Recognising a crisis and responding to it effectively
Amid the high inflation and sliding foreign exchange reserves, an energy crisis has crept into Bangladesh. Globally, the worry for high commodity prices was multiplied with Russia's invasion of Ukraine in February, because Russia is a major supplier of fuel and many commodities to the world. Price hikes and supply shortages hit the growth prospect of many countries. China's zero Covid policy has hit its production volume and shrunk the alternate source of supplies of many commodities for importing countries.
As a net fuel-importing country, Bangladesh has been in the front line facing the challenges of war-induced price hikes. Bangladesh also imports several essential commodities from the global market, including Russia. The official inflation rate in the country has increased to 7.56 percent, which is the highest in nine years. In Bangladesh, not only the imported products and services, but local commodities too have gotten more expensive. Add to this the poor market monitoring mechanism and the profiteering behaviour of a small group of market players who always take advantage of crises.
Soaring oil and commodity prices have hit Bangladesh's foreign exchange reserves significantly. Bangladesh's exports have made significant rebound with the pandemic slowing down. In the first 11 months of the 2021-22 fiscal year, export growth was 34.09 percent. As import growth was higher at 39.01 percent, there was a deficit in the balance of payment equivalent to USD 3.7 billion during this period. Indeed, during the same period in the previous fiscal year, there was a surplus of USD 7.5 billion in the balance of payment. Moreover, the negative growth of remittance in FY2021-22 led to a current account deficit of USD 15.3 billion, during the July-April period of FY2021-22, which is 3.3 percent of the country's GDP.
On the other hand, the Bangladeshi taka against the US dollar has seen a free fall in recent months, despite the central bank's attempts to keep the taka stable by injecting at least USD 5 billion into the market. Since countries have withdrawn travel restrictions, people have resumed international travels for various purposes. On the other hand, money laundering and trade mispricing through under-invoicing and over-invoicing have also put pressure on the forex market. Due to the shortage of adequate foreign currency in the market, the US dollar is being sold at a much higher rate in the kerb market than the official rate. Though the Bangladesh Bank has recently allowed the market to determine the exchange rate, the market is yet to be corrected.
Meanwhile, the Bangladesh Bank has taken a few measures to ease the pressure on the forex reserves, such as restrictions on importing luxury items, reporting of all types of foreign exchange transactions by banks, and encashment by banks of 50 percent of the total balance held in exporters' retention quota (ERQ) accounts in the exporters' names.
A depreciated taka against the dollar may be good for exports and remittances, but it makes imports expensive, which is further fuelling the inflation rate. The government now makes much higher payment for fuel imports. High import payments have already depleted the forex reserves by a significant amount. Since August 2021, the forex reserves have declined by USD 7 billion, now standing at USD 39.8 billion in early July 2022 (FY2022-23). However, the International Monetary Fund (IMF) says the estimation of Bangladesh's forex reserves is exaggerated, and the actual forex reserves are USD 7.2 billion less than what is reported by the government.
Falling forex reserves is a red signal, since the cost of energy imports is increasing significantly. Forex is needed not only for energy imports, but also for capital machineries for industries and infrastructure. The cost of energy imports by the Bangladesh Power Development Board (BPDB) increased by about 20 percent in FY2020-21, compared to the previous fiscal year. With the continuous rise of global fuel prices, the import payment for fuel will be even higher for FY2021-22. Energy experts view that a lack of initiatives for new gas exploration and efficient management are the causes of the current power shortage crisis in the country. Despite the prospect of success in gas exploration, according to various geological surveys, the government has been reluctant to explore new gas fields. Instead, it opted for importing expensive liquefied natural gas (LNG) from the international market.
In view of the soaring prices, the government has taken measures to reduce the cost of energy. It has rolled out a load-shedding schedule of one hour per day throughout Bangladesh. It has also announced to keep petrol pumps closed one day a week. The production of domestic diesel power plants will be suspended for now. Additionally, several measures have been announced to reduce nationwide electricity consumption by 25 percent. While these measures are necessary in view of huge expenses for energy, this is causing public suffering. It is also hampering industrial production. If this continues, production costs will increase and there may be disruptions in the supply chains. It will further increase inflationary pressure. Reduced production also risks reduced employment.
Therefore, rationing of power distribution cannot solve the core problem, which is deep-rooted. In the face of high inflation, there is a need for continuing energy subsidies. But where is the fiscal space for the government? With a tax-GDP ratio of less than nine percent, there are very limited scopes for meeting the required expenses, not only for energy, but for all other expenditures. Earlier, the government asked everyone to be frugal, and suspended low-priority projects and foreign tours of government officials, which are positive moves. Along with these, it is also crucial to improve governance in project implementation and reduce corruption in public expenditures. This is the time to be more prudent in economic management through immediate, medium and long-term measures.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author's own.