The economic turbulence that Bangladesh is currently going through has caused a rapid increase in food and energy prices. This has affected low and middle-income families who spend a large share of their income on food. With huge uncertainties, how will Bangladesh cope with the global supply-side shocks?
Over the last few years Bangladesh has experienced high economic growth, low inflation, and decent foreign exchange reserves. Recently this has changed as the country is experiencing economic pressures from high global commodity prices, high inflation, and supply chain disruptions. Not only is the country affected by high inflation and diminishing foreign exchange reserves, it is also on the cusp of an energy crisis due to low energy output. High global commodity prices were made worse by the Russia-Ukraine war in February 2022, because Russia is a major global fuel and commodity supplier. Price hikes, a shortage of commodities, and a downward trend of remittance inflow to Bangladesh over the past three years have impacted the growth prospect of Bangladesh. According to data from Bangladesh Bank (BB), during 2020-21, remittance earnings from Saudi Arabia stood at $5.7 billion. This amount dropped to $4.5 billion in 2021-22, and even further to $3.7 billion in 2022-23. This was despite the fact that more migrant workers went from Bangladesh to Saudi Arabia during this period. While around 161,726 Bangladeshis went to the Kingdom in 2020, this number quadrupled to 612,418 in 2022. This trend is very concerning for a country overly dependent on remittance earnings, the second highest earner that contributes significantly to the payment of import bills. Not so long ago, countries like Sri Lanka were on the verge of economic collapse but have managed to turn things around, while Bangladesh’s economy continues to face many difficulties including spiralling food prices, problems largely created by policy failures.
In May 2023, the US dollar surpassed the 100 taka mark. In reaction to this, BB sold $7.62 billion from its reserves to protect the value of the taka against the sudden appreciation of the dollar. Not long after the government applied for a $4.5 billion loan from the International Monetary Fund (IMF) and $1 billion loan from the World Bank (WB). As the price of the US dollar appreciated, the taka depreciated, consequently making import payments higher than before leading to inflation through imports. Even though a weaker taka encourages exports and remittances, it does not necessarily mean it will be at the same pace to offset the increase in import bills. Defective policymaking by the BB and the Ministry of Finance is at the root of the recent dollar crisis, which if not dealt with urgently will allow the taka to collapse further. For too long, policymakers in Bangladesh allowed the taka to be overvalued. Ever since committing to a floating exchange rate from 2003 onwards, the BB has been fixing the exchange rate. Had BB followed an econometrics model and made monthly changes, Bangladesh would not have been exposed to sudden shocks and subsequent volatility of the global financial market. Because this decision was not based on any research and was more of a political decision, it exposed why this approach to economics does not work.
Foreign Exchange Reserves
The undervaluation of the US dollar and the artificial overvaluation of the Bangladeshi taka is the single factor which has caused the recent forex reserve crisis. To put into context, in August 2001, forex reserve peaked at $48 billion, but by September 2023, it had come down to $21 billion. If the forex reserve maintained its normal growth trend as it had done since 2009, it would be around the $60 billion mark by August 2023. Related to the forex reserve crisis is the recent drop in the flow of remittance. Although the Ministry of Finance and the BB are downplaying the seriousness of the situation, policy incentives have proven to be worthless and have weakened Bangladeshi’s fiscal capacity. While the BB is offering Tk 109.5 to remitters per $1, money-changing agents in street markets are reportedly offering Tk 120. Because remitters are losing Tk 8 per $1, migrant workers resort to sending money via unofficial channels that are accessible, faster, and comparatively rewarding. However, the government finds remitters’ use of unofficial channels unpatriotic and have even gone to great lengths by engaging the police and intelligence agencies to track and prosecute money changing agents. BB data for September showed remittance plunged for a third consecutive month to $1.34 billion, a 41-month low since April 2020. Amidst the backdrop of the forex crisis, BB’s September monetary policy announcement stated for the first time that it will make the exchange rate market-based on the US dollar. Although this will be delivered in the future, the move has created mixed reactions among businesses. As of 27 October 2023, $1 was trading at Tk 116.01.
Government debt and Inflation
In June 2023, central bank figures showed that Bangladesh’s external debt was $98.93 billion, an increase of 3.35 percent from a month earlier when it was $95.7 billion. The increase for funds from both the public and private sectors is to finance mega projects such Roopur Nuclear Power Plant, Karnaphuli Tunnel, and the Padma Railway Bridge. Bangladesh’s foreign debt build-up is less than 20 percent of gross domestic product (GDP), which remains within the sustainability threshold recommended by the IMF. Nonetheless, unfavourable developments on various economic fronts will apply pressure on the government, particularly when it comes to short-term private sector loans of $15 billion, which need to be repaid in the coming year. Eventually, these loans will be paid out of the forex reserves, as it is the BB that has to provide the foreign currency for this repayment. At present, Bangladesh has to repay foreign loans worth $2-2.5 billion annually. In the coming years, the amount is expected to rise, therefore, the government has to focus on enhancing revenue collection. For example, Bangladesh has one of the lowest tax-to-GDP ratios in the world. Usually, a reduction in short-term debts is positive news during times of prosperity, however, overall debt increased instead of reduced. Furthermore, external debt is rapidly rising without export receipts not growing at the expected pace.
Inflation is fuelled when the government borrows money from the central bank, and for fiscal year 2023-24, the Ministry of Finance announced it intended to borrow less to fund its budget deficit in the run up to the next national election. In July, the first month of the fiscal year, the government did not borrow any money from the central bank and instead returned Tk 9,354 crore according to data from BB. Although this is the right course of action, it remains to be seen how long the government can comply with this as monetary policy alone is not sufficient. As predicted, the government’s borrowing from the banking sector over FY2024 will be even higher, especially as it will borrow to plug the budget deficit as it does not have the means to raise taxes from businesses and individuals. FY2024 budget is not heading in a good direction, primarily because of its underestimation of inflation and overestimation of growth. Furthermore, market imperfections and foul play in a monopolistic and oligopolistic market have long been understood as a major factor which have exacerbated the recent rise in inflation. Generally, food inflation is linked to supply side issues while non-food inflation is almost always due to demand side issues. The government must develop a credible plan to open up the economy and mitigate deflationary pressures resulting from lack of demand during lockdowns. Moreover, to avoid creating inflationary pressures, a data-dependent monetary and fiscal policy based on the strength of the rebound in supply and demand is needed.
Cost of Living
The cost of living crisis has severely affected lower-middle-income groups in Bangladesh as inflation continues to elevate while salaries and income have seen very little upward adjustments. Because inflation and wage rate growth are linked, hundreds of thousands of unskilled and low-skilled workers are struggling to make ends meet amid the higher cost of living. According to data from the Bangladesh Bureau of Statistics (BBS), wages for low and unskilled workers grew to 7.58 percent in August, which was 2.34 percentage points below the inflation rate that stood at 9.92 percent. Furthermore, wage growth has been behind inflation for the past 19 months. The widening gap between inflation and wage growth means almost everything has become more expensive for low-income and unskilled workers who have been forced to make changes to their consumption habits. According to the WB, the recent surge in inflation has eroded consumer purchasing power, contributing to a deceleration in estimated private consumption from 7.5 percent to 3.5 percent. Inflation hit consumers have taken additional jobs, slashed monthly budgets set aside for groceries, switched to cheaper alternatives or stopped spending on non-essentials like eating out, particularly as real incomes fall and the cost of living rises.
Food Inflation and Food Security
In August 2023, inflation advanced by 23 basis points to 9.92 percent, primarily propelled by food inflation which hit a 12-year-high, further exacerbating the cost of living crisis for poor and low-income people. According to the BBS, food inflation soared 278 basis points to 12.54 percent, the highest since October 2011, when it was 12.82 percent. August’s data meant inflation averaged 9.40 percent in 2023, even though countries near Bangladesh were dealing better at lowering inflation. Sri Lanka which had recently gone through political and economic crisis managed to keep its inflation rate at 4 percent in August, down from 6.3 percent from the previous month. Surprisingly, food inflation was -4.8 percent in August, while non-food inflation was 8.7 percent. India’s inflation data for August stood at 6.83 percent, down from 7.44 percent in July. Although government subsidies, a ban on exports of certain cereals, 40 percent export duty on onion, as well as the forthcoming sugar ban are lowering food inflation in India, these policies are fuelling food inflation across the border in Bangladesh. Furthermore, Russia pulling out of the Black Sea grain deal in July means Ukraine is unable to export wheat and other grains, which has caused instability in the global market, particularly in Bangladesh as it relies on imports of wheat, a staple food item. The continued appreciation of the dollar against the taka is also fuelling inflationary pressure. Poor market management domestically by the authorities is also to blame, particularly as the prices of commodities have fallen in the global market, however, consumers do not benefit due to market manipulation by big business groups, further reducing the purchase power and quality of life for low-income people.
According to the Economist magazine, the high cost of staple foods has raised the number of people who face acute food insecurity to 1.6 billion, a global increase of 440 million. The rapid increase in global food prices over the last year can be attributed to the Russia-Ukraine war, dry weather in several countries, and a surge in price of fertiliser which has lowered food production and increased prices. The Global Report on Food Crises 2022, stated 193 million people in 53 countries and territories faced food insecurity. Inflationary pressures have worsened the situation in many countries, and according to the Food and Agricultural Organization (FAO), up to 46 countries including Bangladesh require external support to satisfy their food imports. This has put countries like Bangladesh in a crisis, affecting low and middle-income families whose purchasing power has been reduced even though they spend a significant amount of the income on food. In March 2022, the FAO Food Price Index reached 158.5 points, much higher than the previous peaks of 132.5 and 137.6, which happened during the 2007-2008 and 2001 food crises, respectively. The food crisis has a lot to do with the Covid-19 pandemic in 2020, which contracted the global economy by 3.1 percent. While the global economy grew by 6.1 percent in 2021, the growth rate began to decline even prior to the Russia-Ukraine war, due to record public debt and supply chain bottlenecks.
Bangladesh has been trying to tackle the sharp rise in food prices in a number of ways. First, it had to devalue the taka against the US dollar, which is expected to have a positive effect on exports. But tighter monetary policies in developed Western countries and a slow pick up of the global economy are significant challenges which the government must focus its attention on. In early June, AHM Mustafa Kamal, Minister of Finance, emphasised the importance of food security through boosting food production. Although it was evident from the minister’s rhetoric that agricultural production for the country was of significant value, this was not reflected in the final budget. Even before the price increase in agricultural commodities, farmers have been struggling with the consequences of floods, extreme heat, and limited rainfall, all of which have been chaotic to their livelihoods through crop losses and significantly low yields. For instance, farmers face higher irrigation costs of an additional Tk 4,000 per hectare for rice production and a 37.5 percent rise in urea fertiliser prices. Likewise, a 42.5 percent rise in diesel prices puts farmers at greater risk, particularly as 75 percent of all irrigation equipment is diesel-run. Because farmers will not be able to pass higher production costs onto consumers as they are not likely to get reasonable prices, there is a fear that many will give up on farming altogether or be discouraged to increase production. An increased dependence on food imports will not only burden farmers, but the entire country at large.
Energy Price Increase
The recent unprecedented long period of high energy prices and supply shortages have exerted significant pressure on all economies, developed and developing in which poorer countries are facing a serious cost of living crisis. This unusual situation was not caused by any single event. It is also not the result of the global energy transition trend towards renewable and sustainable energy. The Covid-19 pandemic contributed to energy supply issues, particularly as in the beginning, energy demand drastically decreased that oil, gas, and coal prices became historically low, and in some instances, production was halted. As countries began to open up from the beginning of 2021, the global economic recovery hit full swing, which allowed for the highest post-recession recovery in the last 80 years, driving the demand for energy to exceed that of pre-Covid-19 times. In response, the energy sector could not increase production at the same pace of the recovery, creating a major supply deficiency within the global market. Nor could renewable energy fill the energy void. Natural calamities like fires, hurricanes as well as tight control by OPEC+ countries created less than expected energy supplies. The Russia-Ukraine war and the sanctions against Russia further exacerbated the situation, especially as pre-war Russia provided 40 percent of Europe’s gas and 12 percent of global crude oil, half of which went to Europe. The high European gas price dictated global prices that even affected energy insulated countries like the US. In this environment the principal challenge faced by import dependent countries such as Bangladesh will be to reduce high cost liquefied natural gas (LNG) imports as well as reduce domestic consumption.
Natural gas has been the dominant fuel source for electricity production in Bangladesh, which has fuelled the country’s rapid economic growth. Between 1991 and 2020, access to electricity for the population grew from 14 percent to 96 percent, and per capita income of GDP rose from $283 to $2,233. From 2000 onwards, Bangladesh faced increasing power outages. This was due to the dwindling domestic production, mostly from gas fields discovered before 2000. In 2014, Petrobangla, the state owned gas and oil supplier in its annual report noted that a shortfall was emerging due to an increased demand. The country had already surpassed around 3,200 million cubic feet per day (MMCFD) whereas gas supply was around 2,700 MMCFD, leaving a shortfall of 500 MMCFD. Facing increasing power outages that were hindering economic growth, the Bangladesh Nationalist Party government introduced the idea of oil-based rental power plants. In 2008, the caretaker government implemented this plan by awarding the first 10 plants and more were later added by the Awami League government. Throughout that period the problem of the power sector shifted from a lack of power generation, to a shortage of energy. Both the Power System Master Plan (PSMP) 2010 and PSMP 2016 accepted the deficit and instead of new gas explorations for future power generation, the gap increased and the sector relied on coal and imported natural gas. As fuel import dependency increased, it put Bangladesh and its energy sector at high risk to international supply and price fluctuation, made worse by the recent Russia-Ukraine war. The government hinted that high energy import bills in the future would be off-set by the growing economy of the country.
Bangladesh Petroleum Corporation
Economies like Bangladesh which depend on petroleum imports have largely benefitted from low prices in the international markets over the past eight years. The state-owned Bangladesh Petroleum Corporation (BPC), which mostly operates in loss receive huge government subsidies despite a lack of accountability or transparency. However, during the Covid-19 pandemic the BPC’s fortunes turned as it made huge profits, so much so that the government began to re-think its subsidies. According to the Bangladesh Economic Review 2021, published by the Ministry of Finance, in FY2020-2021, the BPC earned Tk 5,839.39 crore in profits, which was an increase from Tk 5,066.54 for FY2019-2020. However, during February-July 2022, the BPC lost Tk 8,014.54 crore, which the government argued was due to high import prices, but at this rate the BPC would very soon become bankrupt. The decision taken by the government to fix Bangladesh’s fuel prices on par with India was to prevent fuel from being smuggled out to India. Because fuel prices are set by government policies without consultation from the Bangladesh Energy Regulatory Commission, transport operators, the agricultural sector, industrial sector, and consumer rights associations, stakeholders have no role in price determination. Although not new issues and primarily governance related problems, during difficult times the people of Bangladesh are being penalised by having to bear the burden of high fuel prices even though the government are solely responsible.
Fixed fuel prices do not correlate to demand and supply in the market and as such, Bangladeshi consumers do not benefit from low fuel prices in the international market. Losses incurred by the BPC are not customer related, but has more to do with mismanagement, corruption, and poor governance. Therefore, the BPC should improve fuel pricing and strengthen the supply chain and procurement mechanism. Although many countries take part in futures market for commodity trading – including petroleum products, existing laws in Bangladesh does not allow the BPC to take part in futures market, hence, the country is not allowed to take advantage of low prices in the international market. Bangladesh could purchase fuel in advance when international prices are low, however, there are risks associated, especially if there is a steep price drop. If Bangladesh wants to go down this route then there will need to be change on the BPC’s part. In early September, the government approved two proposals of purchasing LNG from Switzerland and Singapore to cover consumption which domestic production could not provide.
Global inflationary pressure has risen in the wake of the Russian-Ukraine war. Even so, this reference point is not the sole cause of domestic inflation in Bangladesh as there are many other factors which are contributing to inflationary concerns. The artificially high value of the taka for a long period of time has been helpful for importers, however, has not been appropriate for exporters. Pressures on dwindling forex reserves will likely persist even though BB’s unified market-driven exchange rate allows the exchange rate between the taka, US dollar, and all other foreign currencies to be determined by the market. Going forward, BB will no longer provide specific exchange rate interventions for buying or selling foreign currency, thus promoting market stability. At present, 90 percent of public sector external debt is dollar-denominated, while 100 percent of private sector debt is dollar denominated. Since Bangladesh’s outstanding foreign debt has tripled over the past decade, the country may soon face some difficulties in the sphere of debt repayment, particularly as the grace period for the megaprojects is nearing the end. Although there is no silver bullet for this situation, the BB can relax the interest rate and exchange rate to adjust over time as well as slow down credit growth as a way forward. Regardless, the government needs to recognise that ordinary people are feeling the impact of the current crisis, much more than the government has admitted to.
Ordinary people’s purchasing power is a key indicator of a country’s economic well-being, which at the moment is being eroded by high inflation. Although the official inflation rate currently stands above 9 percent, this is most likely underestimated as the BBS continues to use the 2004-2005 data to calculate the consumer price index. Commodities including food are heavily dependent on imports and the prices of these commodities are often beyond government control. As a temporary fix the government could lower import duty on food, thus, also eliminating inefficiencies in supply management. Between 2014 and 2020, fuel prices were low in the international market, but the BPC did not pass the savings onto the consumers which could have contributed to further growth acceleration. In the medium-term, management of the energy sector has to be improved, because it is the main claimant of foreign currency subsidies, which is currently threatening the country’s balance of payment and macroeconomic stability. There is an argument for the incompetent and corruption-prone BPC to be dismantled and replaced by private agencies so prices are determined by the market demand and supply. Otherwise, the BB will not be able to perform its primary job of maintaining a moderate level of inflation which is advantageous to higher growth and enhanced development. Bangladesh will continue to face problems in the energy sector as long as its energy policy remains short-sighted and opaque. It is imperative that the government recognises the mistakes it has made in the past and foresee fast approaching warning signs, and implement sound policies based on empirical data to bring about lasting changes to improve economic resilience.