Last week, India's central bank introduced a new mechanism for international trade settlements in rupee, the Indian national currency. The idea behind the move is to promote international use of the local currency, keep the foreign-exchange reserves stable and facilitate trade with countries like Russia and Iran, which are under western sanctions. The step, initiated by the Reserve Bank of India (RBI), is not an abrupt one. Some countries like Indonesia, the United Arab Emirates (UAE), Sri Lanka, Myanmar, and India have discussed settling trade in their domestic currencies with each other for the last couple of months. However, the Russia-Ukraine war, followed by a series of economic sanctions imposed on Russia by the western world, prompted these countries to move in this direction.
Bangladesh also tried to do so once the war broke out. There was an attempt to initiate a settlement process using the Russian currency, ruble, to make the trade with Russia easier in the face of US-led sanctions. However, little progress has been made in this regard so far.
However, settling the international trade payments in local currencies is not easy. Over the years, some countries have tried to do so with limited success. The global transaction network is extensively linked and dependent on the US dollar settlement system in the dollar-dominated financial world. For countries like Bangladesh, it is also quite difficult to avoid or bypass the dollar-centric settlement system.
As the war disrupted the global economy and trade, many countries, including Bangladesh, are facing uneasiness in foreign trade as prices of commodities have increased and costs of shipments jumped. The immediate result is the fast depletion of reserves to settle costly imports. Bangladesh Bank has already taken some restrictive measures to contain less-important and luxury imports. Nevertheless, goods imports jumped by 39 per cent in the first 11 months of the past fiscal year (FY22) over the same period of FY21. Foreign-exchange reserves also came down below $40 billion in the second week of July, enough to meet the import payments of goods and services for around four and a half months. It is an alarming sign for Bangladesh's economy as the country is widely dependent on imports for both domestic consumption and export-oriented industries.
Almost five months have passed by, and there is no indication that the war will end soon. Initially, Russian president Vladimir Putin thought his troops would compel the Ukrainians to bow down within a couple of weeks. He proved wrong as Ukraine continued to resist Russian aggression. Again, the United States (US) and its allies were confident that economic and military sanctions would force Russians to sit at the negotiation table. The reality is otherwise. As a result, the global economy is facing turbulence and uncertainties. A persistent rise in global inflation reflects the trouble to a large extent.
Meantime, Bangladesh Prime Minister Sheikh Hasina recently asked the US to withdraw the sanctions it imposed on Russia as their punitive action is causing immense suffering across the globe. She also said that the war and the subsequent sanctions have hit Bangladesh when it was just recovering from the adverse effects of the coronavirus pandemic. In addition, the sanctions have restricted the availability of some items that Bangladesh imports, so prices of foods and essentials increased.
The monthly inflation rate in Bangladesh jumped to 7.42 per cent in May last from 6.29 per cent in April, according to the Bangladesh Bureau of Statistics (BBS). A large part of the country's inflation is imported. Costly imports of inputs are taking a toll on the production and supplies of various goods and services.
Countries worldwide are now interlinked through the global value chain, which is a critical component of international trade. That's why any shock is easily transmitted from one country to another. Due to the Ukraine war, various shocks are transmitting into different counties and shaking the internal mismanagement there. During peacetime, it was possible to conceal or obscure many economic weaknesses. Now those flaws have started to resurface strongly. Bangladesh is no exception in this connection. The country's power and energy sectors provide a significant example.
Since 2015, Bangladesh has switched to importing Liquefied Natural Gas (LNG) to produce electricity, bypassing the exploration of natural gas. As a result, hype was created that gas reserves were dwindling fast. Within a few years, the energy sector became entirely dependent on imported LNG, putting energy security at risk. Though local experts and activists had cautioned the government in this regard, policymakers paid little attention.
In December last, the Institute for Energy Economics and Financial Analysis (IEEFA) said that at least six emerging Asian countries' 'unrealistic LNG-to-power project pipeline threatens their macroeconomic and financial stability.' These countries are Bangladesh, Myanmar, Pakistan, the Philippines, Thailand and Vietnam.
The power situation aggravated in the country as LNG became expensive on the global market due to war, and supply also became uncertain. The government is now trying to tackle the situation at the cost of regular load shedding and some demand- management tools. All these are hurting production and economic activities. There is also a move to cut energy subsidies by hiking electricity prices at the consumer level, which will fuel inflation further. Moreover, gross mismanagement in the power sector is quite visible now, which is also an ominous signal for the economy.