No big push to settle fault lines in economy

May 23, 2023

From a period of stability lasting for approximately two decades, Bangladesh has suddenly found itself in a state of vulnerability.

This can be attributed to the Russia-Ukraine war that commenced in February 2022, which has revealed several vulnerabilities within the economy.

These vulnerabilities include depleting reserves and currency devaluation, a widening gap between revenue targets and actual collection, deficit financing through bank borrowing that may impede private sector growth and rising demand for subsidies and social safety nets due to soaring inflation.

Also, the imposition of import controls to save the US dollar has hindered growth in both the industry and service sectors.

The finance minister acknowledged this decline in his budget speech in Parliament on Thursday, stating that the current fiscal year has witnessed a decline in these sectors, resulting in a slight decline in GDP growth to 6.03% compared to the previous fiscal year.

Exports and inward remittances, the two major sources of foreign currency, are also on a decline, making the situation further critical for the finance minister.

Economists and analysts were waiting to see what the finance minister proposes to fix these growing weak points in the economy. But he did not mention anything concrete about how to address these risks that can create a further imbalance in the economy.

Towfiqul Islam Khan, a senior research fellow at the Centre for Policy Dialogue, told The Business Standard, "A dream Bangladesh has been presented to us in the way the finance minister has given the macroeconomic framework. It seems that after a month all the problems will be removed and from the next financial year, everything will be better in the macro-economy."

"A number of reforms have been called for in the macroeconomic framework, including many institutional reforms. But the impact of these reforms has not been taken into consideration. We have seen such frameworks in the past too, which could not be found in reality later," he continued.

"During the announcement of the budget for the current fiscal year in June last year, when the Ukraine war is still affecting the world, such a framework was proposed, which had no resemblance to reality. It seems that the finance ministry is formulating these policies sitting in a closed room," Towfiqul Islam said.

The external sector is seen as the main controller in the finance minister's macro policy discussion. There are many crises within the country, which are not acknowledged. However, the country's problems have become clear in the measures he talked about, he said.

"IMF conditions are not recognised in macroeconomic policy-making. The IMF has stipulated that all types of external sector debt should be cleared by June this year. But the finance minister did not disclose the information about how much foreign currency debt Bangladesh has," Towfiqul Islam Khan added.

Finance minister on Forex reserves

Though the foreign ministry predicts that foreign exchange reserves will bounce back to pre-war levels in the coming fiscal years, the country's reserves now stand below $30 billion.

According to the estimate of the finance ministry, the foreign exchange reserves will increase to $34.6 billion by the end of the current financial year and another $1.2 billion will be added by the end of the next fiscal year.

The finance ministry expects Bangladesh's foreign exchange reserves to rise again to $48 billion in 2026. The ministry, however, believes that it will be a challenge to maintain the value of the taka consistently till 2041.

GDP growth and export

In its Medium-Term Macroeconomic Policy Statement (2023-24 to 2025-26), the finance ministry said the current account balance will also return to a positive trend by the end of the 2025-26 financial year. During this period, exports will reach $78 billion and imports will reach $101 billion.

Finance Minister AHM Mustafa Kamal predicts that the gross domestic product (GDP) growth will increase to 8% at that time.

The Ukraine-Russia war continues but if its scope does not increase, the prices of goods will continue to decrease in the international market, according to the finance ministry.

The ministry says, in the medium term, the exchange rate of money will stabilise and inflation will also come down to a bearable level.

The ministry sees the escalation of the Ukraine-Russia war and the fear of other countries getting involved in this war as a significant risk to restoring macroeconomic stability in the medium term.

Optimism against odds

The finance ministry believes that overall, the country's macroeconomic situation will remain stable in the medium term and growth will gradually pick up due to political uncertainty and reduction in global inflation.

Regarding the control of inflation, the ministry said that it is not yet possible to bring inflation under control, but it will gradually decrease in the medium term.

BUDGET FY2024 / Bangladesh National Budget 2023-24 / Bangladesh Economy