Economic reform is the need of the hour

A B Siddique :

Inflation is now averaging double digits.

Food inflation rose to 12.58 percent, the highest in 11 years and seven months.

According to Bangladesh Bureau of Statistics data, inflation was recorded at 9.2 percent in the fiscal year 2022-2023.

Most of the indicators of the economy, including inflation, are responsible for the deepening of the economic crisis in Bangladesh at the moment.

The policies adopted to solve the economic crisis have become ineffective.

Many times policies become ineffective due to global reasons.

More recently, war broke out between Palestine and Israel.

If this conflict lasts long, the price of oil in the world market will increase by 25 to 30 percent.

Oil prices have risen by 7 percent since the start of the conflict. Middle East crisis will also affect Bangladesh.

Weak monetary policy and fiscal policy are more responsible for deepening the economic crisis.

The World Bank says inflation in Bangladesh is rising due to weak monetary policy, high energy prices, currency devaluation, commodity supply shortages and import controls. Besides, there are four types of crisis in the economy of Bangladesh: (1) high inflation (2) pressure of international situation in business and trade (3) risk in the financial sector (4) instability around the upcoming national elections.

Apart from inflation, the major challenge for the economy today is to prevent the loss of foreign exchange reserves.

In an import-dependent economy, the situation could not be direr if foreign exchange reserves continue to deplete. It is not an easy task to handle this situation overnight.

According to Bangladesh Bank, foreign exchange reserves were recorded at US$ 48.80 billion in the fiscal year 2021-2022.

In the second week of October this year, the reserves decreased to 26.84 billion dollars. According to international standards, the reserves stand at 21.7 billion dollars.

And the net reserve is below 14 billion dollars.

That means there is a reserve to meet three months of import liabilities, which is very risky.

Ways to increase reserves are narrowing day by day.

The ways to increase reserves are remittances sent by expatriates, export earnings, foreign loans, foreign direct investment. Sadly none of these are in good condition.

Recently, remittances fell by 13 percent, foreign investment fell by 29 percent, foreign loan concessions fell by 11 percent and exports fell by Tk 5,200 crore in September.

On the other hand, the principal and interest cost of external borrowing from reserves has increased recently.

At the beginning of this financial year, principal foreign debt repayments increased by 29 percent and interest payments increased by 58 percent.

Currently, the interest rate on foreign loans has increased to 9 percent, which was only 2 to 3 percent two years ago.

There is also a reason for interest rates to rise.

Most recently US-based rating agencies Moody’s and Fitch downgraded Bangladesh’s credit rating.

In this situation, if the special loan is more than doubled, the World Bank wants 5 percent interest. Lending agencies charge higher interest rates if a country has a lower credit rating.

How will foreign currency reserves increase in this situation? Even by controlling imports, it was not possible to overcome the crisis in reserves.

If the reserve cannot be lifted from this situation, a situation like Sri Lanka will arise in Bangladesh. According to the conditions of the International Monetary Fund (IMF), the reserve should be taken to 26 billion dollars by December this year. Is it possible in the current situation?
The dollar price has not yet been marketed. Remittance flow through legal channels is decreasing due to overpaying of dollar in kerb market. Remittances are not coming through the banking channel at the desired rate due to dollar peg. Remittances sent by expatriates recently recorded a 41-month low.

In the last three years, the migration of workers from Bangladesh to Saudi Arabia has almost quadrupled. Remittances from Saudi Arabia fell by more than 17 percent. On the other hand, bad debt is now widely discussed in the economy of Bangladesh.

Banks will lose profits and face liquidity crunch if they fail to reduce the amount of defaulted loans. If the banks do not have enough liquidity, the flow of credit to the private sector will decrease. This will have a negative impact on the economy.

Currently, the flow of credit to the private sector is the lowest in 22 months (9.75 percent). The IMF said three to four years ago that Bangladesh’s non-performing loans amount to 24 to 25 percent of GDP (about Tk 3 to 3.5 lakh crore).

According to the data of Bangladesh Bank, as of June this year, defaulted loans were recorded at Tk 1 lakh 56 thousand 39 crore, which contradicts the IMF data.

Bangladesh is one of the money laundering countries in Asia. Failure to curb money laundering stalls development. The twelfth national election will be held in the first week of next January.

Various types of violence including strikes, blockades have already started around this election. Economic activity almost came to a standstill in the run-up to the election.

Foreign investment decreases, remittances sent by expatriates decrease, no one wants to invest again by taking loans from banks, import of raw materials for manufacturing products decreases, the number of foreign tourists decreases.

In particular, money laundering increases manifold during election years. Due to the strike-blockade, the import-export activities stopped.

In this context, Bangladesh Bank has already started consulting economists to deal with the economic crisis. Officials say reforms in the economy will begin after the national elections.

As the political unrest around the election is increasing, it is imperative to start reforming the economy without delay. Political instability will deepen the economic crisis if the economic reforms are not started from now.

This has become a matter of thought.

(The writer is a journalist.)