No government is perfect and every economy has its share of skeletons in the cupboard. However, for a democratic nation, Bangladesh made it a norm to remain opaque in its economic affairs. The lack of transparency is now proving the biggest stumbling block for the country to avert a crisis and return to the growth path.

The trouble starts with the basic economic data. Even a simple question like devaluation has no easy answer. If you take Dhaka’s official version based on interbank exchange, Taka depreciated by 10 per cent from 86.27 to 94.95 between 4 May and 10 August.

This is the rate at which the government imports essentials like energy, fertiliser etc. Naturally, it has a direct and indirect bearing on key macroeconomic fundamentals involving the fiscal status of the country, inflation, adequacy of the foreign reserve, and growth potential.

However, the official rate is a figment of imagination, as is exposed by the recent crisis and that raises questions about the authenticity of many tall claims that Dhaka has been making in recent times.

Between 21 July and 10 August, the official value of the Taka depreciated by 1.06 per cent, but the kerb (unofficial) rates were down by 14 per cent to Taka 120. The gap between official and unofficial rates widened from 12 per cent to 26 per cent.

Lying between official and unofficial is the rate at which banks open LCs (letter of credit) for private importers. Since 21 July, the LC rate slid by 6.7 per cent from Taka 103 to Taka 110.

However, the LC rate is not representative, as Dhaka imposed heavy import restrictions for nearly a month. Also, the central bank is making every effort to keep the optics intact. Treasury chiefs of at least six banks have been sacked over the last week allegedly for high rates.

Lack of transparency

Dhaka blames hoarding for rapid slide in kerb rates. But even an undergraduate student of economics will understand that the key problem lies in the lack of transparency. Going beyond the scope of forex rates, that’s exactly the problem of the Bangladeshi economy, and it’s not new.

If the exact value of the import in local currency is not reflected in the government books, then who is mitigating the gap? Apparently, the government resorted to this tactic to make its accounts look more presentable. But what happened to the monetary and financial system?

Part of the answer is now known. The same government that has been boasting of ‘adequate forex reserve’ and has reported GDP numbers well above the World Bank projections even in the Covid year, is now running from pillar to post for bailout packages.

According to newspaper reports, Dhaka has so far sought support worth $7.5 billion - $4.5 billion from IMF and $1 billion each from World Bank, Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) – equivalent to a month’s import bill.

The desperation of the Sheikh Hasina government can be understood from the recent decisions to hike farm-end Urea fertiliser prices by 25 per cent and the shock increase of auto-fuel prices by over 50 per cent.

The revision was due as auto-fuel prices in Bangladesh were among the lowest in Asia. However, the entire episode lacked transparency.

Global crude prices surpassed the five-year high in October 2021 and breached the 10-year high in March this year. Accordingly, pump prices of petrol and diesel soared everywhere. But Dhaka was sitting tight, happily reporting the lowest inflation numbers in the subcontinent.

Now that crude prices plunged by 30 per cent in the last two months, amidst fears of global recession and inflation, numbers are coming down in major economies. At such a time, the Sheikh Hasina government increased auto-fuel prices on 6 August.

There is no way to know how the wild devaluation of Taka, stiff import restrictions and sharp rise in fuel and fertiliser prices are impacting the economy. The growth numbers are published once a year and June inflation is pegged at 7.5 per cent, which no one trusts.

Unofficially everyone can see the impact. Prices are soaring in local markets, and although there has not been much public protest to date, as the principal Opposition Bangladesh Nationalist Party (BNP) became too weak, the people are said to be fuming.

Situation may worsen

Bangladesh is far from safe and the situation may worsen in no time. If it’s not reflected in official data, the fault lies elsewhere. The stock market was on a tailspin in July. The fall was broken by imposing artificial barriers (floor price).

Such shortcuts will not take the economy too far. Over and above the recessionary trends in Western markets, rising costs and artificially high Taka are fast eroding the cost competitiveness of the export-oriented readymade garments industry.

The sector is notorious for arm-twisting. During the first phase of Covid lockdown in 2020, they sent workers packing to extract cash handouts from the government. Any such trick may create a serious problem this time.

Bailout packages might help Bangladesh to survive the short-term problems. But thorough reform is mandatory to avoid snowballing of the crisis.

Dhaka piled up huge debt over the last decade. According to ‘Prothom Alo’, loan agreements worth $36 billion were signed with China ($17.54 billion), Russia ($11.38 billion) and India ($7.36 billion). Indian loans are the cheapest.

This is over and above huge funding by multilateral agencies in infrastructure projects. Commercial agreements - like $1.6 billion easy Indian finance in 1,320 MW ultra-super-critical Maitree Super Thermal Power Project in Bangladesh – are extra.

A good part of the loans is directed to prestige (read white-elephant) projects like the upcoming $12 billion Rooppur nuclear power plant. Built under Russian support, the generation cost of the plant is currently estimated to be 70 per cent higher than comparable Indian projects.

China is funding 12 exorbitantly costly infrastructure projects. Some of them, like the underwater Karnaphuli tunnel, have already witnessed 20 per cent cost escalation, which is a norm in Bangladesh.

To cut the story short, Bangladesh is staring at an exponential jump in its loan repayment obligations in the next two to three years.

Between the fiscal year 2016-17 (FY17) and FY22, the country’s annual repayment (against past long-and-medium term loans) increased by 80 per cent to $2 billion. Exports increased by 30 per cent, indicating structural stress on the system. According to World Bank, the external debt stock to export ratio was 174 in 2020.

On average, lenders now disburse $4-5 billion in loans a year. With the grace period of new loans coming to end, repayment is now set to move up sharply.

‘Prothom Alo’ (1 August 2022) estimated repayment obligation for FY23 at $2.78 billion (39 per cent year-on-year), $3.28 billion in FY24 (18 per cent), $4.02 billion in FY25 (22.5 per cent). Assuming Bangladesh doesn’t take any fresh loans, the repayment obligations will peak at $5.15 billion in FY30.

A potential drag force

During the last decade, Bangladesh and CLMV (Cambodia, Laos, Myanmar, and Vietnam) region together were considered a pull factor for the regional economy. The dream now stands shattered. Myanmar exhausted its forex reserve. Laos is on the verge of collapse, and Bangladesh is facing hiccups.

It's not a happy time for the regional economy. Bangladesh is crucial for India due to its high degree of exposure (total assistance including sovereign loans, commercial loans and aids will be near $10 billion), huge exports ($14 billion in 2021), and geographic location.

Unguided, this economy can be a serious drag force on India’s growth ambition. Any disruption in Bangladesh will spill over to India’s East and Northeast in no time. It is, therefore, mandatory that India diversifies its economic risks and stop taking Dhaka at face value.

For regional good, Bangladesh must reform.

Also Read: Bangladesh Finance Minister Warns Countries Against Belt And Road Project Loans Just Days After Chinese Foreign Minister's Visit

Prothom Alo

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