The stable macroeconomic environment that Bangladesh enjoyed in recent years—characterized by strong economic growth, low inflation, and healthy foreign exchange reserves—has now eroded. This shift is largely due to rising global commodity prices, imported inflation, and supply chain disruptions. However, Bangladesh is not alone in facing these challenges; nations around the world, both wealthy and developing, are grappling with the economic fallout from the pandemic and the ongoing conflict in Ukraine.
While countries like Sri Lanka, which was on the brink of economic collapse, are showing signs of recovery, Bangladesh’s economy continues to face significant challenges. The fiscal year 2022-23 concluded with several troubling economic issues, exacerbated by policy shortcomings, many of which remain unresolved.
Bangladesh’s Inflation Remains High, Exceeding Government and Central Bank Projections
Despite some fluctuations, high inflation remains a significant issue for Bangladesh. According to the Bangladesh Bureau of Statistics (BBS), the average monthly inflation rate was 9.02% as of June 2023, surpassing both the government’s projected rate of 5.6% for FY2023 and the central bank’s forecast of 7.5% for the first half of the year. In contrast, average inflation was 6.15% in FY2022. Recent BBS data shows that inflation increased to 9.92% in August 2023, with food inflation rising to a troubling 12.54%.
Domestic Factors Drive Bangladesh’s Inflation Despite Falling Global Commodity Prices
Policymakers have largely attributed rising prices in Bangladesh to external factors, such as high import costs for essential commodities. However, with global prices declining over the past several months, this explanation no longer holds. Inflation in Bangladesh is now driven by the increasing prices of domestically produced goods, despite adequate local production levels. Market manipulation and the inability of policymakers to address these issues have left the public struggling, as wages have failed to keep pace with inflation.
Bangladesh’s Monetary Policy and Shrinking Reserves Contribute to Inflation Challenges
In response to the economic impact of the Ukraine war, most countries implemented contractionary monetary policies to manage money supply. However, Bangladesh Bank maintained fixed interest rates of nine percent for loans and six percent for deposits, despite high inflation. This low lending rate made borrowing more attractive, leading to a 10.48% increase in broad money supply (M2) for FY2023, up from 9.43% in FY2022. Pressure from the business community influenced the Bank’s decision to keep rates low, while high inflation eroded depositors’ purchasing power. In July, Bangladesh Bank shifted to a market-based interest rate policy in line with IMF conditions for a $4.7 billion loan.
Additionally, the external sector situation affects inflation. The country’s foreign exchange reserves have been dwindling, dropping from $41.8 billion in June 2022 to $31.2 billion in June 2023, impacting its ability to manage imports and external payments.
Bangladesh Adjusts Forex Reserve Calculations, Reveals Lower Figures Under New IMF Method
In July, Bangladesh Bank began using the IMF’s Balance of Payments and International Investment Position Manual (BPM6) to calculate foreign exchange reserves. This updated method revealed that reserves had fallen to $23.06 billion by August 30. The revised calculations now exclude amounts allocated for export development funds, foreign currency loans to local banks, and other funds not readily accessible. Previously, the inclusion of these funds had inflated the apparent size of the reserves.
Bangladesh’s Missed Opportunities: Currency Stability and Lack of Strategic Response Amid Global Economic Challenges
For several years, Bangladesh enjoyed a stable external sector, even during periods of weak export performance and sluggish remittance growth. This stability provided policymakers with a degree of flexibility and confidence. Unfortunately, this advantage was not leveraged to address the impacts of the global economic crisis on Bangladesh’s external sector and macroeconomic conditions.
The taka was maintained at an artificially high level for an extended period, despite currency depreciations in neighboring countries such as China, Cambodia, India, and Vietnam. While a strong currency benefited importers, it was less favorable for exporters. Despite a depreciation of the taka against the US dollar, the export sector’s performance remained lackluster in FY2023. Data from the Export Promotion Bureau (EPB) shows export revenue growth at 6.7%, falling short of the government’s 11.4% target. This underperformance has been primarily driven by low demand in importing countries.
Bangladesh Faces Economic Strains: Rising Deficits, Low Remittance Growth, and Persistent Inflation
In FY2023, Bangladesh experienced only a 2.7% growth in remittances, despite an 11.38% increase in migrant workers. The discrepancy has raised concerns, as the influx of migrant workers has not translated into corresponding remittance flows. Many remittances are reportedly channeled through informal methods, such as hundi, due to unattractive incentives provided by the government and higher costs associated with formal remittance channels.
Imports also dropped by 15.76% in FY2023, due to selective import restrictions, a decline in global commodity prices, and challenges in accessing foreign currency for letters of credit. Although import restrictions were intended to curb inflation, they have also reduced the inflow of essential capital machinery and intermediate goods necessary for production. With global prices falling, these restrictions have become less effective in controlling inflation.
The foreign exchange market has struggled with multiple exchange rates, leading to market instability. The central bank’s shift to a unified, market-driven exchange rate system aims to stabilize the taka’s value against foreign currencies, though the results of this approach are still pending.
The failure to boost export and remittance earnings has put pressure on Bangladesh’s trade and current account balances. The current account deficit reached a record $18.6 billion in FY2022 and remained high at $3.3 billion in FY2023. While the trade deficit improved slightly, it still stood at $17.15 billion. Most notably, the financial account deficit hit a historic $2.14 billion in FY2023, contributing to an overall balance of payments deficit of $8.2 billion.
High energy prices have further exacerbated inflation. Payments to independent power producers and rising energy costs, partly driven by IMF-mandated subsidy cuts, have led to increased energy prices for consumers and producers alike. The shortage of natural gas and reliance on costly liquefied natural gas (LNG) imports, coupled with inadequate public investment in the energy sector, have compounded the problem.
Government borrowing from the central bank has also contributed to inflation by increasing the money supply. Limited domestic resources restrict fiscal space for supporting vulnerable populations amidst high inflation. The economic stability has deteriorated further due to excessive borrowing, akin to printing money.
Bangladesh’s major economic challenges stem from inadequate policies, poor implementation, structural weaknesses, and a lack of reform. With two months of FY2024 already passed, there are few signs of imminent improvements, as political activities may overshadow the necessary economic reforms.
References
- https://www.thedailystar.net/opinion/views/
- Bangladesh Bureau of Statistics (BBS). “Monthly Inflation Report, June 2023.” Accessed August 2024.
- Bangladesh Bank (BB). “Monetary Policy Statement for January to June 2023.” Accessed August 2024.
- Export Promotion Bureau (EPB). “Export Performance Report, FY2023.” Accessed August 2024.
- World Bank. “Bangladesh Economic Update, August 2023.” Accessed August 2024.
- International Monetary Fund (IMF). “Bangladesh: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Bangladesh.” Accessed August 2024.
