Friday, 17 May, 2024
By: Sutanu Guru
Bangladesh faces a daunting situation even as it approaches the International Monetary Fund for assistance; just as Sri Lanka and Pakistan have done. Image source: IANS
The foreign exchange reserve of Bangladesh have almost halved over a year or so. Though it is not in a bad shape as Sri Lanka and Pakistan, it faces a daunting situation as it approaches the IMF for assistance
Page 15 of the Delhi edition of The Times of India o October 18, 2022 features an unusual story with a headline: ‘B’desh Scraps Nora Fatehi dance event to save dollars’. The feature quoted the ministry o culture of the country which justified the cancellation of the Nora show be stating “in view of the global situation and with the aim of maintaining the foreign exchange reserves”. The obvious question any analyst would ask is: Is Bangladesh facing such an alarming foreign exchange crisis that it cannot even afford to pay a B List Bollywood starlet? Forget Nora Fatehi. The bigger issue is: has the remarkable performance of the Bangladesh economy in the second decade of this century run out of steam? Going strictly by numbers and hard data, the Bangladesh economy is definitely not in as bad a shape as the economies of Sri Lanka & Pakistan are. But it faces a daunting situation even as it approaches the International Monetary Fund for assistance; just as Sri Lanka and Pakistan have done.
As the chart above shows, the foreign exchange reserves of the country have almost halved over a year or so. In August 2021, Bangladesh had enough foreign exchange reserves to pay for about 8 months of imports. By October 2022, that cushion had dropped to 4 months. Like India, Pakistan and Sri Lanka, Bangladesh is heavily dependent on imports of oil & gas to meet its energy demands and fertilisers to sustain agricultural growth. The prices of both have soared in global markets in 2022, particularly after Russia invaded Ukraine on February 24, 2022. It is hardly surprising then that the foreign exchange reserves of the country have witnessed a drain this year. Nor is there any immediate relief in sight as OPEC+ countries have recently decided to cut oil production by 2 million barrels per day to keep prices high. Besides, fertiliser prices in global markets are showing no signs of easing. This has inevitably led to tremendous pressure on the Taka, the Bangladesh currency.
The chart above shows how the value of the Bangladeshi currency has fallen by about 20% against the US dollar in 10 months. This should not come as any surprise for non partisan economists as the dollar has been appreciating against virtually every currency in the world. This trend has been reinforced after the Federal Reserve of the United States has been repeatedly hiking interest rates to rein in inflation in America that still threatens to touch double digits. A steep decline in the value of the currency is a double edged sword. While it makes garments exports from Bangladesh more competitive, it makes the imports of oil and fertilisers prohibitively expensive. India is facing a similar dilemma and situation. The value of the Rupee has Allen from about Rs 75 per dollar to about Rs 83 now. At the same time, foreign exchange reserves of India have fallen by more than $ 100 billion. It is the same story in Pakistan and Sri Lanka whose economies have gone virtually bankrupt. Analysts expect more interest hikes by the US Federal Reserve; in effect implying countries like Bangladesh and India will continue to confront turbulent and volatile economic headwinds. But there is one key difference between the Bangladesh and Indian economies. The export basket of India is highly diversified while Bangladesh is too heavily dependent on readymade garment
Source: The Bangladesh Garment Manufacturers and Exporters Association
The chart above shows the spectacular success of readymade garments exports from Bangladesh. In fact, the dollar value of garment exports from Bangladesh surpasses that of India. One reason for this is the conducing investment environment created by the government that has relaxed labour laws for this sector. Massive factories employing tens of thousands of workers each have sprung up in the country. While there have been many ghastly tragedies where thousands of workers have died in factory fires and other accidents, exports have boomed. Even Indian companies involved in garments exports have set up a factories in Bangladesh. But there is a problem. The chart shows that readymade garment exports recovered remarkably well in 2021-22 and earned $ 42 billon in precious foreign exchange for the economy. That’s the good news. The bad news is that ready made garment exports accounted for almost 82% of total exports from the country. Any problem that crops up with garments exports and the Bangladesh economy could land in very deep trouble. A recession or extremely weak growth in Britain, the European Union and North America, the biggest markets for exports from Bangladesh is inevitable. This will adversely affect growth momentum in garment exports.
What happens to the Bangladesh economy then?
