In 2023, Bangladesh experienced the worst macroeconomic instability in recent years. While until 2019, the country was cited as a successful case of macroeconomic stability, the Covid-19 pandemic inflicted a significant scar in 2020 and 2021. While the economy went through a recovery process in late 2021 and early 2022, the war in Ukraine and resultant global supply shock triggered domestic macroeconomic instability, which persists.
The crisis has affected the economy through various channels. The monthly average inflation rate (January-November) increased from 7.6 percent in 2022 to 9.5 percent in 2023. Export earnings increased by only 2.4 percent in January-November 2023 compared to the same period in 2022. Remittance growth through formal channels was only 1.7 percent in January-November 2023, compared to the same months in 2022. However, as there is a strong suspicion of large illicit money outflows from Bangladesh, it is anticipated that the informal channels of remittances, commonly known as hundi, were extensively used for such outflows, leading to low growth in remittances through formal channels.
The official exchange rate depreciated by 30 percent between November 2022 and November 2023. The foreign exchange reserves declined from more than $30 billion to less than $20 billion between November 2022 and November 2023. Since the middle of 2022, the country has been facing the tightest import restriction in recent decades, through the control of letters of credit (LCs) for imports, which has affected domestic investment. The shortage of US dollars for imports through formal channels substantially increased the margin between the official exchange rate and the kerb market exchange rate.
However, it should be noted that the global shock resulting from the war in Ukraine was only a catalyst, while the current macroeconomic crisis in Bangladesh has deep roots in persistent unresolved structural issues, which include poor tax revenue performance, a fragile banking sector, ineffective public expenditure management, unsuitable trade and industrial policies for economic and export diversification, low FDI, inadequate public spending on health and education, and weak institutions.
Furthermore, some wrong policies worsened the situation. One of them was fixing the interest rate at 9-6 percent in April 2020, which continued until the middle of 2023. This bizarre decision made the monetary policy instrument ineffective in controlling inflation. Another wrong policy was artificially maintaining the exchange rate of foreign currency for years. It was obvious that in the face of dollar shortage, large adjustments to the exchange rate had to be made in a very short period, which further fuelled inflation.
The interventions in 2023 were inadequate to address the problems. The new interest rate policy was too slow to adjust, which had little effect on curbing inflation. Meanwhile, the banking sector’s weakness was more evident this year. There was no significant improvement in tackling the large irregularities and massive bad loans in the sector. Moreover, no efficient measures were taken for revenue collection reforms. The gap between the official exchange rate and the kerb market rate remained very high, indicating that the exchange rate was not market-based.
Is there a quick solution to these problems? Will the macroeconomic pressure be eased soon? The success in controlling inflation would depend on the execution of prudent monetary policy, supporting fiscal policy, and coordinated management of domestic markets to combat anti-competitive practices. Some export and remittance growth may ease the macroeconomic stress in 2024. However, the prospect of a strong rebound in export growth remains a challenging task, given the domestic and global scenarios, and the continued excessive reliance on RMG exports. The RMG sector is also exposed to external pressure for compliance and labour issues. Moreover, the potential of attracting more remittance through formal channels depends on the appropriate market-based exchange rate policy and the effective control of hundi business.
Another mounting source of macroeconomic pressure is the increased obligations to repay the escalated amount of foreign loans. The country has borrowed heavily in recent years to fund several mega projects, and the annual debt servicing is on the rise. Delays in implementation and cost-overrun of these projects exert an additional burden on the economy. To ease the pressure on loan repayment, these mega projects must contribute to boosting exports and attracting large-scale FDI.
Furthermore, in absence of an effective reform of the taxation sector, the prospect of substantial domestic revenue mobilisation will remain bleak, public spending on critical sectors like health and education will remain small, and the government will continue to borrow hefty amounts of money from domestic and external sources for budgetary support.
An independent and powerful central bank, without any political influence, is a precondition to bringing back the discipline in the banking sector. Otherwise, the private sector will continue to face the challenges of accessing financing for diversified investment ventures.
As far as the reforms are concerned, there is a need to resolve the high mismatch between the government’s stated objectives, plans and programmes mentioned in the critical policy documents (like the sixth, seventh, and eighth five-year plans and perspective plan) and the actual policies and approaches implemented. All the critical policy documents emphasised the need to reform key economic areas such as taxation, banking, capital markets, and export diversification, and raise public spending on social sectors. However, the actual policies which are implemented remain mainly incremental measures that lack clear connections with the critical policy documents.
The ability and responsibility of the relevant policymakers to design and implement economic reform policies and strategies define the quality of economic leadership, and regrettably, such leadership seems to remain weak in Bangladesh during this crisis time. However, to overcome the economic crisis, no doubt, the country needs strong economic leadership, backed by strong political will.