Import suppression, energy crisis weigh on BD economy: WB

Staff Reporter :
Continued import suppression measures and energy shortages have weighed on both industrial production and the services sector in Bangladesh.
Apart from this, weak corporate governance and capital buffers also increase the risk of stress in the financial sector in Bangladesh.

According to the Global Economic Prospects report released by the World Bank (WB) on Tuesday night said, real household earnings are yet to recover to pre-pandemic levels despite an improvement in employment in Bangladesh.
A policy program supported by the International Monetary Fund (IMF)-approved in January-aims to pre-emptively address further balance of payments pressures and help unwind import suppression measures in Bangladesh.
In 2022, South Asia (SA) endured significant negative spillovers from rapid monetary policy tightening in advanced economies, weak growth in China, and the Russian Federation’s invasion of Ukraine. The peak impact of these shocks appears to have passed, and regional economic conditions have improved so far in 2023, however, the economic and financial consequence of these shocks persist.

Import restrictions imposed by several economies (Bangladesh, Nepal, Pakistan, Sri Lanka), which adversely affected economic activity, have been relaxed as external imbalances

have improved and exchange rate pressures have eased. Food export bans, however, are expected to remain in place in Bangladesh, India, and Pakistan through 2023 despite falling global prices.
According to the report, elevated inflation, policy uncertainty, and weakening external demand are expected to slow growth to 5.2 percent in FY2022-23 (July-June) from 7.1 percent in the previous fiscal year in Bangladesh.
Gains in market share in key export markets are expected to sustain export growth, offsetting the effects of weaker growth in advanced economies. Growth is projected to accelerate to 6.2 percent in FY2023-24 as inflationary pressures ease, reform implementation accelerates, and transportation and energy infra-structure megaprojects are completed, the report added.

Risks to the outlook remain predominantly to the downside and these risks include adverse spillovers from further monetary policy tightening or banking sector stress in advanced economies, the possibility of more economies falling into crisis, sharper-than-expected tightening of domestic macroeconomic policies to contain inflation expectations or protect foreign exchange reserves, social tensions, policy uncertainty, and climate-change-related shocks in Bangladesh. In economies already in crisis, the human toll could worsen, with possibilities of widespread starvation and disease outbreaks, it added.
However, the report also said that the South Asian countries could face significant adverse spillovers from further global monetary tightening, although their severity would differ among countries depending on their integration into global financial markets as well as on domestic policy choices.

Additional increases in U.S. interest rates would likely cause foreign exchange market pressures, leading to local currency depreciation relative to the U.S. dollar, declining foreign exchange reserves, capital outflows, or broader financial stress. Renewed financial sector stress in advanced economies could spillover into the region-including by undermining global growth.
High government and external debt, low foreign exchange reserves, and socio-economic tensions heighten the risk of financial crises in several economies in the region. Such crises could significantly reduce potential as well as actual output growth.

Rising interest payments on debt, and the need to consolidate government expenditure following pandemic-related stimulus, may undermine efforts to support vulnerable communities and economic activity in the face of global headwind.
With limited ability to access international financial markets and elevated fiscal needs, many governments have been looking to borrow domestically, which could increase linkages between the banking sector and government and complicate any debt resolution. One-third of banking sector assets, on average, were claims on governments in late 2022-up from one-fourth in the decade before the pandemic. Increased government borrowing risks crowding out private sector investment and could lead to fiscal dominance, where interest rates are set too low for economic needs, to make it cheaper for the government to service its debt.