Bangladesh (Commonwealth) _ Bangladesh’s macroeconomic circumstances, which were relatively favorable for the past few years due to strong economic growth, low inflation, and healthy foreign exchange reserves, have suddenly vanished. The economic strain was caused by supply chain interruptions, significant import inflation, and high global commodity prices. While Bangladesh is not alone, all nations—rich and poor—are struggling to recover from the epidemic and Ukraine conflict.
Nonetheless, Bangladesh’s economy continues to struggle on many fronts, whereas nations like Sri Lanka, who were on the brink of economic catastrophe, have started to recover. Several unsettling aspects of the economy were present at the end of the fiscal year 2022-2023. Policy shortcomings prevented the appropriate resolution of most of these issues.
High inflation has continued to be a major worry, notwithstanding minor fluctuations. The monthly average inflation of 9.02 percent as of June 2023 exceeded both the central bank’s estimate of 7.5 percent in the Monetary Policy Statement for January to June 2023 and the government’s projected rate of 5.6 percent for FY2023 stated in the finance minister’s budget speech.
In contrast, the average rate of inflation in FY 2022 was 6.15 percent. Concerningly, according to the most recent BBS estimates, food inflation reached a peak of 12.54 percent in August 2023, while the average inflation rate was 9.92 percent.
While most countries adopted a contractionary monetary policy to control the money supply in their respective markets after the war in Ukraine, Bangladesh Bank maintained interest rates fixed at 9% for lending and 6% for deposits. Policymakers continue to attribute price increases to exogenous factors, such as high import prices of essential commodities, but global prices have been declining for several months, so this is no longer the case. However, the prices of domestically produced commodities are continually rising, despite ample local production.
People were encouraged to borrow because of the low loan rate and high inflation, which made money more affordable. As a result, the broad money supply (M2) rose from 9.43% in FY2022 to 10.48% in FY2023. Despite pressure from the business community, BB maintained the low loan rate. However, excessive inflation was diminishing depositors’ purchasing power, causing them to lose money. Ultimately, as part of an IMF condition for the $4.7 billion loan, Bangladesh Bank implemented a market-based interest rate policy in July.
There is also a relationship between inflation and the external sector. Our foreign exchange reserve is getting smaller and smaller. In June 2022, the nation had $41.8 billion in reserves, which allowed it to spend comfortably on imports and external payments. In June, the gross official foreign exchange reserve was $31.20 billion.
However, the central bank began calculating the foreign exchange reserve in July using the Balance of Payments and International Investment Position Manual (BMP6) technique, which is based on the IMF. This means that by August 30th, our reserve had dropped to $23.06 billion. BB has now disbursed the sum for export development funds, foreign exchange loans to regional banks, and other non-immediately-usable funds. In the past, the FX reserve appeared larger than it actually was due to the inclusion of these monies.
Bangladesh’s external sector has been stable for a number of years, despite times of weak export performance or slow remittance development. This gave policymakers a certain amount of confidence and flexibility. Unfortunately, they made no strategic choices to deal with how the global economic crisis affected Bangladesh’s external sector and macroeconomic circumstances.
Even if the currencies of nations like China, Cambodia, India, and Vietnam had declined, the value of the taka was maintained at an artificially high level for a considerable amount of time. While a strong currency benefitted buyers, exporters did not want it.
However, FY2023 saw poor results from the export industry, notwithstanding the taka’s fall against the US dollar. Export revenue growth was 6.7 percent, whereas the government’s goal was 11.4 percent, according to data from the Export Promotion Bureau (EPB). The primary cause of low export revenue has been the decline in demand in importing nations.
