Major challenges for Bangladesh economy in 2023

| Updated: February 10, 2023 20:33:36

Major challenges for Bangladesh economy in 2023

Bangladesh's economy has faced a number of challenges in recent years, and as we enter 2023, these challenges continue to persist. Despite some progress, the country still has a significant portion of the population living in poverty and suffering from inadequate access to basic services such as healthcare and education. Additionally, the country is highly vulnerable to natural disasters such as floods and cyclones, which can disrupt economic activity and cause significant damage to infrastructure and crops.

Bangladesh has made significant progress in recent years in terms of economic growth, poverty reduction, and human development, driven by a combination of factors such as a growing MAC, low labour cost and an expanding manufacturing sector. According to data from the World Bank, the GDP of Bangladesh has been growing at an average rate of 6.5 per cent per year over the past decade.

Let's examine the economic challenges that Bangladesh is likely to face in 2023, especially in the context of a global economic crisis, Russia-Ukraine war, the national election-2023, Forex reserve, internal capacity of the banking systems to facilitate import and export through opening LCs, timely payment and collection of foreign currencies, Remittance etc.

EXPORT, IMPORT AND BALANCE OF PAYMENT (BOP) GAP: The country is dependent on both imports and exports, on export side - particularly on the readymade garments (RMG) sector, which accounts for around 80 per cent of total exports, and on import side - commodity, raw materials and capital machineries etc. The RMG sector has been hit hard by the ongoing trade tensions and economic slowdown in major markets such as the United States and Europe. This has already led to a decline in export revenues and a slowdown in economic growth.

The currency flow of export and import during the years 2013 to 2022 shows that the amount of money Bangladesh spent each year on import is higher than that earned through export. However, it is worth noting that though the country was able to reduce the import-export gap to US$ 2 billion in 2021, it rose to $4 billion in 2022.

REMITTANCE: Additionally, the country is also facing a slowdown in remittances, which is a major source of foreign exchange and a key driver of the country's economic growth.

The decline in remittances is mainly due to the economic crisis in the Middle East and Gulf countries, which are major destinations for Bangladeshi migrant workers. These workers are facing job losses and reduced wages due to the economic crisis, which has led to a decline in remittances to Bangladesh.

BANKING & FINANCIAL SYSTEM: Poor Capital market, lack of governance, corruption and mismanagement in the financial sector, especially in the banking sector, have been persisting for many years. The sector, which is dominated by state-owned banks, has been plagued by a lack of transparency and accountability, leading to widespread corruption and mismanagement. One of the main issues in the banking sector is the lack of proper regulations and oversight. The government has been accused of turning a blind eye to the corruption and mismanagement, and of not taking action to prevent it. This has led to a culture of impunity. Another major issue is the lack of proper risk management systems.

Many banks in Bangladesh have poor lending practices, which have led to a high level of Non-Performing Loans (NPL). This has put the banks at the risk of insolvency and has had a negative impact on the overall economy. The banking sector in Bangladesh has also been affected by political interference. Many politicians have been accused of using their influence to secure loans for themselves or their allies. All these factors are limiting the country's ability to mobilise savings and provide credit to the private sector which in turn is constraining the growth of the economy. The lack of access to credit is also affecting the country's small and medium-sized enterprises, which are the backbone of the economy.

DOLLAR CRISIS: Commercial banks in Bangladesh are facing difficulties in fulfilling their import payment obligations due to a rapid depletion of their foreign currency holdings due to the ongoing dollar crisis. The foreign currency held by these banks decreased by 13.5 per cent to 20 per cent in the last quarter of 2022, making it difficult for them to open Letters of Credit for importing essential products. This situation has become increasingly challenging, as commodity traders in major markets are unable to open LCs for essential products, particularly for the upcoming  Ramadan. The inter-bank foreign exchange market has nearly collapsed, and banks have been unable to meet their own demand in recent months. The Bangladesh central bank's decision not to sell dollar from its reserves to private commercial banks has exacerbated the crisis. Despite the increasing of Repo and Reverse Repo rate from the beginning of 2023, it is yet to be seen what actually emerges.

 Over 40 per cent of commercial banks with negative balance in foreign currency holdings are currently struggling to pay their import payments against their issued LCs. These banks have fallen into a dollar deficit after paying large amounts against LCs. Many banks have delayed paying their import payment obligations, and the crisis has prompted other banks to refuse to open LCs, as they do not have enough dollars to meet the high demand in the market, which has resulted in a bad reputation in the international financial system.

NATIONAL ELECTION-2023: Another major challenge Bangladesh will face in 2023 is the upcoming national election. This is a tricky issue. It has both internal political weight and also the chain reaction of the geo-political events going on around the world. In the past, the country's political environment, especially in the year of national elections, has often been characterised by uncertainty and instability which can have a negative impact on business and investment in 2023.

INFLATION: The rate of inflation in Bangladesh increased to 6.2 per cent during the last fiscal year, up from 5.6 per cent the previous year. This uptick in inflation is primarily due to strong domestic demand and rising global prices of oil, gas, and other commodities as a result of supply disruptions caused by the Russia-Ukraine war. Additionally, the depreciation of the Bangladeshi Taka against the US dollar also contributed to trigger inflation. In the coming months, inflation in Bangladesh is expected to continue to rise due to factors such as increasing global commodity prices, increases in prices of all types of fuel, and an anticipated upward adjustment in domestic power tariffs.

RUSSIA-UKRAINE WAR: The ongoing conflict between Russia and Ukraine has had a significant impact on currencies, with the euro falling below the dollar for the second time in 20 years. Other currencies, such as the Bangladeshi Taka and the Indian Rupee, have also lost value against the dollar, while the Russian Rouble has gained 34.14 per cent by July last  year. The decline in the value of these currencies is largely attributed to the Federal Reserve of the USA raising interest rates, which has led to foreign investors moving their money to the USA. Additionally, Russia's invasion of Ukraine has driven up commodity prices globally, particularly crude oil, which has led to a higher trade deficit. In Bangladesh, the situation has been further exacerbated by the Bangladesh Bank's policy of fixing the exchange rate without adjusting for inflation differences, and by maintaining a fixed interest rate. This has made it harder for the country to cope with the gradually increasing interest rates in developed economies to curb inflation. The economic fallout and uncertainty over the war in Ukraine will slow the growth in key export destinations and substantially reduce export momentum and growth in the coming months.

The recent discussions with the International Monetary Fund (IMF) are a positive development in the current economic situation. Securing funds from the IMF can play a crucial role in stabilising the economy in the medium-term and controlling inflation. IMF has already approved US$4.7 billion loans for the country. The first tranche of $476 million is likely to disburse by the second week of this month. It can help the country to address its short-term economic challenges and promote sustainable growth in the medium-term.

Shah Kamal Sohail is an entrepreneur and economic analyst.

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