade has reaffirmed what the Bangladeshi economy was signaling.
For instance, if we look at the data from the Bangladesh Bank, it indicates that the number of new letters of credit dropped by around 14 per cent from July to December last year. On top of that, payments on those debts declined by 9 per cent. Bankers tried to explain the situation by stating they did not have enough US dollars to settle import bills. On the other hand, local media reported that around 20 banks with negative balances in their foreign currency holdings could not make such payments. The reduction comes as the official reserves of foreign currencies have fallen below $32 billion from a high of $48 billion in August 2021, while the value of the taka dropped by 27 per cent in only 6 months, from 84 per dollar to 107.
The Bangladeshi nation needs a plan to combat this crisis. In October 2023, the latest Bangladesh Development Update titled ‘New Frontiers in Poverty Reduction’ was released. It explains how monetary and fiscal policies are vital to combat inflation and address financial sector vulnerabilities.
Fighting these issues will be crucial for the country to sustain growth and reduce poverty. The report also suggests that adopting a single market-based exchange rate would help attract foreign currency inflows and support the balance of payments and reserve accumulation.
Thanks to its economic growth, Bangladesh has improved its living conditions and reduced extreme poverty to 5.0 per cent in 2022 from 9.0 per cent in 2016. This places the country on par with South American and Caribbean nations and positions it favourably compared to the South Asian average. The poverty benchmark is based on international standards, set at $2.15 a day (using 2017 Purchasing Power Parity), as well as data from the Bangladesh Bureau of Statistics (BBS) Household Income Expenditure Survey for 2022, along with re-estimations for 2016. Besides that, Bangladesh has reduced child mortality and stunting and improved access to basics such as electricity, sanitary toilets, and education.
The latest South Asia Development Update, titled “Toward Faster, Cleaner Growth,” indicates that South Asia is expected to achieve a growth rate of 5.8 per cent this year, with Bangladesh having a 5.5 per cent. While this growth rate might appear significant when compared to that of other emerging and developing regions worldwide, the reality is that it falls short of the pace seen before the Covid-19 pandemic and does not align with the region’s development objectives. In the regional report, South Asia is projected to experience a growth slowdown, with a rate of 5.6 per cent forecasted for both 2024 and 2025. Once again, this decrease in growth can be attributed to several factors, including the diminishing effects of post-pandemic economic rebounds, a combination of monetary tightening and fiscal consolidation measures, and reduced global demand, all of which collectively exert pressure on economic activity in the region.
The precarious fiscal conditions in countries like Bangladesh contribute to vulnerabilities in their growth outlook. On average, in 2022, this will lead to higher borrowing costs and an elevated risk of default. Additionally, these countries have a certain level of dependence on the Asian giant, China, and a potential slowdown in its economic growth could also affect the other South Asian nations. Finally, Bangladesh is also facing fiscal constraints, which limit its government’s ability to enable its economy to take advantage of the global energy transition. The energy transition holds significant potential for future economic growth and job creation if it encourages corporate investments, reduces air pollution, and lessens dependence on fuel imports.
That said, it is evident that Bangladesh is not experiencing its most glorious years after the pandemic. Issues such as the amount of foreign currency they hold, corruption, geopolitical competition, inflation, high leverage, fiscal constraints, and limited growth rates for the following years do not form the best mix for a developing country. The government needs to devise a package of solutions to address the above mentioned points. Otherwise, the nation’s future as it is known today may differ in a couple of years.
(M. Kabir Hassan is a Professor of Finance at the University of New Orleans, USA and José Antonio Pérez Amuedo is a Ph.D. Student at the University of New Orleans, USA).