Is Bangladesh headed towards economic recession?

Is Bangladesh headed towards economic recession?

Farah Masum,

Bangladesh has been the only country is South Asia over the past seven years with an average economic growth exceeding six percent. And the government has predicted that the growth is about to break the records of the past few decades to reach 7.11 percent. However, there seems to be a discrepancy between the government’s projection and the real state of business and the condition of the people in the country. Independent economists tend to take the government’s projected growth figures with more than just a pinch of salt.

In recent times there has been a downward turn in the various indictors drawn up by the central bank and other agencies in Bangladesh dealing with economic estimations. There is apprehension that the country may face a significant economic crisis in the last year of the government’s second term.

On one hand there has been a continued decrease in remittances and, on the other, export growth has come to zero. Yet due to recent floods and other climate related disasters which have depleted crops, import expenditure has increased. This has impacted negatively on balance of payment. Stagnancy in the overall economy has caused a large deficit in revenue collection too.

The several initiatives taken in the new fiscal to step up revenue collection had to be shelved at the last minute due to political pressure and so implementing the budget may pose as a serious challenge for the government. It may also be difficult for the government to control the foreign exchange rates. If the Bangladesh taka drops in value against the dollar, there may be a sudden surge in inflation.

According to Bangladesh Bank’s latest report of 13 July, deficit has increased in both foreign trade and foreign transactions. Foreign exchange reserves have gone down too. In the 2015-16 fiscal, there was a US$ 3706 million surplus in current account of the balance of payment. Yet in the just concluded 2016-17 fiscal, in the 10 months till April, this surplus was replaced by a deficit of US$ 2103 million. This situation was created by a negative trend in the two main sources of foreign exchange – remittance and export earnings.

In the just concluded financial year, remittances fell by 14 percent from the previous year to US$ 12.77 billion. After a positive 5.4 percent growth in 2014-15, overseas remittance in 2015-16 fell to 2.5 percent. It has been downhill since then.

The downward trend in remittances is being blamed on the erroneous fiscal policy to artificially hold on to the exchange rate of the Bangladeshi taka and also the shortsighted steps taken regarding overseas employment. The overvaluation of the taka is a disincentive for overseas workers to send their remittances though the formal banking channels. There has also been no success in overcoming the standstill in manpower export to Bangladesh major labor markets of Malaysia, Saudi Arabia, UAR and a few other countries. The government made declarations at various times in this regard, but nothing materialized.

Alongside remittance, the other major sector for foreign exchange earnings, export, is also seeing a downward incline. For the first time in many years, the garments sector has seen negative export growth. According to latest statistics of the central bank, overall export growth in the just concluded financial year was only 1.7 percent. In the last month of the previous fiscal, exports fell by over 15 percent. Yet even in the 2015-16 fiscal there had been a 9.75 export growth.

In the meantime, Bangladesh officials met with the European Union officials in Brussels on 12 July. Bangladesh’s commitment to democracy and human rights issues were raised during the discussions. The EU officials were not satisfied with Bangladesh’s explanations regarding the workplace environment in the garments industries and other sensitive issues like compliance. The EU authorities are preparing to tie compliance in the garments sector and overall human rights issues with GSP facilities. There is fear that the GSP facilities may even be temporarily suspended if Bangladesh fails to make progress in implementing its commitments. This is likely to cause a crunch on Bangladesh’s export sector.

The prevailing crisis in Bangladesh’s foreign exchange sector is impacting the country’s foreign exchange reserves. Just 12 days into the new financial year, foreign exchange reserves plunged from US$ 33.4 billion to US$ 32.5 billion. Alongside a decrease in remittances and export earnings, the increased demand for food grains has pushed up import expenditure. This could put further pressure on the forex reserves in coming days.

In 11 months of the just concluded financial year, import costs increased by nearly 11 percent to over US$ 40 billion. Yet the increased in import expenditure in the previous year was almost half of that. The picture of new L/Cs indicates that the pressure on reserves will go up further in the days ahead. In 11 months of the last financial year, import L/Cs increased by 14 percent and food grain L/Cs by 23 percent. Yet the previous year saw a two percent decrease in new L/Cs. This indicates an increased pressure of imports in the new fiscal year. This will pull the reserves down further, forcing the central government to adjust the foreign exchange rates upwards. If not, remittances will drop further. On the other hand, if the value of the taka falls, prices of imported goods will go up and people’s living stands will go down. There may also be a significant increase in inflation, something which the government has been endeavoring to keep in check for long.

Alongside monitory management, Bangladesh may also see pressure on fiscal management. Over the last two years, Finance Minister Abul Mal Abdul Muhith has set high revenue targets. However, as these targets could not be met, the revenue target in last year’s amended budget was brought down by Tk 25,000 crore (Tk 250 billion) to Tk 2,23,000 crore (Tk 2.23 trillion). It hasn’t been possible to meet even this reduced target. The revenue target of the new financial year has thus been increased even further to make up for this deficit. As it is, in the new fiscal, a 31.5 percent increase in revenue target has fixed compared to the amended target. It was deemed that it would hardly be feasible to achieve this target, so the question of earning any more than this does not seem possible.

According to the Dhaka-based think tank, Centre for Policy Dialogue (CPD), a Tk 43,000 crore (Tk 430 billion) to Tk 55,000 crore (Tk 550 billion) revenue shortfall may be created in the new financial year. A proposal had been made for additional revenue earnings though a 15 percent uniform VAT rate and imposition of excise duty on various sectors. This step was held up at the last minute due to political pressure. According to the government, just for this reason Tk 20,000 crore (Tk 200 billion) less revenue will be earned.

Pressure to implement development projects increases in the last year of the government’s term and lesser funds for foreign projects are released. That means the government will have to take more loans from the banking sector to implement the development project.

Bangladesh’s banking sector is faced with uncertainty at the moment. A total of Tk 2000 crore (Tk 20 billion) has been allocated in the budget to fill the deficit in state-owned banks caused loan fraud and other reasons. Instead of ensuring good governance in these banks, the government has used its administrative powers to take over an extremely successful bank like the Islami Bank. The main shareholders of the bank now have no say in its policymaking. And since the government took over, there has been an abnormal increase in investments in weak projects which will invariably fall into default.

Another matter of concern is that even after taking measures in principal to provide the banks with all sorts of facilities, it has become difficult to bring down the default loans. So apparent statistics show an increase in default loans. And with a decrease in profitable sectors that can invest in the banks, actual capital is decreasing. But the top executives in the banks are manipulating things so that it seems that the banks are actually generating profit. And as half of this projected profit is going to government coffers, the bank’s actual capital base is weakening.

A sort of smokescreen has been created over the past few years over Bangladesh’s economic condition. The government claims that the GDP growth is 7.11 percent, but the World Bank, IMF and ADB do not agree with this figure. Even CPD has questioned the GDP calculations.

In the GDP of the recently concluded financial year, the agricultural sector saw a 2.5 percent growth. Yet due to the upset in food production, food grain import has increased since the last Boro crop season. Ground reality indicates there has been no growth in agriculture.

Even though there has been no growth in exports and raw material imports are at the lowest, an 11 percent growth rate has been projected in the manufacturing sector. Manipulating figures may have created a glittering picture of Bangladesh’s overall economic indicators, but the void within is gradually becoming crystal clear. If political control is loosened, it will no longer be possible to conceal this void. Economic recession may then be inevitable.