Between 2010 and 2020 the Bangladesh economy performed extraordinarily well: rapid growth of GDP, the balance of payments in surplus, full employment, and moderate inflation. The private banking system prospered.
In 2021 and early 2022 four things happened externally to Bangladesh:
- The strong efforts to prevent a large drop in aggregate demand in the advanced economies during the Covid-19 pandemic resulted in a strong level of demand triggering a substantial inflation of the order of 8-10% per annum. The previous decade's inflation rate had been 2%.
This resulted in a sharp increase in the dollar price of Bangladesh's imports. - Energy markets became extremely volatile.
There were multiple causes.
The volatile Chinese economy; the slowing American economy and the decline in drilling in the US Shale markets for gas and oil.
The continuing demands to reduce fossil fuel production to achieve climate change mitigation goals.
Finally, the war in Ukraine and the uncertainties of Russian supply of gas and oil to Western and Eastern Europe.
The spot market price rose to above $40 and Bangladesh decided to stop purchases and reduce the supply of electricity to the market.
Bangladesh also sharply raised the price for oil products [these are controlled so do not immediately respond to market prices changes.] - Food prices increased due to the war in Ukraine.
Both Russia and Ukraine were major sources of wheat to the world market, as a result, reduced supply raised the prices.
There was also an impact on the edible oil market and the fertilizer market.
This raised food prices in Bangladesh. - The response of the major central banks to the rising inflation was to raise interest rates.
These increases are continuing as there is no sign of global inflation slowing. There is now widespread expectation that there will be a recession in the EU, UK and the US.
In Bangladesh, expectations of readymade garment (RMG) sales became pessimistic.
There are many thoughts expressed about RMG exports over the next 18 months, and the consensus is pessimistic.
Impact on balance of payments
These four factors led to a sharp shift in Bangladesh's balance of payments in FY22 compared to FY21.
In FY21 the overall balance was +$9.3 In FY22 -$5.4 billion a change of $14.7 billion.
What happened? Exports and imports increased in dollar terms at 33% and 36% respectively with the trade balance decreasing $10 billion.
The net services decreased $900 million; net primary income [interest and dividend payments] decreased by $100 million; secondary income [remittances] declined $3.7 billion.
Altogether this resulted in the current account deficit declining about $14.1 billion.
The capital and financial accounts led to a decline of $700 million.
Hence there were two major reasons for the shift in the balance of payments -- the change in the trade balance and the decline in remittances.
Data on the volume and price of exports and imports is not available so only some intelligence guesses are possible.
Export volume sharply and we estimate 15% on the basis of the data on the increase of the manufacturing sector; price increase would then be about 15%, including the higher transportation costs.
This is consistent with discussions with the experts on the RMG sector.
Import prices we assume increased 20% from the underlying inflation and the higher shipping costs.
The volume of imports is increasing 15%.
These are informed guesses.
The volume of imports is consistent with the high level of exports, and economic growth of about 7.5% and a high level investment.
The change in the balance of payments took place throughout the year.
By December 2021 the overall balance was -$1.79 billion.
Bangladesh Bank was fully aware that the balance of payments was shifting into a significant deficit.
By the end of the third quarter of FY22 the picture was very clear.
At the end of the third quarter of FY22 L/C openings were 50% higher than at the same time in FY21.
The situation was getting worse.
The inflation was evident to everyone although it was not showing up in the official data.
The economy was growing strongly.
Action was clearly indicated against the inflation but little was done.
However, Bangladesh Bank was buying Taka [using its reserves] to ease pressure on the balance of payment.
No significant effort was made to slow the growth of the economy.
The Taka was depreciating without recognition by Bangladesh Bank.
It appears that a balance of payments crisis was emerging but there was no effective action to limit this: No real effort was undertaken to depreciate the currency although the currency was depreciating, apparently unknown to Bangladesh Bank and the Ministry of Finance.
No effort to slow economic growth.
Dollars were sold to close the gap between supply and demand, but this action makes sense only if something was being done to change the real causes.
Nothing was being done.
There is one important lesson from these events.
There are tremendous gaps or uncertainties in the data.
Most important was the lack of export and import price indexes.
Second was the unsatisfactory inflation index.
An earlier 137 column reviewed some of these problems and suggested some actions.
The next article will take up the behavior of the exchange rate in FY22 and the first quarter of and the continuing delay to take effective action.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.
