In May this year, Bangladesh surprised the world by extending a $200 million currency swap — effectively a loan in dollars — to help Sri Lanka tide over its foreign currency crisis. Too many saw it as a mark of Bangladesh’s economic progress.
Weeks down the line, the same Bangladesh — the second largest economy in the Indian subcontinent — is postponing the import of even energy essentials, at great harm to its domestic economy, to survive a looming foreign exchange crisis. The problem is real and may compound in the days to come.
Bangladesh sources barely 30 per cent of nitrogenous fertiliser (urea) through domestic sources, and ahead of the critical monsoon season, two of the plants suspended production due to the non-availability of gas.
According to Dhaka-based Business Standard, production is down by 40-50 per cent in ceramics, 30 per cent in steel mills and five to 10 per cent in readymade garments. One to two hours of scheduled power cuts have become a routine.
Garments earn 85 per cent of the export revenue of Bangladesh. Exports touched $52 billion in the financial year (FY) 2021-22 (July-June) riding on post-Covid revenge buying in the prime markets of the US and Europe. However, the trend is unlikely to continue in FY23.
“Persistent high inflation pressures are going to bite the U.S. apparel industry,” reported Chinese news agency Xinhua on July 20, quoting Marc Cohen, director of retail studies and adjunct professor at Columbia Business School. China is the largest apparel exporter.
The Ukraine war has affected Europe the most. The PMI (purchasing managers index) for eurozone services fell to 53 in June down from 56 in May. The UK is witnessing a decline in retail sales. Services activity in the region is dangerously close to the contraction zone.
It will take time to know if the global economy slips into a recession. Meanwhile, there are murmurs in Bangladesh about the low order book positions for the fall fashion season. To add to the worry, remittance — Dhaka’s second largest source of forex — declined by 15 per cent in FY22.
The global turbulence is surely a reason behind Bangladesh’s concerns. However, close scrutiny will reveal that a good part of the problem was invited by the Sheikh Hasina government in Dhaka which celebrated its success a bit too early and had been in a denial mode about the economic vulnerabilities.
Finance Minister A H M Mustafa Kamal keeps claiming that the nation has close to a $40 billion foreign currency reserve which is sufficient for six to seven months of import. The country has also set a tall export target of $67 billion in FY23, ignoring ground realities.
Nicknamed Lotus, Kamal is a top businessman. He along with Prime Minister’s business adviser Salman Rahman (together referred to as ‘Lotus-Rahman’) are referred to as the driving force of Bangladesh’s economic policies.
And, the drivers did great injustice to the economy. First and foremost, according to the International Monetary Fund (IMF), the actual reserve is nearly $7.5 billion less to nearly $31 billion, which is sufficient to support the inflated import bills for a maximum of four months.
In IMF’s view, the $7 billion export development fund (EDF) that offered cheap foreign currency loans to exporters and some smaller entries including that $200 million currency swap; should be kept out of the context.
The EDF was created in 1988 to encourage exports. As foreign currency reserves swelled (up to $48 billion) during the Covid years, Bangladesh suddenly increased the size of the fund and widened the scope of the loan facility.
Commercial banks were allowed to borrow funds in dollars from the EDF to give foreign currency loans. Borrowers were supposed to repay the loans in the dollar from the export proceeds. But that didn’t happen.
According to an article by Bangladeshi economist Dr Moinul Islam in the country’s reputed pink paper Bonik Barta on 2 July; most of the loans turned bad. Bangladesh’s notorious politically influential business lobby used the facility “to park assets abroad”.
Such defaults are not new in Bangladesh. The banking sector is overburdened with sticky assets. The government brushes the issue under the carpet by offering amnesty to the defaulting business groups to regularise bad loans, at minimum cost, and enjoy fresh borrowing facilities.
However, the latest instance of the abuse of the banking sector (locally referred as ‘bank game’) may prove costly to Bangladesh. In theory, they have adequate reserves but the reality is different.
According to the vernacular Prothom Alo (14 July 2022), the state-owned Bangladesh Petroleum Corporation (BPC) has been facing hurdles in opening LC (letter of credit) for import since April. Even if LCs were opened, payments to the foreign exporter were delayed.
BPC alerted the government at least thrice, beginning May 2022, about a looming energy crisis. The government finally admitted the crisis only last week. However, that is not the end of the trouble.
Despite adopting a floating exchange rate back in 2003, Bangladesh kept fixing the official exchange rate to make the Bangladeshi currency (Taka) artificially strong against the dollar.
This is different from market intervention (by selling or buying dollars) and essentially created two exchange rates with the open market proving to be closer to reality.
As of 21 July, the open market rate of a dollar (Taka 103) was 10 per cent more than the Bangladesh Bank (BB) declared interbank exchange rate (Taka 93.95). The kerb rates are even higher at Taka 105.
Dr Birupaksha Paul, professor of economics at the State University of New York and former chief economist of Bangladesh Bank feels the policy harmed Bangladesh’s export and remittance earning potential. In an article in The Daily Star (1 July 2022), he squarely blamed the central bank and the finance ministry for the dollar crisis.
Looking For Bailout?
According to newspaper reports, Bangladesh recently explored a $4.5 billion budgetary support (read bailout) from the International Monetary Fund (IMF). The last time Dhaka took IMF finance was in 2012.
Apart from other conditions, IMF asked for re-estimation of foreign exchange reserve (by excluding EDF and other liabilities), making exchange rate floating and checking loan defaults.
Bangladesh denied following the prescriptions. “We don’t need it (IMF loan) now,” the finance minister told the media.
It is up to Bangladesh to decide if they need external support. But the reality is the economy has too many problems.
The energy sector is a replica of Pakistan. According to ‘Bangladesh Power Sector Review for 2020’, 85 per cent of electricity is generated by burning costly resources like natural gas (including 25 per cent imported gas) and liquid fuel.
For a country that imports refined petroleum products, pump prices are lowest in south and southeast Asia, indicating low tax revenue generation potential, inefficient energy economy, disguised subsidies and, concerns over future growth potential.
These are, however, challenges of a much lesser scale when compared to the political and political-economic vulnerabilities, as was pointed out by this author in his 8 April column (Why Cronyism Could Make Bangladesh Go The Sri Lanka And Pakistan Way).
The compromised election in 2018 robbed the ruling dispensation of its political legitimacy to power. The opportunity was used by the cronies who had been calling the shots in the government. The India-China rivalry and the moneybag diplomacy created a perfect playground of vested interests.
The abnormally high cost of infrastructure building is proof enough that all is not well with the Bangladeshi economy. From the scam-tainted years of the United Progressive Alliance government in India to the subprime in the US — the world is full of examples of corruption and easy money creating growth bubbles.
Let Bangladesh not face any such eventuality — because that wouldn’t augur well for either the subcontinent or the Indian economy. The Hasina government has once broken many taboos in regional politics. India would do well to help it regain popular confidence.
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