There are two dimensions of Bangladesh's response to the on-going global economic crisis. The response has been a mix of both domestic and external in nature. The domestic response has been focused mostly on promoting domestic supplies in the fast-advancing deglobalised world following the Ukraine-Russia war. One desirable option has been to ensure sustainable agricultural development to avoid a food crisis in the country. Of course, the country will still have to import some food to build up the stocks to ensure desired food security. We now have a food stock of about two million metric tons. Ideally, we must aim to raise this stock to three million metric tons through both domestic and external procurement processes. Bangladesh is exactly following this strategy. Thriving agriculture is, of course, a boon for an emerging economy like ours with a huge population. Besides feeding the millions, it has also been providing necessary employment to the rural population and raw materials and sources of demand for industrial products. The growth of the agricultural processing industry depends largely on thriving agriculture. That Bangladesh has responded far better than many of its peers is mainly because of the better performing agriculture and related small and medium enterprises providing huge employment. The agricultural processing industry has also come of age in Bangladesh mainly due to better-performing agriculture. Thanks to robust financial inclusion, including mobile financial services and microfinance penetration into the rural economy, the rural economy of Bangladesh has been transformed into a vibrant landscape of smaller entrepreneurs providing strength to the macroeconomic stability. Indeed, sustainable agriculture has been synonymous with import-substituting industrialisation in Bangladesh. Bangladesh avoided billions of dollars of food imports mainly due to its better-performing agriculture. However, in a globalized world, diversified agriculture and MSMEs alone cannot do much in ensuring a stable macroeconomic outcome. The external economy, including the regional one, is also crucial in responding to the global economic crisis. In particular, the growth of the low-skilled manufacturing industry, particularly in the textile sector, has been the key to Bangladesh's transition to a developing country from its Least Developed Country (LDC) status. The export of textile products has given special comfort to Bangladesh in not only earning continued foreign exchanges but also providing abundant employment to low-skilled rural youths, including the overwhelming proportion of women. The contribution of low-skilled remittance earners in providing both employment and foreign exchange earnings has also been equally strategic for Bangladesh. Besides making a significant contribution of the domestic response to the global economic crisis by these three sectors, namely agriculture, export, and remittance, their role in shaping the external sector economy has also been highly strategic. Despite some headwinds, Bangladesh's external economy looks much more resilient than many of its peers.
One of the external sector vulnerabilities of Bangladesh, like many other developing countries, is certainly rising inflation which has been pushed to this level mostly by the higher prices of imported goods. The supply-chain disruptions due to the Ukraine-Russia war and the lagged effect of the devastating pandemic are at the root of higher fuel, fertiliser, and food prices (e.g., wheat, edible oil, etc.). In addition, the unprecedented tightening of the monetary policy of the Fed has been raising the primary rate of interest in the US financial market leading to speedy gains in the yields of the US long and medium-term bonds. Simultaneously, the exchange rate of the US dollars against the major currencies has been gaining strength making the world's foreign exchange market seriously turbulent. Almost all currencies, including Euro, Pound Sterling, and Indian Rupee, have been weakening consistently to keep pace with the gaining spree of the USD. The dollar has gained 13 per cent against Euro, 15 per cent against the Pound, and 20 per cent against Yen. Bangladesh Taka has not been an exception. Since most international import products are dollar-denominated, the landing prices of almost all the imported goods and services in non-US economies, including Bangladesh, are experiencing phenomenal price rises leading to higher inflation. The inflation in the UK has jumped to double-digit, and that in European Union is almost touching the same bar. Bangladesh's inflation has also been hovering around 7.5 per cent. So is the case with India. The inflationary situation in developing countries, including Bangladesh, has been exacerbated by a deteriorating exchange rate of their currencies against the USD. Most central banks of the world, including ECB, Bank of England, and RBI, have started raising their primary rates to address the inflationary challenges. Bangladesh Bank, however, has been finding it difficult to raise its Repo rate as there is very little room to manoeuvre given a general cap on the rate of interest. As a result, depositors are also getting jittery about the existing rate, which is substantially below the inflation rate. Already the rate of growth of deposits has been running much lower than that of the private credit growth. If continued, this may lead to a liquidity crunch in some banks. However, besides substantial devaluation of the Taka to make imports more costly, the central bank of Bangladesh has also been taking several macro-prudential measures to suppress the import of luxury and non-essential items, including raising margins and strengthening stronger monitoring of letters of credit above three million USD to tame the pace of import. The government has also complemented these measures by introducing several austerity measures, raising tariff barriers for undesired imports, and slowing the pace of implementation of those projects that may not yield immediate investment and employment. It has also been readjusting subsidies given to imported items like fuel to keep the budget deficit within the targeted level despite some risk of a rise in inflation.
The end results of all these prudent moves by both the central bank and the government have been quite encouraging in reducing the trade deficit, though slowly. In fact, the trade deficit went up to nearly US$33 billion leading to a current account deficit of about US$17 billion at the end of the last fiscal year. All this put pressure on the foreign exchange reserve as the central bank tried to protect the Bangladesh currency. Bangladesh Bank sold nearly eight billion USD during the last fiscal year and more than two and a half billion USD in the current fiscal year to ease the foreign exchange market. Apparently, this market is now moving towards stability as the monthly trade gap has been closing. The latest data from BB indicates that the amount of L/C opening in August 2022 came down to US$5.65 billion from US$7.42 billion in August 2021. The decline has been US$1.77 billion or 24 per cent. The L/C opening for July 2022 was US$6.22 billion indicating a decline of 10 per cent in a month. The trend continues in September as well. The settlement or actual import in value terms declined by 13 per cent in August'22 compared to the same month in 2021. The actual import is still maintaining an upward trend compared to the same time of the previous year mainly because of clearing outstanding import payments. If this trend of declining import orders continues, the actual import will also come down in the coming days. Fortunately, the export figures have been rising during the first two months of the current fiscal year. The July-August 2022 export earnings went up to US$8.59 billion compared to US$6.86 billion during the same period of 2021. The growth recorded was 25.31 per cent. The export earnings have been increasing due to the encashment of the 50 per cent of Export Retention Quota (ERQ), and the reduction of the Net Open Position (NOP) limit of commercial banks by 5 per cent. Thanks to the depreciation of the Taka, remittance inflow has also been rising by 12 per cent during the first two months. The monthly inflow has been more than two billion USD in this period. The government has also been up and doing in procuring more low-cost long-term foreign loans from international finance and development organisations like IMF, World Bank, and ADB. It has already asked for US$4.5 billion long-term loans from the IMF, including the Resilience and Sustainability Trust (RST) Fund. The actual negotiation will start soon after the visit of the finance minister to Washington in October. The government is also working hard to enhance the release of committed funds by various development partners accumulated in the pipeline. Last year it was able to release about US$8 billion from the pipeline. This year Bangladesh should do more to release an even larger amount as the pressure on its reserve has increased further.
Besides these international moves, the government has been enhancing its regional economic diplomacy to get more support from its trusted neighbour in the areas of connectivity, energy, and trade cooperation. Also, it has started negotiating the import of diesel and continuous flow of essential commodities following the successful visit of the Bangladesh Premier to Delhi. And, the import of electricity from India is going to gain further pace after the visit of HPM, which has just been concluded.
Bangladesh has also worked closely with Japan to get more bilateral low-cost loans from JICA. The launch of Special Japanese Economic Zones in Araihazar at the year-end will attract more FDI from Japanese and international investors. All these smart moves will certainly attract more FDI, particularly at a time when more western investors are redirecting their investment from China. One recent study shows that more than 50 per cent of the US importers of RMGs would like to source garments from Bangladesh. In other words, the change in geopolitics has also been turning favourably towards Bangladesh. The upcoming visit of our Premier to the UN will further push deeper trade cooperation between the US and Bangladesh as she will also participate in programs to celebrate fifty years of diplomatic relations between the two countries.
Given this background, it will be wise to work more on how to improve the business environment in Bangladesh by providing hassle-free one-stop services to the investors to enhance the flow of foreign direct investment. In addition, we must focus more on augmenting the supply of foreign exchange by easing and incentivising the foreign exchange market. Certainly, we have made enough progress on the demand side of the foreign exchange market. The results have started yielding. The current stress is, no doubt, more short-term. As indicated by IMF and S&P recently, our overall long-term external debt position is very comfortable, as the overall ratio to Gross Domestic Product (GDP) is around 15-17 per cent, much lower than many comparable countries (it is 104 per cent in Sri Lanka). Now is the time to focus more sharply on the supply side:
1. We must continue to work closely with all stakeholders (avoiding 'blame game') to augment the flow of foreign exchange from multiple sources. Of course, strong monitoring must also continue. But no 'media trial'. On-going discussions on concessional long-term borrowings from multilaterals are, therefore, very timely and prudent.
2. Export diversification is certainly needed. The non-RMG exports (e.g., light engineering, electronics, cars etc.) which is stuck up at 20 per cent must be further promoted with necessary policy facilitation. The new markets for RMG exports must also be explored along with up-skilling of workers to respond to high-end buyers. The infusion of new technology in this sector must also be encouraged. However, this will still be a blended strategy where both humans and machines will work hand in hand.
3. This is absolutely good time to focus on the "Made in Bangladesh" or "Product of Bangladesh" campaign. For example, tiles, ceramic items, and others can be produced in Bangladesh, to reduce major import dependency. Focus on production of more fruits to reduce import-bill for the same.
4. We should focus on short term foreign exchange flow into Bangladesh where the international and better performing local banks can play significant role. As the central bank has been allowing fund transfer from OBU to DBU, it's an opportunity to bring short term foreign currency liquidity in banks which will ease the market.
5. All Banks with stakeholders (BB, BIDA, BSEC and chambers) must focus more on bringing FDI and Foreign Portfolio Investments into Bangladesh. As emphasised by the IMF and international rating agencies like S&P and Moody's about no investment risk in Bangladesh, this is high time that we tell our development story in a smarter way. We have never delayed in repayment of the debt installment. We have very little high-cost commercial loans. Even if we have some, those are in promoting export industries meant for earning dollars. So, this is the best time to attract more external investors as we have just done in Delhi. This is Bangladesh's time and let's say so boldly and smartly to attract more FDI.
6. As foreign exchange management gradually becomes more market based, interbank forex market needs to be more open and adequately transparent with a benchmark rate which can be used by all stakeholders -- local and global. This is very important to give comfort to the global investors, banks, and counter parties.
7. Wage earners remittances will continue to remain very important source of our comfort. Besides, providing the remitters a market-based stable exchange rate, a long-term plan to attract remittances is needed. In addition, it is important to remove the complications related to opening and managing foreign exchange accounts as NRBs with the digital platform to buy wage-earner and premium bonds with auto renewal facilities using their passport numbers/ NIDs. The hard-working remitters should also be prioritised to join the universal pension scheme and other social security supports to their children for better education and healthcare etc. Indeed, they should be incentivised to tie up with long-term programmes so that they feel encouraged to send money through official channels. The digital payment system should reach them without delay so that they can easily send money to their bank and MFS/Agent banking accounts without any hassle.
Bangladesh has been doing well in responding to the global economic crisis utilising both demand and supply sides related policy initiatives. Indeed, the excess demand for foreign exchange will diminish, and the flow of foreign exchange will further augment. Together, we will see the forex market stabilising shortly. The reserve will also remain good enough for meeting six-plus months; imports bills. Finally, inflation will come down. It's a matter of time only, not to be impatient.
Dr Atiur Rahman is a noted economist and former governor of Bangladesh Bank.
