Inflation, unrest challenge Bangladesh’s ‘miracle economy’


DHAKA, Bangladesh (TBEN) — Rekha Begum stands in line to buy food and is distraught. Like many others in Bangladesh, she struggles to find affordable daily necessities such as rice, lentils and onions.

“I went to two other places, but they told me they have no supplies. Then I came here and stood at the end of the line,” said Begum, 60, as she waited nearly two hours to buy what she needed from a truck selling subsidized food in the capital, Dhaka.

Bangladesh’s economic miracle is under pressure as the rise in fuel prices exacerbates public frustration over the rising cost of food and other necessities. Violent opposition from the opposition and minor street protests have erupted in recent weeks, increasing pressure on Prime Minister Sheikh Hasina’s government, who has sought help from the International Monetary Fund to secure the country’s finances.

Experts say Bangladesh’s predicament is not nearly as serious as that of Sri Lanka, where months of unrest led the longtime president to flee the country and people are outright short of food, fuel and medicine, and queue for days. for essentials. But it faces similar problems: excessive spending on ambitious development projects, public anger over corruption and cronyism, and a weakening trade balance.

Such trends undermine Bangladesh’s impressive progress, fueled largely by its success as a garment manufacturing center, towards a more prosperous middle-income country.

The government raised fuel prices by more than 50% last month to counter rising costs from high oil prices, sparking protests over the rising cost of living. That prompted the authorities to order the subsidized sales of rice and other staples by government-appointed dealers.

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The final phase of the program, which began on Sept. 1, should help about 50 million people, Commerce Minister Tipu Munshi said.

“The government has taken a number of measures to reduce pressure on low-income people. That affects the market and keeps the prices of everyday commodities competitive,” he said.

The policy is a stopgap solution to larger global and domestic challenges.

The war in Ukraine has led to higher prices of many commodities at a time when they were already rising as demand recovered as the coronavirus pandemic eased. In the meantime, countries like Bangladesh, Sri Lanka and Laos – many of them – have seen their currencies weaken against the dollar, increasing the cost of dollar-denominated imports of oil and other goods.

To ease pressure on public finances and foreign reserves, authorities imposed a moratorium on major new projects, shortened office hours to conserve energy, and imposed restrictions on imports of luxury goods and non-essential items, such as sedans and sedans. SUVs.

“Bangladesh’s economy is facing strong headwinds and turbulence,” said Ahmad Ahsan, an economist and director of the Dhaka-based Policy Research Institute, a think tank. “Suddenly we are back in the era of progressive blackouts, with taka and forex reserves under pressure,” he said.

Millions of low-income Bangladeshis like Begum, whose family of five can afford fish or meat barely once a month, still struggle to get food on the table.

Over the past two decades, Bangladesh has made tremendous strides in growing its economy and fighting poverty. Investments in clothing production have provided employment for tens of millions of workers, mostly women. The export of clothing and related products accounts for more than 80% of exports.

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But because fuel costs were so high, authorities shut down diesel plants that produced at least 6% of total production, cutting daily power generation by 1,500 megawatts and disrupting production.

Imports in the last fiscal year ending June 2022 rose to $84 billion, while exports fluctuated, leaving a record current account deficit of $17 billion.

More challenges lie ahead.

Deadlines are fast approaching for repaying foreign loans related to at least 20 mega infrastructure projects, including the $3.6 billion over the Padma Bridge built by China and a nuclear power plant largely funded by Russia. Experts say Bangladesh needs to prepare for when repayment schedules increase between 2024 and 2026.

In July, in a move economists view as a precautionary measure, Bangladesh sought a $4.5 billion loan from the International Monetary Fund, making it the third country in South Asia to recently seek its aid after Sri Lanka and Pakistan.

Finance Minister AHM Mustafa Kamal said the government has asked the IMF to begin formal negotiations on loans “for balance of payments and budget support”. The IMF said it is working with Bangladesh to draw up a plan.

Bangladesh’s foreign exchange reserves have declined, potentially undermining its ability to meet its loan obligations. On Wednesday, they had fallen to $36.9 billion, from $45.5 billion a year earlier, according to the central bank.

Useful foreign reserves would be about $30 billion, said Zahid Hussain, a former chief economist at the World Bank’s Dhaka office.

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“I wouldn’t say this is a crisis situation. This is still enough to cover three months of imports, three and a half months of imports. But it also means that … you don’t have much room to maneuver on the reserve front,” he said.

Despite what some economists believe is excessive spending on a number of costly projects, Bangladesh is better equipped to weather tough times than some other countries in the region.

The agricultural sector – tea, rice and jute are important exports – is an effective ‘shock absorber’ and the economy, four to five times larger than that of Sri Lanka, is less vulnerable to external calamities such as a slump in tourism.

According to the latest Asia Development Bank forecast, the economy is expected to grow at 6.6% this fiscal year, and the country’s total debt is still relatively small.

“I think in the current context the main difference between Sri Lanka and Bangladesh is the debt burden, especially the external debt,” said Hussain.

Bangladesh’s external debt is less than 20% of gross domestic product, while Sri Lanka’s was about 126% in the first quarter of 2022.

“So we have some space. I mean, debt as a source of macroeconomic stress isn’t that big of a deal yet,” he said.

Mohammed Jamal, 48, who waited in line to buy subsidized food, said he didn’t feel much room for his own family.

“It has become unbearable to maintain our standard of living,” Jamal said. “The prices are just out of reach for the common people,” he said. “It’s hard to live this way.”


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