Amid falling foreign exchange reserves due to rising import bills, Bangladesh applied for a $ 4.5 billion loan from the International Monetary Fund (IMF).
According to economists, who participated in a recent discussion at the Center for Policy Dialogue in Dhaka, Bangladesh is facing an “economic crisis” that will not end soon when the global economy is also in turmoil.
The crisis was not unexpected, it seems. “We expected a deterioration in the current account deficit due to lower remittances, lower export demand and, of course, high fuel and food prices,” according to a sovereign analyst at Moody’s in Singapore.
On July 27, Bangladeshi Prime Minister Sheikh Hasina said the crisis was not imminent. The country has enough foreign exchange reserves to import food for six to nine months, he said. “We have money in our hands to import grains and other food products (essential items) for at least three months during any crisis.”
However, the signs of an economic crisis are evident. The cost of the US dollar against the Bangladeshi taka has increased significantly and the Bangladeshi currency is devalued almost every week. One dollar, which was worth around 85-90 taka in May, is now being sold for 112 taka in the sidewalk market.
Bangladesh’s forex reserve recently dropped below $ 40 billion for the first time in two years. Amid the COVID-19 pandemic, forex reserves exceeded $ 48 billion in August 2021, the highest ever recorded in Bangladesh history. It has been declining since then.
This is largely due to the trade deficit. Although export earnings hit a record $ 52.08 billion in fiscal year 2021-2022, the trade deficit also peaked at $ 33 billion. The high trade deficit is to some extent a fallout from the Russia-Ukraine war, which has affected food and fuel supplies around the world. Global inflation also affected Bangladesh’s reserves.
Foreign remittances are Bangladesh’s lifeline. According to the World Bank, Bangladesh is the seventh highest remittance recipient country in the world. Its remittance inflows hit a record $ 24.77 billion in fiscal 2020-21, but fell to $ 21.03 billion the following year.
Bangladesh is listed as one of the top 30 money laundering countries in the world. Some analysts describe this problem as the cancer of its economy. According to the US think tank Global Financial Integrity (GFI), Bangladesh is among the countries most affected by the scourge of trade-based money laundering. Statistics from the GFI indicate that Bangladesh lays an average of $ 7.53 billion annually through international trade.
A recent report by the Swiss National Bank (SNB) states that “the amount of money deposited by Bengalis in various banks in Switzerland amounted to 871.1 million Swiss francs” (approximately $ 916.92 million) at the end of 2021. The report reveals that the amount increased by $ 310 million in just one year.
Currently, Bangladesh has over $ 90 billion in foreign debt. Its debt has doubled in the past five years due to the construction of mega infrastructure projects. These projects, which are part of the Awami League (AL) government’s “More Development Less Democracy” strategy, enabled the AL to manipulate and win general elections in 2014 and 2018.
These mega-projects could now become a major concern for the government. He will have to find the foreign currency to repay the debts incurred on these projects.
According to Debapriya Bhattacharya, a distinguished colleague of the CPD and coordinator of Citizen’s Platform for SDGs, “Bangladesh could face serious shocks in 2024 and 2026 regarding the repayment of the external debt of 20 large mega projects”. This equates to approximately $ 43 billion mainly owed to Russia, Japan and China.
With an economic crisis looming, the government of Bangladesh has begun to take steps to curb foreign exchange spending. Bangladesh Bank has tightened its import policy for luxury and non-essential items such as sport utility vehicles, washing machines and air conditioners.
Meanwhile, the Hasina government cuts the expenses of its officials. Foreign travel by government officials was canceled. They were asked to reduce electricity consumption by 20% and limit the number of vehicles they use.
As part of her austerity measures, Hasina called for scheduled power outages across the country, even though her government celebrated 100% electricity coverage in March for the first time in Bangladesh history. Some power plants have been closed to reduce fuel consumption.
In addition, the government has classified its development projects into three groups. Nearly completed projects (category A) will continue, while projects in category B can only use up to 75% of the budget. Category C projects will remain suspended until the economic crisis has subsided.
The AL government has begun to take measures in anticipation of an economic crisis. Will it prevent Bangladesh from following the Sri Lankan path?