Bangladesh’s central bank takes some critical decisions
Dhaka, June 24: Bangladesh’s central bank took some critical decisions at its latest monetary policy meeting on June 18. It had decided to replace the prevailing regime of administered or artificial foreign exchange rates with a unified market-determined rate by the end of the 2023-24 (July-June) fiscal year. Also, the three-year-old deposit floor rate is removed. Banks can now offer interests of their choice to the depositor. The cap on the lending rate is allowed to move up to three percentage points from the prevailing 12%.
The lending rate was capped to ensure the flow of cheap funds to the export- driven readymade garments (RMG) industry. Bangladesh is the second largest garment exporter in the world after China. It is also the second biggest economy in South Asia after India.
The decisions of the Bangladeshi central bank are indeed courageous and are indicative of the resilience of the country. After 15 years of exponential growth that sent the gross domestic product (GDP) soaring by over 4.5 times (from USD 91 billion in 2008 to USD 416 billion in 2021), and increased per-capita GDP by four times (from USD 631 in 2008 to USD 2458 in 2021), Bangladesh faced some unexpected headwinds 2022. They maintained strong growth to prosperity during the covid years of 2020 and 2021 when most major economies including China were in trouble.
The Ukraine crisis in 2022 and the resulting rise in prices of petroleum products and global inflation, proved a little heavy for the small resource-poor country. The import bill doubled from the pre-covid levels. The exports, which were rising robustly all through, suffered temporary jolts in the face of turbulence in the key western markets of the USA and Europe. Inflation was hovering around double digits in both destinations. The US adopted a tight money policy, defined by hikes in policy interest rates. The value of the US dollar soared and since it’s a global currency, there was another round of inflationary pressure on the entire world. In a parallel and linked development, consumer sentiment dropped in the USA and Europe.
It is common knowledge what happened next to the developed world after 2022. Germany (a key market for Bangladesh) and New Zealand officially entered a recession. The US is facing job cuts. Bangladesh didn’t face any major crisis, except that inflation rose to 9% and the foreign exchange reserve had come down to the pre-covid level of USD 30 billion (from USD 45 billion a year ago).
Notably, the reserves are a few times higher than in 2008, when the incumbent Sheikh Hasina government came to power.
At pre-covid global prices, USD 30 billion was enough for seven-eight months' import bill of Bangladesh. At prevailing prices, this is equivalent to an import bill of five plus months, significantly higher than the International Monetary Fund (IMF) and World Bank prescribed buffer of three months.
However, the alert Hasina government in Dhaka was not happy.
The Bangladesh government took this as an opportunity to restructure the economy for better macroeconomic stability. They approached the IMF, in 2022, partly to create an additional forex buffer and mostly to get solutions on the way forward. IMF promised to advance a total of USD 4.7 billion in loans (less than one month’s import bill of Bangladesh) over the next few years. The first tranche of USD 476 million was advanced in February 2023. The next tranche is due at the end of this year.
Chances are high that Bangladesh wouldn’t require the residual loan. With global prices - including petroleum and freight costs – starting to soften, the US has paused the rate hikes and, the Indian economy, across the border, has been firing from all cylinders; Bangladesh’s forex cover may improve over the next few months.
Meanwhile, the country implemented several reforms like hiking the pump price of fuel and increasing electricity tariffs, which were distinctly low. This will ensure the sustainability of the energy trade, reduce the subsidy burden and will optimize tax opportunities. As a final impact, it will force Bangladesh's RMG sector to save costs through improved efficiency.
As the next level of reforms, Bangladesh has now removed the interest rate and forex rate cushion once granted to its export-oriented industries. This will pave the way for improved fundamentals in the banking sector. With the cap on deposit and credit rates relaxed, banks will be forced to compete to attract depositors and offer credits. The benefits of these structural changes will be felt when Bangladesh will graduate from a Least Developed Country (LDC) to a ‘developing nation’ latest by 2027-28.
As per norms set by the World Trade Organisation (WTO), the graduation will require Bangladesh to ensure a level playing field and reduce subsidy elements in its export trade. Artificial forex rates and/or caps on lending rates would have been considered deemed subsidies. Dhaka has started preparations to improve economic efficiency. The pro-Pakistan politics in Bangladesh is trying to undermine the bold policymaking by describing it as IMF -dictated. This is laughable, to say the least.
Since its creation in 1947, the Pakistani economy required a bailout by IMF every three years, without any positive results whatsoever. Their economy is now leaking from every side. From 21% in July 2022, inflation has reached 38% in May 2023 throwing common citizens under the bus. There is no respite in sight.
The economy is fully dependent on imports even for food and Pakistan doesn’t have foreign exchange to pay for it. As of the end of May, the highly indebted country had barely USD 102 million forex reserve against an interest repayment bill of over USD 4 billion. Clearly, Islamabad is broke. It is stupid to compare the failed Pakistani economy with one of the top-performing global economies in Dhaka.