Bangladesh ended the fiscal year 2022-23 with slow economy growth. The same trend continues in the current financial year as well. At least three major indicators of the country’s economy – exports, expatriate income and import data – have emerged in that scenario.
In the first quarter of the current financial year, the growth of export earnings, the main source of foreign exchange of the country, decreased to 9.5 percent. It was 13.3 percent in the first three months of last financial year.
Remittances, another source of foreign exchange, fell by 13 percent, even though a record 1.137 million workers migrated abroad in the last financial year.
On the other hand, imports of industrial raw materials, intermediate goods and major machinery from other countries, this sector is also facing problems.
In July-August of this year, loan opening rate decreased by 18 percent and settlement by 22 percent compared to previous year. It fell by 15 percent in the 2022-23 fiscal year due to a dollar deficit and central bank policies desperate to hold reserves.This has slowed down industrial production and new investment by entrepreneurs, which is undesirable.
According to the data of Bangladesh Bureau of Statistics, the general index of industrial production (medium and large production) showed that the production up to May of 2022-23 fiscal year has increased by 8.93 percent compared to the previous year. However, factory production increased by 11.19 percent in FY 2021-22.
Overall, the prospect of recovery from the current economy woes seems highly unlikely in the short term. Because high inflation, volatility in the foreign exchange market and crises like the Russia-Ukraine war show no sign of resolution any time soon.In addition, the growing political tension around the general elections due in January next year has added to this uncertainty.
Institute for Inclusive Finance and Development Executive Director Mustafa K Mujeri said, ‘The level of political uncertainty is quite high. This continued uncertainty could further slow the economy and deepen the downward trend. That means less employment opportunities and less income. So, the suffering of the people will increase.’Already, the people of Bangladesh have been in crisis for more than a year due to record inflation.
While there is a tendency to blame external factors for the current situation at the policy-making level, the former central bank chief economist says there is no point in blaming the global crisis caused by the war. South Asian countries, including neighboring India and Sri Lanka, have moderated inflation. Not only that, they have managed the economy better in the ongoing crisis.
He said, ‘There is a problem in our internal policy. We could not control inflation. Domestic policy failures account for most of our problems.’
This was supposed to increase expatriate income or remittances after a large number of people went abroad for jobs. However, a large gap remains between the dollar rates paid in money transfers through banks and other legitimate channels and informal channels. This is one of the obstacles to getting more remittances from expatriates.
The informal channel has a gap of up to 8 rupees per dollar, which is essentially luring poor migrant workers to hundi operators or illegal channels for remittances to family and relatives.
A market-based exchange rate could reduce this disparity, although experts have repeatedly recommended this has yet to materialize.
Policy Research Institute of Bangladesh Vice Chairman Sadiq Ahmed feels that it is difficult to comment on the broader economy impact from three months of data.
However, he commented, ‘The slowdown in export and import growth in the first three months is consistent with the fiscal year 2020-23. This means that stabilization and structural reforms are needed to revive the economy.’
Sadiq Ahmed, who served in various positions including the World Bank’s South Asia Regional Chief Economist, said, ‘The export slump is a reflection of the continued lack of capacity to grow exports of goods outside the garment sector.’
Associate Professor of Economics Department of Dhaka University. Deen Islam said, ‘Many of the market participants think that since the exchange rate has been kept artificially low, the central bank will eventually be forced to adjust it. As a result, the supply of foreign currency decreases, as many prefer to hold foreign currency.’
He said capital outflow before elections and use of illegal or informal channels to send remittances are other common factors affecting remittance flow.
Bangladesh has long struggled with a negative trade balance, as our import bill payments exceed export earnings. In such circumstances, remittances sent by migrant workers have served as an important shield for the country’s economy.
Economy Challenges and Uncertainty Impacting Bangladesh’s Growth
He said, ‘Unfortunately, remittances have decreased alarmingly in recent months. Which is definitely a concern.’The rupee has depreciated by around 28 percent against the US dollar in the last one and a half years.
According to him, if the government or the central bank wants to control the exchange rate, then it has to impose restrictions on imports. In both cases, inflation will increase, people’s purchasing power will decrease and economy activity will decrease. As a result, economic growth may slow.
He said, ‘Uncertainty surrounding the elections can also be blamed for the recent decline in remittance flows. This uncertainty is also affecting people’s expectations about the country’s future economy prospects.An entrepreneur says that traders are also facing difficulties in importing products for industrial use.
He said, ‘Gas prices are high and there is no guarantee of uninterrupted power supply. People are more concerned about their daily work than political uncertainty.’The entrepreneur urged the revenue authorities and Bangladesh Bank to show a business-friendly attitude.
What can be done?
According to Sadiq Ahmed, to bring export growth back to double digits, focus should be on exports of other products apart from apparel products. Exports of the country need to be diversified.
He said that there has been some revision of overvaluation of exchange rate effective in recent times especially in FY 2022-23. But trade protectionism continues unabated. For this it is necessary to reduce the market based exchange rate as well as import duties along with other para-tariffs such as supplementary duties and regulatory duties. Trade supply systems will also need to be improved.’
The economist suggested lifting exchange rates and import restrictions to allow importers to buy essential raw materials and goods used in production.But Deen Islam sees no short-term solution to the current predicament.
He said, ambition about the economy is linked to political stability. Nevertheless, the situation could improve if some market-oriented policies were adopted. First, the central bank should adopt a flexible exchange rate regime. Second, there is a need to strengthen customs operations to effectively reduce foreign exchange outflow through under or over invoicing.
Thirdly, although the garment industry is a dominant foreign exchange earner, it is dependent on imported materials. To counter this, efforts should be started to diversify exports and encourage low import sectors.