Bangladesh’s economic growth may shrink due to the fallout from the ongoing Russia-Ukraine conflict and the hike in global commodity prices forecasts the Bangladesh Bank (BB).
The central bank also warned that inflation may also rise by the end of the current fiscal year 2021-22.
According to the latest quarterly economic review report of the central bank, the growth momentum is expected to be stronger the rest of the current fiscal year (FY) 2021-22, hinging upon growth-supportive fiscal and monetary measures, growing external and internal demand, improving Covid-19 situation, and rising business confidence.
However, Bangladesh Bank Quarterly (BBQ) for October-December 2021 also pointed out that the headwinds to this growth outlook could emerge from many factors, such as the unfavourable outcomes of the Russia-Ukraine war and elevated global commodity prices.
“Given a soft trade linkage of Bangladesh with Russia and Ukraine, the direct adverse impact of the war on Bangladesh is expected to be modest. However, if the war lingers and affects other neighbouring European countries, which are major destinations of Bangladesh’s export and source of remittance inflow, the damaging effects of the war on Bangladesh might be non-trivial,” the report added.
Moreover, the sharpening of global energy and non-energy commodity- price spikes caused by the Russia-Ukraine war may translate into domestic prices and create an unfavourable position in the balance of payments in the coming months, it added.
“A rising domestic demand due to economic rebounds along with increasing global energy and commodity prices amid the Ukraine-Russia war may put some upward pressure on inflation in the coming months,” noted the BB.
However, the recently published Monetary Policy Review of the central bank also forecast inflation to stay in the range of 5.9% to 6.3% in June 2022, indicating an uncertainty to contain the inflation within the target for FY22.
To anchor inflation expectations and continue the growth momentum in the near and medium terms, BB recommends adopting a coordinated fiscal-monetary policy action.
Moreover, economists also urge the government to take effective policy measures immediately to face possible external pressures on the economy following the ongoing Russia-Ukraine war.
Talking to Dhaka Tribune, Zahid Hussain, former lead economist at the World Bank said that the inflation was 6.17% in February, so it is safe to say that inflation may rise again in the current fiscal year.
“The companies want to increase gas prices and if the price of gas goes up then inflation rate will also go up,” he added.
However, even if gas prices do not increase, domestic inflation is likely to rise thanks to the rise of import costs due to rising prices of other commodities, industrial raw materials, consumer commodities and depreciation of the Taka, said the economist.
In this case, the inflation rate may increase to 6.30%, or even higher, he added.
The economist also said that there is also a risk of declining growth. Russia is a major supplier of energy to the European market and if European countries impose tougher sanctions on Russia over energy, the global economic cost will increase.
“If the energy supply is disrupted, our exports which are at a recovery stage will decline and have an impact on our national growth. Exports to Russia through EU countries will not be the same and the potential market will be lost,” he added.
The economist also expressed concern regarding domestic inflation as people's purchasing capacity has been declining.
“One of the major driving forces of our growth is the domestic demand, of which private consumption is the key,” he added.
When people's purchasing power decreases, all their expendable income will be spent on buying food and they won’t be able to use the internet, go on holiday trips or eat in restaurants, and there will be an adverse effect on demand due to rising inflation, the economist explained
“So, this report of Bangladesh Bank is a very plausible observation about growth and inflation,” he concluded.
Meanwhile, by official count, the inflation as measured by the consumer price index (CPI) rose to 6.17% in February 2022 from 5.86% a month before on a point-to-point basis while the inflation reached 5.69% from 5.62% on a 12-month average.
However, the government has set the target average inflation rate for FY22 at 5.3%.
However, the country's current-account deficit exceeded the $10 billion mark during the July to January period of FY 2021-22, following higher import-payment obligations alongside a lower inflow of remittances.
The current-account deficit rose to $10.06 billion during the period under review from $8.18 billion a month ago. It was a $1.56 billion surplus in the same period of FY21.
Inward remittances dropped nearly 18% to $15.3 billion from July to March of FY22 from $18.6 billion in the same period of FY21, BB data showed.
Actually, the soaring deficits in the trade, as well as the current account, reflect the growing imbalance on the external front, thus creating mounting pressure on the country's overall balance of payments (BoP).
The BB data show that the BoP posted a negative balance of $2.05 billion in the first seven months of FY22 against a positive balance of $6.41 billion in the same period of FY21.