Unexpected Consequences: How Bangladesh is Weathering the Economic Crisis

A small country without mineral resources other than natural gas and with the eighth biggest population in the world, Bangladesh has flourished as one of the fastest growing economies. The 35th biggest in the world – it reached lower middle-income status in 2015 and is poised to leave the least developed countries list by 2026 – its GDP is expanding by over 7 percent, making it an emerging-market star and pandemic recovery leader.

Yet, the economy is beset by multiple problems including the lingering impact of Covid-19, the effects of the Ukraine crisis, volatility in dollar market, a widening export-import ratio, higher inflation driven in particular by surging energy prices, and increasing unemployment. As the pandemic wore on, Bangladesh pursued a stage-by-stage economic revival strategy, first adopting the humanistic approach – putting people’s survival and health as the top priority – and then gradually moving towards economic reopening, accelerating and expanding exports, reducing imports and imposing austerity measures.

While the higher fuel price eased the government’s budget shortfall, it led to higher inflation, which had a negative impact on people’s livelihoods. The cost of necessary commodities and goods including edible oil, vegetables and baby foods increased, as did transport fares, accommodation rates, healthcare charges, and school tuition. This happened at the time when the purchasing power of general people was already constricted because of inflation induced by Covid. Most negatively affected were lower-income people, who faced severe difficulties.

Pitfalls of borrowing

The government viewed external borrowing as a key way to revive the economy. The oil price hike met the requirements for the International Monetary Fund (IMF) to open up a new borrowing window that enabled Bangladesh to secure a US$4.5 billion loan. The country has already received the first installment of US$476 million, with six tranches of US$704 million to go. The government was also successful in negotiating a US$6.05 billion loan from the World Bank. External borrowing is seen as the means to revive the economy.

The loans, however, came with conditions such as maintaining a minimum level of net foreign reserves, a minimum level of domestic revenue collection, and a ceiling on the government’s budget deficit, as well as implementing structural reforms in financial sector governance, fuel pricing, and banking and corporation laws. The government has had to set up an asset management company to dispose of non-performing loans. These measures, while beneficial in terms of improving public finances and the resilience of the financial sector, heightened pressure on the purchasing power of citizens.

The government was also strongly advised to cut unnecessary spending on development projects by shelfing low-priority public works. In an effort to reduce public expenditure further, the government placed restrictions on foreign study tours by officials and state-owned institutions. In the 2020-21 fiscal year, this produced saved the government US$250 million but was a significant blow to public-sector capacity building.

The government also levied import taxes on 300 luxury items including cars, air conditioners, cosmetics, flowers, fruits and furniture, and on a range of finished goods such as ICT products. The effort to give a boost to local industries has failed as yet to produce new employment opportunities. The unemployment rate has been rising.

Impact of the Ukraine crisis

Meanwhile, as the Ukraine-Russia war has raged, the resulting higher oil and gas prices have severely hampered electricity production, consumption and costs in Bangladesh, where 52 percent of the electricity is produced from natural gas. To save electricity, government has taken some initiatives including shortening office hours, fixing air conditioners thermostats to below 25 degrees Celsius in offices, and controlling power use in social establishments.

Protests and the political season

All these measures which were deemed necessary but have had intended and unintended consequences have stirred discontent among the people most negatively affected. In December 2022, large anti-government protests erupted in Bangladesh, with tens of thousands marching in the capital Dhaka demanding the resignation of Prime Minister Sheikh Hasina, who has been in office since January 2009. The political opposition, along with civil society organizations staged demonstrations to call for price controls on necessary items.

With a general election scheduled for January 2024, the political climate could become more heated and volatile over this year. The incumbent government in power for 14 years has a track record of strong leadership. It will need to stay the course on major development projects and resolve to ensure that the socio-economic situation in the country does not deteriorate further. Many of its measures to reduce inflation, increase foreign exchange reserves, boost exports and reduce imports did not produce the expected results. The inflation rate has hit record levels creating more pressure on people’s purchasing power and livelihoods.

What is needed is a comprehensive economic plan to control and restore the economy by pursuing strategic interventions at all levels, particularly by applying market mechanism to address the food crisis and increasing social safety net allocations for the poor and low-income people. Economists have emphasized the need for efficient market management through close monitoring and supervision to keep the commodity prices stable as unscrupulous market players may be active in taking advantage of rising prices by stockpiling and creating an artificial crisis. The government must use its foreign currency reserves with care as the import payments may continue to rise and public debt increases due to spending and loans.