The conflict between Ukraine and Russia has had negative effects on the world economy, that much is clear. In the global economy, both product prices and transportation costs have increased. On the other hand, when the Covid-19 outbreak subsided, Bangladesh's economy began to improve.
As a result, demand has grown in the production and other industries. Due to this, import payments reached a record high of $89.16 billion in the most recent fiscal year, an increase of roughly 36% from the year prior.
The nation is currently experiencing a dollar crisis, and this situation is directly tied to high import expenses. As a result, the taka decreased in value in relation to the dollar. Each dollar was worth Tk86 in May of last year. As of right now, that amount has increased by 24.4% to Tk107.
In order to address the situation, Bangladesh Bank began selling the US Dollar to banks from its reserves. The reserves are quickly running out, as evidenced by the pertinent data. It has decreased by nearly $13bn in just one year. The reserves, which were $44.16bn on the same day last year, dropped to $31.18bn on April 17, according to the central bank.
When Sri Lanka announced its bankruptcy, Bangladesh was in the midst of the US dollar crisis. Unsurprisingly, there was panic across the nation. Opposition political figures and economists have not stopped expressing concern that Bangladesh would possibly experience a similar circumstance. To prevent a situation in Bangladesh resembling Sri Lanka, the government acted quickly.
The most important action the relevant authorities have made, in our opinion, is to restrict imports in order to reduce the amount of dollars leaving the country. LC margins of all items have been raised, with the exception of those that are essential commodities, and the regulatory duty of some products has also gone up. As a result, LC opening declined by 25.38% to $51.36bn from July to March of FY23 compared to the corresponding period of FY22.
However, the rise of LC settlement was substantially lower than LC opening because of deferred LCs from prior FYs. From July through March of FY23, LC settlements decreased by 5.87% to $57.05bn from the same time frame in FY22.
Additionally, the import payment declined 10.27% overall from July to February of the current fiscal year compared to the same period in FY22. From $54.37bn to $48.79bn was paid in imports. Due to the sharp decline in LC openings, the effect will probably be realized in the remaining months of the current fiscal year.
The depletion of reserves started to slow down when imports sharply decreased. By examining the data for each month from July through April of FY23, it can be seen that the reserve fell by the most (5.64%) in November when compared to the month before. Since then, the reserve loss has been relatively moderate.
Additionally, the import payment declined 10.27% overall from July to February of the current fiscal year compared to the same period in FY22. From $54.37bn to $48.79bn was paid in imports. Due to the sharp decline in LC openings, the effect will probably be realized in the remaining months of the current fiscal year.
The depletion of reserves started to slow down when imports sharply decreased. By examining the data for each month from July through April of FY23, it can be seen that the reserve fell by the most (5.64%) in November when compared to the month before. Since then, the reserve loss has been relatively moderate.
In such a situation, the media has asked whether the economy had been eased of the extreme pressure it was experiencing on April 18 during a discussion program in the conference chamber of the Executive Committee of the National Economic Council (ECNEC). State Minister for Planning Shamsul Alam responded by unequivocally stating that the current status of the economy is stable. "We were able to appropriately manage it. “We are progressing despite world conflicts and inflation,” he said, sounding pleased.
He added that concerns over the Bangladesh problem were unfounded. "Many said we would turn into Sri Lanka. But it didn't go like that. The economic indications at the moment are promising. It's wrong that so many of us occasionally let negativity influence us.
We can mostly concur with the state minister's remarks. First off, it is true that Bangladesh was spared the crisis that Sri Lanka experienced. Second, despite the economy being in crisis, the pressure that was present at the start of the current FY has somewhat abated.
Import reduction without consideration of the economic effects is rarely a wise course of action.
In a recent study titled Bangladesh Development Update, the World Bank condemned the drastic cut in imports made to conserve reserves. According to this international lender, such a decision will have a significant negative impact on small enterprises that rely heavily on imports. So, it's time to decide whether imports will be severely regulated going forward or whether more focus will be put on growing export revenues and remittances.
Bangladesh has requested a $4.7bn loan from the IMF in an effort to avert an economic catastrophe. The loan's initial payment has been received. This loan's objective is to lessen the partial imbalance in the balance of payments (BoP). In this instance, the current account deficit declines, but the BoP deficit rises as a result of the financial account's change from positive to negative.
In July through February of FY23, the balance of payments deficit was over $8bn, compared to roughly $2.22bn during the same time period in FY22. This shortfall warns us that while the economy is currently under less pressure, if remittances, export revenue, and foreign debt do not rise, the pressure could return.
And, as is always the case, the people will be forced to bear any additional burden. Due to the requirement that fuel prices double in order to qualify for an IMF loan, Bangladesh is currently experiencing the strongest inflation pressure in the last ten years. Even if identical circumstances exist in many other nations, Bangladesh may be able to lessen the strain if it can strengthen its own deficiencies.
The price of fuel and other commodities have recently decreased on the global market. Will the broader public, however, reap that benefit? In Bangladesh, once a product's price rises, it typically doesn't go down. There is always the unholy possibility of dishonest merchants driving up the cost of commodities by faking a crisis.
The cost of living might be brought down to a manageable level if the government can act to address these issues. Additionally, it will ease the strain on the economy.
Anup Sinha is a researcher specializing in South Asian affairs.
