The IMF has warned that the overall economy of Bangladesh is under three risks, which is causing great damage to the economic balance.
A report from IMF pointed out, the disparity between foreign exchange income and spending, the trend of the BDT devaluing against the dollar, and the continuous decline in foreign exchange reserves are the three concerns that are risking the overall economy.
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These factors are increasing the inflation pressure. As a result, the government’s total expenditure is rising. To cover the increasing costs, the government is now more reliant on debt. This pressure can only be relieved by boosting foreign earnings, and revenue, and lowering subsidies.
Moreover, Bangladesh has economically suffered due to the negative impact of the global situation. There is a risk of a new crisis in the supply of goods and the risk of an overall increase in commodity prices. Besides, the way the US central bank Federal Reserve Bank (FRB) is increasing its policy interest rate, may also hurt Bangladesh. Because it will increase the price of the dollar, and the crisis will increase.
These findings were uncovered during an assessment of Bangladesh’s economy by the International Monetary Fund (IMF). On January 14, Antoinette M. Sayeh, the IMF’s Deputy Managing Director (DMD), traveled to Bangladesh to finalize loan negotiations. She was in Dhaka until January 18. The government received a report from the IMF during that period outlining the overall state of Bangladesh’s economy. It also defines the IMF’s strategy for accessing credit. These are currently being implemented, and several government authorities are monitoring the process’s development.
This report has emphasized several of Bangladesh’s economy’s advantages. The external debt situation is still stable in the meantime. The organization has placed a strong emphasis on halting the practice of taking out short-term loans, nevertheless. Such loans, according to IMF, would raise the danger.
Bangladesh is getting a loan of 4.5 billion dollars from the IMF to deal with the economic recession. The loan proposal is likely to be approved at the IMF Executive Board meeting on January 30. If this happens, the first installment of the loan may be disbursed by mid-February.
Why the increase in cost is causing the fall of reserves?
According to IMF observations, with the global recession, the price of goods in the international market has amplified and the cost of imports has also increased significantly. In contrast, foreign exchange earnings have decreased. Global volatility has reduced foreign direct investment (FDI) inflows. Consequently, the reserve is decreasing due to the heavy pressure of import expenditure.
A continued decline in reserves is a cause for concern for the economy. If the reserves decrease, the dollar pressure will also increase in the market. This reduces the value of money against the dollar, which is happening in almost all Asian countries. If the value of money decreases, government expenditure will increase in all sectors. At the same time, import costs and product prices will increase. All these will further affect the inflation rate, which can put pressure on the entire economic management.
How reserve control has affected the economy?
According to the report, imports of all types of luxury goods have been reduced to minimize the pressure on reserves to deal with the crisis. Imports of essential goods have also decreased. The continued rise in inflation has reduced people’s incomes and adversely affected the expenditure of government agencies. Oil and gas imports have been reduced to save foreign exchange due to the increase in the price of all types of fuel in the international market.
Additionally, the shortage of all types of fuel including electricity has reduced economic activity. At the same time, the tightening of monetary policy further reduced economic activity. In this, the inflation rate is on a downward trend, but the excessive borrowing by the government is increasing the risk.
Revenue needs to be increased and subsidies need to be decreased
Income is not increasing as foreign exchange expenditure is increasing in other sectors including import expenditure. This is increasing the deficit in the overall foreign exchange management. To reduce this deficit, emphasis has been placed on increasing foreign exchange earnings.
To overcome the crisis due to global instability, the government needs to raise revenue from both sides. Foreign exchange earnings should be increased to maintain balance in the foreign sector. For this, expatriates should be encouraged to diversify exports and send remittances through banking channels. Domestically increasing the expenditure should increase revenue to generate employment.
At the same time, subsidies in unnecessary sectors should be reduced. Then it will be possible to keep the economic management in order by maintaining balance in both sectors.
Remittance needs to be increased
According to the Central Bank report, the impact of the Russia-Ukraine war resulted in the highest import expenditure of $9.51 billion in February of the last financial year. Since then, import has been strictly limited. Therefore, last December, the cost of imports decreased to 7 billion dollars.
However, the import expense could not match with export earrings as the export earrings and remittance did not increase. It has continuously resulted in the reserve being in a negative trend. The use of hundi has restricted the use of formal channels for remittance, and the government has no record of that amount sent through hundi. The expatriates need to be encouraged to use banks for sending remittances.
No increase in foreign reserves since February 2022
The last increase in reserves was in February 2022 and since then, it has not increased in any month. The downward trend continues.
According to the IMF report, although the rate of inflation has started to decrease, its impact has not yet started to fall on the economy. Rather, the economic situation has created negative conditions in some indicators. The trend of increase in bank defaults and decrease in savings may put the banking sector at risk as well.
IMF predicts that the economy of Bangladesh will not be able to turn back the recession in the current financial year. However, economic activity will increase compared to last year. The report expressed optimism that the economy of Bangladesh will return to its potential speed in the next financial year.