By 2023 inflation rose to a rate of 10%, well above the 7% growth of wages. Most of the population experienced a declining standard of living and a large share of the population found themselves in financial difficulties.
Efforts to contain the inflation have not been successful to date. Emphasis has been on reducing demand, while there is a case that improving supply is the correct policy in the case of Bangladesh.
In a world of variable rate loans, high debt-equity ratios, higher interest rates raise costs and hence prices. The economic and political prospects for Bangladesh were deteriorating. Direct attempts by the government to control prices did not work.
Reducing the government deficit remains the most effective policy action to lower the inflation. So far, over the past two years, little seems to have been achieved to reduce the government deficit. The new government will be more successful, but macro-economic changes take 6-8 months to be seen in the data.
Desperate political leaders and frightened business persons worked to transfer their wealth abroad. From mid calendar 2023, the prime minister was losing control of the country.
The Modi government did all that it could to strengthen her position. This included pressuring the United States to ease its efforts to promote a fair election. From the American viewpoint the alliance with India (informal as it was) was a key to their anti-China policy.
Economic data
The poor quality of the economic data presented a false picture of the condition of the economy, particularly in calendar years 2023 and the first half of 2024.
The level of constant price GDP was probably 15-20% too high. Some reasons are suggested below. GDP was not growing: Data on agriculture is seriously wrong exaggerating output. Rice is a good example.
Production is estimated at 40 million MT per annum based on steady increases in yields. The authorities take the available net rice at 36 million MT, 10% subtracted as waste and seed. Another two million MT is imported. There are available 38 million MT.
The 2022 Household Income and Expenditure Survey reports each Bangladeshi consumes 329 gms of rice per day or 120 kg per year. This is 120 kg per year per person. Total consumption for Bangladesh is 20 million MT. There is 18 million MT of rice somewhere! This strongly suggests that that production is overestimated.
Manufacturing data suffers from poor price deflators, unverified production estimates, and dated estimates of value-added ratios. The heavy reliance on the RMG sector for manufactured goods estimates requires that inputs and outputs be adjusted for price changes separately in determining value added, which is not done.
The manufacturing estimates depends on factory level reports; many major producers refuse to give the data to BBS. The sample is large but not really controlled.
The CPI suffers from the complexity of the products included, weak commodity weight estimates, and uncertain quality control of price collection.
Unemployment data is suspect; the basic message from BBS is that there is no significant unemployment.
Imports are under estimated 20-25% due to under invoicing. Exports have been overestimated due to wrong accounting procedures.
Surveys in Bangladesh suffer from low attention by enumerators to their work, requiring extensive supervision to obtain reasonable returns.
BBS is certainly correcting this, but it takes time and discipline.
Most serious is the population data. Each census is reasonably adjusted to the previous one. Hence, if there is a significant error in a census it is carried forward in reports of subsequent census results.
The past 12 years have seen increasing political interference in published BBS results. This corruption of data is hopefully at an end. But, it is very difficult to understand the economy when there is no satisfactory time series for key concepts.
For example, the low tax/GDP ratio is probably an illusion as the GDP is less than officially recorded. On the other hand, with a lower GDP the debt/GDP ratio is higher.
Earthquake and flight
The Bangladesh elites felt the tremors of the approaching earthquake and ran for their lives. The greatest abuse came from manipulation by bank directors and large business groups. There was widespread borrowing for imports that would never actually appear. These would eventually turn into nonperforming loans.
Considerable effort was made to take over small banks and loot them. The leaders of the financial system did nothing to stop this. The Anti-Corruption Bureau did nothing. The central bank knew what was going on, but did nothing. No one resigned and tried to expose the truth.
Expecting a government collapse they grabbed what they could, sent it abroad, and in some cases, moved away.
My estimate is that in the last three years $10-12 billion was removed. This is based on the size of hundi market and the shift away from its use for under invoicing of imports and towards financing capital flight. In addition, direct looting was achieved through fake import orders.
The governor of the central bank has just announced an estimate of $17bn capital flight. How much of this looting and capital flight can be recovered?
Fleeing from the coming earthquake was not a conspiracy. It was a spontaneous sense that the Hasina regime was in its last days. Many ruined reputations with consequences of shame that will last for years.
Several private banks were effectively driven into insolvency. The condition of these private, insolvent banks remains uncertain, while the central bank tries to bring back to life the already dead. All the government banks are insolvent, representing the greatest of all scams in the financial sector.
Many of these men had extensive, thriving business establishments whose fate is uncertain, resulting in declining production and unemployment. The total impact on the economy remains to be assessed.
The capital market has fallen sharply since the new government removed administrative floors that kept prices from falling. The capital market and the insurance sector are contributing very little to financing the needs of the economy, resulting in the banks carrying the burden.
Clean up
The central bank is now taking strong steps to untangle the losses. There are two important undertakings: To recover money moved abroad; to recover as much from the non-performing loans as possible. Neither is very promising.
There are 10-15 banks that are in very bad straits. Perhaps the central bank should just pay off the non-official depositors and close the bank. The government just writes off the official deposits.
The other banks may be able to work their way to real capital adequacy in two-three years. (But with no dividends to owners). It is best to clean up the banking mess quickly.
In doing so, the central bank should seek to increase the credit to small and medium businesses. This is the heart of the economic recovery program. Banks are not very comfortable with this. But for rapid increases in goods production that low income people will use this is the approach that can raise supply quickly.
Forrest Cookson is the Research Advisor to the Research and Development Centre. In Bangladesh, he led the central bank component of the Financial Sector Reforms; was the Team Leader of the study of Northwest Area Development of Bangladesh; and served as the Statistical Advisor of the Legal and Judicial Capacity Building Project.
