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Bangladesh risks macroeconomic shocks

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One of the best instances of a development narrative, Bangladesh stands out for being a “model of poverty reduction” with an economy that grew at one of the fastest rates during the last 10 years.

East Pakistan was one of the world’s poorest regions until its liberation in 1971 and creation of Bangladesh, and the new nation remained poor for some time after. However, the early 1990s saw widespread trade liberalization, followed by rapid economic growth in the 2000s.

As a result, the country’s poverty rate was significantly reduced, falling from 43.5% in 1991 to 14.3% in 2016, based on the international poverty line of US$1.90 per day at the 2011 PPP (purchasing power parity) exchange rate.

Moreover, to achieve its goal of becoming a developed country by 2041, Bangladesh moved from a low-income country to a lower-middle-income one in 2015. Now, it is on track to join the group of least-developed nations by 2026.

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

Bangladesh has a strong demographic dividend, plenty of natural resources, enormous natural-gas reserves, and finally, the ready-made clothing industry, one of the main drivers of the nation’s economic growth. The sector has created more jobs at home and paved the way for manufacturing and industrialization-focused exports.

While the agricultural and food-processing industries and international remittances both contributed significantly to the country’s rise, the current efforts to promote information technology (IT) through such programs as “Digital Bangladesh” appear to hold promise for technological advancements, skill development, and human-capital enhancement, ultimately accelerating the growth trajectory over the longer term.

Seven memoranda of understanding (MoUs) relating to railroads, space, water sharing, judiciary, and science were signed between India and Bangladesh during Prime Minister Sheikh Hasina’s recent visit to India in September.

Economic precarity

With frequent cyclones and flooding, which place enormous pressure on the domestic economy, along with unsustainable rural-to-urban migration patterns, Bangladesh’s geography makes it one of the nations most vulnerable to climate change.

When the Covid-19-related health crisis was at its initial height in May 2020, Bangladesh was hit by Cyclone Amphan, which also wreaked havoc on sizable portions of the Indian states of West Bengal and Odisha.

More than a million people were affected by the disaster in Bangladesh, severely damaging the country’s physical infrastructure, including roads and bridges; Bangladesh alone was believed to have suffered losses estimated to the tune of $130 million.

Covid-19, and efforts to contain its spread, has also had a negative influence on the entire South Asian region, not only Bangladesh. Hence it is not possible to have an isolated picture of Bangladesh’s recent economic difficulties given the interconnection in the global value chains and the political foundations of the regional economies.

In contrast to the Sri Lankan economy, which is experiencing a severe crisis and a shortage of such necessities as food and gasoline, Pakistan is in an exceedingly tricky financial condition due to political unrest, spiraling inflation, and the loss of foreign-exchange reserves.

Again, Nepal is experiencing a banking-sector liquidity problem, stagnating overseas remittances, and a growing trade imbalance, while massive unemployment is seen in Myanmar because of the country’s severe economic downturn following the military coup in February 2021.

The Russia-Ukraine conflict has added more problems in the form of skyrocketing gas and oil prices and substantial food-security concerns for the Global South, including Bangladesh, to a significant extent.

Financial assistance

After Sri Lanka and Pakistan, which are also in talks with the International Monetary Fund for bailout packages of $2.9 billion and $6 billion respectively, Bangladesh has been added to the list of South Asian nations to request an IMF bailout of roughly $4.5 billion. By June 2023, the country anticipates receiving a $1 billion loan from the Asian Development Bank (ADB).

Additionally, Bangladesh is currently in negotiations with the World Bank for an additional $400 million to $450 million to support the national strategy for green growth. In addition, a new credit from the World Bank of $1 billion is requested to address the effects of the Russia-Ukraine situation.

The government will also negotiate financial assistance with the Japan International Cooperation Agency (JICA) and the Asian Infrastructure Investment Bank (AIIB). As of March, Japan accounted for the most significant proportion of bilateral debt (out of Bangladesh’s total bilateral loans) at 45%.

Proportion of bilateral debt to Bangladesh (as of March 31, 2022). Source: Author’s own, data from Ministry of Finance, Government of Bangladesh

Zahid Hussain, a former chief economist at the World Bank’s Dhaka office, claimed recently that “if an IMF plan is still in effect, macroeconomic stability is being supervised. Everyone feels confident as a result. Everyone will feel more secure if the IMF is on board. This would cause a chain reaction. For the WB, ADB, and others, it would be simple since they would expedite the loan approval procedure.”

While the administration has implemented a few short-term initiatives to boost economic growth, the decision to seek loans from several international institutions offers a chance to step back and reconsider the nation’s growth strategy through multifaceted reform initiatives.

Even though the search for such financial assistance is justified as a precaution, the fundamental design of the macroeconomy and its historical tendencies are at the heart of the current economic dilemma.

Several factors threaten the nation’s future development, including persistent current-account and fiscal deficits, declining remittances, a lack of manufacturing-sector diversification, declining foreign-exchange reserves, high inflation, exclusive developmental patterns, and an impending energy crisis.

Despite these factors, Bangladesh registered a positive growth rate of 3.4% in 2020 during the pandemic, while most developing nations, including India, saw negative growth rates. In actuality, fiscal year 2021-22’s per capita gross domestic product of $2,503 in Bangladesh greatly exceeded the South Asian average of $2,176.

These loans from the IMF and other multilateral organizations have a set of requirements that are frequently challenging for the recipient countries to meet. It is true that the country’s macroeconomic stability will suffer from the growing demand for bailouts from multilateral organizations if these funds cannot be effectively mobilized.

The country’s reputation with other external creditors will also suffer, influencing its economic partnerships in the region and beyond. Hence the country’s financial situation is precarious, to say the least, and needs structural intervention led by the government involving all the stakeholders.

The author acknowledges Tushar Katiyar at the National Law School of India University in Bangalore for his research assistance on this article.

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