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Dhaka Tribune

Why did governor say Bangladesh economy has reached rock bottom?

  • Governor foresees economic turnaround post-election
  • Bangladesh Bank and economists strategize solutions amid economic crisis
Update : 10 Nov 2023, 09:23 AM

The recent economic struggles in Bangladesh have brought the nation's financial stability to a critical juncture, a sobering assessment by Bangladesh Bank Governor Abdur Rouf Talukder drawing widespread attention.

Amid efforts to curb inflation, the pegging of dollar prices led to unforeseen consequences, causing a scarcity of dollars. This scarcity affected both businesses and aspiring students planning to study abroad.

The financial policies implemented by the Bangladesh Bank seemed ineffectual in this situation.

The unavailability of dollars caused a strain on foreign exchange reserves, plummeting from $48 billion in 2021 to $19 billion presently.

Consequently, the price of the dollar surged incessantly. Banks purchased dollars from expatriates at Tk124 and sold them to importers at Tk125, stoking fears of escalating goods prices.

In response, Governor Abdur Rouf Talukder is diligently devising strategies by collaborating with esteemed economists and related organizations.

The central bank conducted numerous sessions with former governors, several economists, and organizations. In some meetings, the governor underscored the dire state of the country's economy.

Acknowledging the various economic challenges in a discussion with the Economic Reporters Forum (ERF), Abdur Rouf Talukder said: “We have hit rock bottom, and there's no way down. Our economy is presently navigating a strenuous period.”

He admitted in the ERF meeting that a syndicate is contributing to the price surge, resulting in the inflation of goods' prices even with normal supply.

To mitigate the public's plight, the central bank is selling dollars from reserves to stabilize the dollar market to a certain extent.

In this context, Dr Mustafizur Rahman, an honorary fellow at the Center for Policy Dialogue (CPD), highlighted that the acknowledgment of the economy's true condition by the Bangladesh Bank Governor could be a pivotal step towards finding solutions, a rarity in such circumstances.

He said as the governor is formulating his plans based on the advices and suggestions of the country’s expert economists, the economic downturn can be reversed effectively through proper implementation.

Zahid Hossain, former chief economist at the Bangladesh office of the World Bank, said: “Given the governor's comprehensive understanding of the full situation, we can expect proactive measures now that he acknowledges the economy's rock-bottom situation.”

Improvement after polls

Predicting a turnaround after the national election at the meeting of the ERF, Governor Abdur Rouf mentioned that achieving political stability and reinstating investor confidence would halt the economic downturn. He anticipates increased foreign investment flow and additional financing from international sources due to this.

He said steps have been initiated to alleviate pressure on the country's foreign exchange reserves, reducing volatility in the foreign exchange market.

Expressing a glimpse of optimism amid the ongoing crisis, Abdur Rouf said he sees light at the end of the tunnel with an inflation decrease to 8% by next December and 6.5% by next June.

He aspired to stabilize the exchange rate by then, eventually steering the economy in a positive direction.

Notably, the central bank ceased overprinting money, while banks' interest rates rose, intended to reduce market money supply and subsequently deflate inflation as per the central bank’s vision.

However, the governor expressed concern about non-economic factors' impact on inflation, saying that they remain beyond the scope of monetary and fiscal policies.

Multifaceted problems

Addressing the intricate financial issues, Abdur Rouf Talukder said: “We have always discussed twin deficits – current account deficit and fiscal deficit. Both current account deficit and fiscal account deficit were seen in the last financial year, a situation unprecedented in the last 14-15 years.

He cited a staggering $17 billion deficit in the fiscal account. “The fiscal account has gone from a surplus of $15 billion in the previous fiscal year to a deficit of $2 billion in the current fiscal year. Recent history has not witnessed such a massive change,” he added.

He also noted a decline in foreign direct investment, attributing it to rising interest rates in the US and the upcoming Bangladeshi elections. He further elaborated on unfavorable short-term credit and trade credit, coupled with a three-year low in foreign aid disbursement.

The governor said that these four issues are beyond the control of Bangladesh Bank and the government, which has made Bangladesh face a big challenge.

Hundi and money laundering

Moreover, when journalist leaders mentioned expatriates' substantial income flowing through hundi channel in recent years due to volatile dollar market, the governor pointed out that far more money is clandestinely smuggled under the guise of business than through hundi.

However, thanks to rigorous measures taken by authorities, money laundering camouflaged as business transactions has significantly diminished, he added.

“All types of debt securities are being evaluated. Earlier, about $1.5 billion were smuggled out of the country through invoicing every month. It has reduced due to strict supervision,” he mentioned.

Admitting the escalation in defaulted loans, he outlined stringent measures to curb this trend.

The governor restricted loan rescheduling, which was earlier permitted up to five to six times without any down payment. Now limited to four times, any loan beyond that threshold will be categorized as a non-performing loan, subject to legal action by the bank.

Furthermore, he announced the disqualification of defaulting individuals or institutions from the “President's Industrial Development Award”, regardless of their influence.

Increase in FDIs

Abdur Rouf Talukder believes that foreign direct investment (FDI) has decreased compared to the previous year due to various reasons.

This is due to precautionary measures to monitor the situation ahead of the national elections.

Apart from this, due to the national elections, the amount of loan and grant money waived by the development partners has also decreased a lot, he mentioned.

Their disbursement depends largely on the implementation of various conditions agreed upon by both parties. As the election approaches, they are also monitoring the situation, becoming more vigilant and stricter in their scrutiny.

The governor also said that the limit imposed on bank loan-deposit interest rates has also been withdrawn. The current market-based interest rate system is in place. As a result, the situation will improve soon.

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