Author : Soumya Bhowmick

Expert Speak Raisina Debates
Published on Dec 09, 2022
Bangladesh’s depleting forex reserves, falling remittances, high level of inflation, and an impending energy crisis among others are haunting its future trajectories
Bangladesh economy: Strong points and red flags

An Overview

The Bangladesh economy is one of the finest examples of a remarkable development story characterised by a ‘model of poverty reduction,’ while transforming into one of the fastest-growing economies in the world in the last decade. During Bangladesh’s liberation in 1971, the country was one of the poorest in the world. However, the early 1990s marked large-scale trade liberalisation followed by high economic growth in the 2000s, mitigating the poverty situation in the country to a large extent—poverty declined to 14.3 percent in 2016 from 43.5 percent in 1991 (based on the International poverty line of US$ 1.90 per day using the 2011 Purchasing Power Parity exchange rate). Despite this, economic inequality has been on the rise in Bangladesh since the 1980s, and as of 2021, only 1 percent of the population holds 16.3 percent of the country’s national income. The country had graduated from a low-income country to a lower middle-income country in 2015 and is on track to make it to the list of least developed countries by 2026, enroute to its vision of becoming a developed country by 2041. Figure 1: Bangladesh’s Poverty Headcount Ratio at US$ 1.90 a day (2011 PPP) (2000-2016) Source: Author’s own, data from the World Bank, Poverty Headcount Ratio With effective demographic dividend and ample natural resources such as the massive reserves of natural gas—one of the prime drivers of Bangladesh’s economic progress is the country’s labour-intensive industry of textiles and Ready-Made Garments (RMG). The industry has not only increased domestic employment but also charted the path for the country’s export-oriented industrialisation. While foreign remittances and the agricultural and food-processing sectors also played a large part in the country’s ascent, the current strides towards promoting Information Technology (IT) through initiatives like ‘Digital Bangladesh’ seems promising in terms of technological innovations, skilling and human capital enhancement, and thus accelerating the growth trajectory in the longer horizon. During Bangladesh’s Prime Minister Sheikh Hasina’s recent visit to India in September 2022, the neighbouring countries with historically affable ties have signed seven Memorandum of Understandings (MoU) related to railways, space, water sharing, judiciary, and science. However, Bangladesh’s geography makes it one of the countries that are most vulnerable to climate change with frequent cyclones and flooding, which puts unimaginable pressure on the domestic economy, coupled with unsustainable rural to urban migration patterns. Estimates suggest that about 50 percent of those living in the urban slums with low living standards were forced to flee from rural areas due to riverbank flooding in recent years. In May 2020, when the health crisis induced by the COVID-19 pandemic was at its initial peak, Bangladesh faced the strongest cyclone in history, Cyclone Amphan, that also devasted large parts of the states of West Bengal and Odisha in India. The cyclone affected over a million people across nine districts in Bangladesh and caused heavy damage to physical infrastructure such as roads and bridges—the total losses in Bangladesh alone were estimated to the tune of US$ 130 million.

Estimates suggest that about 50 percent of those living in the urban slums with low living standards were forced to flee from rural areas due to riverbank flooding in recent years.

Additionally, the impact of the COVID-19 pandemic has been harsh, not only for Bangladesh but for the entire South Asian region. Given the interconnectedness in the Global Value Chains (GVCs), as well as the political underpinnings of the regional economies—it will not be feasible to have an isolated view of the recent economic woes in Bangladesh. On one hand, while Sri Lanka suffers from an extreme economic crisis with a scarcity of necessary commodities such as fuel and food, on the other hand, the political instability, spiralling inflation, and depleting foreign exchange reserves have put Pakistan in an extremely precarious economic situation. Again Nepal faces a liquidity crisis in the banking sector, stagnant overseas remittances and a widening trade deficit, while Myanmar depicts massive unemployment due to the tremendous contraction in economic activities post the military coup in early 2021. As the world was getting ready to field the pandemic-induced macroeconomic impacts, the Russia-Ukraine conflict added fresh bullets in terms of soaring gas and oil prices and serious food security concerns for the Global South, including Bangladesh to a large extent.

IMF package and other financial assistance

Bangladesh is now added to the list of South Asian countries to request for an International Monetary Fund (IMF) bailout of approximately US$ 4.5 billion, after Sri Lanka and Pakistan, who had reached out to the IMF for bailout packages of US$ 2.9 billion and US$ 6 billion respectively. As of November 2022, the World Bank has agreed to proceed with the package for Bangladesh and the amount will be disbursed by December 2026 in seven instalments. The government also is seeking a loan of US$ 1 billion from the Asian Development Bank (ADB) by June 2023 and is to also hold discussions on financial assistance with the Japan International Cooperation Agency (JICA) and Asian Infrastructure Investment Bank (AIIB). As of March 2022, Japan ranks the highest in terms of Bangladesh’s percentage of bilateral debt (out of Bangladesh’s total bilateral debts) at 45 percent. Figure 2: Proportion of Bilateral Debt to Bangladesh (as of March 31, 2022) Source: Author’s own, data from Ministry of Finance, Government of Bangladesh While the government has taken various short-term measures to improve economic growth, the move to ask for loans from various multilateral institutions provides an opportunity to take a step back and rethink the country’s growth strategy through multi-pronged reform programmes. Even though the quest for such financial support is cited as a precautionary measure, the roots of the present economic situation lie somewhere deep inside the inherent structure of the economy and how it has been functioning. As the country moves forward, persistent current account and fiscal deficits, falling remittances, lack of diversification in the manufacturing sector, depleting forex reserves, high level of inflation, non-inclusive developmental patterns, and an impending energy crisis among others are haunting its future trajectories. Despite these, Bangladesh experienced a positive growth rate of 3.4 percent in 2020, amidst COVID-19, when most of the developing countries including India had negative growth rates. In fact, the per capita Gross Domestic Product (GDP) of US$ 2503 in the fiscal year 2021-22 significantly transcended the South Asian average of US$ 2176. Needless to say, such loans from the IMF and other multilateral agencies come with a set of conditions that are often difficult for the recipient countries to implement. To be sure, the increasing demand for bailouts from the multilateral organisation without being able to effectively mobilise them will not only hamper the macroeconomic stability of the country but also dent the country’s image with other external creditors impacting the country’s economic partnerships in the region and beyond. Thus, it would be crucial to dive into the red flags and the strong points that could determine Bangladesh’s growth story in the decades to come.
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Soumya Bhowmick

Soumya Bhowmick

Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...

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