Hopes of rapid recovery dashed by war headwinds
Just as the economy was sailing smoothly to make a turnaround from the coronavirus pandemic, the Russia-Ukraine war has suddenly emerged as a major obstacle standing in the way of faster and full revival. And this, among other things, is likely to increase poverty and eat into growth, warned the International Monetary Fund (IMF), policymakers and experts.
The Ukraine crisis sent crude oil prices rocketing close to record levels of $140 per barrel, while other commodities including aluminium, coal, copper, natural gas, nickel, tin, wheat and zinc have hit historic highs on supply fears.
The situation led the IMF, the World Bank, the Council of Europe Development Bank, the European Bank for Reconstruction and Development and the European Investment Bank to warn on Friday of "extensive" economic fallout from Russia's invasion of Ukraine and expressed horror at the "devastating human catastrophe".
The higher prices of commodities would be more painful for a country like Bangladesh, which depends largely on the international market to feed its growing economy and a huge population.
And that pain is already visible.
The import costs of edible oil, namely soybean, crude soybean oil, palm oil, sunflower and wheat have gone up in the domestic market, biting the purchasing capacity of the low-income families, which have been struggling for the last two years for the pandemic-induced price shock.
Last week, the IMF said Russia's invasion of Ukraine will affect the entire global economy by slowing growth and jacking up inflation, and could fundamentally reshape the global economic order in the longer term, reports Reuters.
And Bangladesh has started to feel the pinch of the conflict and it is likely to slow the economic recovery.
The economy grew 6.94 per cent in the last fiscal year despite the pandemic-induced losses and was heading for more than 7 per cent gross domestic product (GDP) expansion in the current fiscal year ending in June.
But the IMF, in a recent report, said the pandemic would eat up Bangladesh's average potential growth rate by around 1.1 percentage points during the fiscal years of 2020-21 through 2024-25.
"We have recovered faster from the pandemic-induced losses. But, the Russia-Ukraine war will affect us. It is affecting supply and prices of essential goods, which has a significant impact on consumer spending," said State Minister for Planning Prof Shamsul Alam.
"If the spending decreases for the current situation, it may have some effect on the GDP growth."
In a rapid assessment of the war's impact, the United Nations Conference on Trade and Development (Unctad) last week painted a rapidly worsening outlook for the world economy, underpinned by rising food, fuel and fertilizer prices, heightened financial volatility, sustainable development divestment, complex global supply chain reconfigurations and mounting trade costs.
Ukraine and Russia are global players in agri-food markets, representing 53 per cent of global trade in sunflower oil and seeds and 27 per cent in wheat.
Bangladesh has to import nearly 90 per cent of its requirement for wheat, so its prices surged after the war broke out owing to the export disruption from the Black Sea region.
Bangladesh relies on Russia for 3.7 per cent of its agri-food commodity supply, whereas it is 2.1 per cent on Ukraine, showed the Unctad report.
Increased petroleum and fertiliser prices have piled up the subsidy burden on the government. Prices of fertiliser, which had been on the rise even prior to the war, has soared since the conflict began. Bangladesh depends on Belarus and Russia for the Muriate of Potash.
Zahid Hussain, a former lead economist at the World Bank's Dhaka office, said, "The war situation is still fluid. It is difficult to predict when the war will end, causing an unstable situation in our commodity and financial markets."
He thinks the volatile situation will lead to higher inflation because the government has no control over imported items.
Excessive subsidies will put pressure on the balance of payments and government budget management, and the cost of projects will rise as machinery is usually imported.
Bangladesh's current account deficit hit an all-time high of $10 billion in the first seven months of the ongoing fiscal year due to a widening trade deficit and dwindling remittances.
On March 15, foreign currency reserves stood $44.18 billion, down from $46.01 billion at the end of June last year, driven by ballooning import payments, Bangladesh Bank data showed.
The cost of imports went up as the exchange rate rose to Tk 86 per USD, up from Tk 84.8 on the last day of June in 2021.
As such, the cost of a number of import-dependent commodities has jumped, hitting the poor and forcing them to queue for hours to buy essentials from the trucks of state-run Trading Corporation of Bangladesh.
Analysts say this would slow the process of lifting people out of poverty, which rose to 24 per cent in the last fiscal year as millions of people lost jobs and incomes plummeted owing to the pandemic, according to an internal estimate of the government.
The World Bank estimates that the poverty rate was around 30 per cent, up from 20 per cent before the pandemic.
And Washington-based Center for Global Development said on Friday that massive price spikes for food and energy sparked by Russia's invasion of Ukraine will push more than 40 million people into extreme poverty globally.
Zahid Hussain said it will take a long to recover the loss in the education sector. "As a result, our productivity will suffer in the long run."
Prof Alam did not completely agree with the IMF projection about the GDP growth in the 8th Five-Year plan period.
"It may decline a bit from what we have targeted. It may be around 8 or 8.15 per cent by 2024-25," he said.
According to the IMF report, the labour force participation will get back to the pre-crisis level in FY23, when vaccines are expected to be widely available in Bangladesh and GDP growth to pick up. From there, the labour market situation is assumed to continue improving.
Prof Alam says the government's main priority now is to strengthen the agriculture sector.
"Our goal is to raise production and continue to export some products. If more subsidies are needed, we will provide."
The government will also place emphasis on the private sector so that it keeps operating smoothly.
"We will continue supporting SMEs through loans and incentive programmes," said Prof Alam.
"The government is trying to make recovery in all possible ways."
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