Bangladesh seeks IMF’s monetary help: How global economic instability hammered South Asia’s export powerhouse

By: Anshul Vipat

The country's economic health largely rests on these three things — exports, remittances and fuel prices. High volume of exports and remittances and low fuel prices kept its economy running

Bangladesh and the International Monetary Fund (IMF) have reached a preliminary agreement under which the global lender will provide a $4.5 billion support package to stabilise Dhaka’s economy and protect the vulnerable people. This is the fourth time the South Asian country has taken monetary assistance. However, the loan amount has never been beyond 100 million dollars. This time, Bangladesh has asked for an assistance of 4.5 billion US dollars, breaking all previous records.

The assistance comes at a time when the country is facing a number of challenges. Its foreign currency reserves are declining and the value of its currency, the taka, is weakening. Electricity load shedding and food insecurity has worsened, adding to the woes of citizens.

Just last year, Bangladesh's GDP was predicted by the IMF to outperform advanced economies. So what went wrong for a country that has been called as "economic miracle" by economists?

Understanding Bangladesh’s economy

The country's economic health largely rests on these three things — exports, remittances and fuel prices. High volume of exports and remittances and low fuel prices kept its economy running.  The ready-made garment industry is the engine of Bangladesh's economy. It accounts for more than 80 percent of the country's exports.

In the past few years, Bangladesh’s economy had expanded, the per capita gross domestic product had increased, reserves of the dollar had grown, inflation was low and poverty levels were decreasing. When COVID-19 hit, Bangladesh's garment industry was devastated. Factories shut, and at least a quarter of their workforce lost their jobs. Many of them went hungry.

Exports took a hit

Last year, as consumer spending bounced back in the West. Factory orders slowly started returning to Bangladesh and early this year, they skyrocketed. In June, Bangladesh exported more than $4 billion in apparel — a single-month record.

But a month later, amid global inflation, orders plummeted again — by a whopping 30 percent. On the other hand, country's import bill rose sharply due to high food, fuel and fertiliser prices. This led to a sharp shift in Bangladesh's trade deficit. In the financial year 2022, the expenditure on imports increased by 36 percent, compared to 20 percent the previous financial year. The current account balance reported a deficit of $18.70 billion compared to the previous year’s deficit of $4.58 billion.

Remittances are down

The current account deficit in Bangladesh is generally met by remittances from abroad, which have also decreased significantly in the financial year 2022. Remittances fell by 14 percent in the financial year 2022, following a 36 percent increase in the financial year 2021. This has affected the balance of payments, foreign currency reserves, and weakened the taka against the US dollar.

Despite adjusting the exchange rate to match the market demand, the Bangladesh Bank continued to sell dollars from reserves to keep the taka stable. As a result, reserves declined further.

Foreign currency reserves fell to $35.98 billion in October, according to the central bank -- a steep drop from $48 billion in September last year and the lowest level in 28 months. Though the country has received relatively large remittances from expatriates in July due to Eid, the taka’s value against the dollar is deteriorating. The depreciation of the taka compelled the government to seek a loan from the International Monetary Fund.

Bangladesh has less money to import fuel — just as prices spike

The weakening of the Taka against the dollar not only makes imports more expensive, but also raises the domestic prices of imported goods and other non-imported goods due to the substitution effect – which is when the sales of a product decline due to an increase in its price which prompts consumers to switch to cheaper alternatives. This worsens inflation. In August, Bangladesh's inflation rate hit 9.52 percent — the highest in more than a decade.

In the midst of this, fuel prices showed a sharp jump in recent months after Russia's invasion of Ukraine. This impacted Bangladesh's power grid which majorly runs on imported fuel. In August, the government decided it could no longer afford to keep fuel prices artificially low. In a single week, it raised the price of gasoline, diesel and kerosene by more than 50 percent. Local media called it the steepest price hike since Bangladesh's 1971 founding. Higher prices have led to rationing. In July, the capital Dhaka began suffering two-hour rolling blackouts. On October 4, the lights went out across almost all of Bangladesh simultaneously, for up to 10 hours.

Buses and taxis raised fares overnight. Food got more expensive. And thousands took to the streets to protest.

Not as severe as Sri Lanka or Pakistan

Bangladesh is the third South Asian country that has asked for monetary assistance. In 2022, IMF provided a bailout package to Pakistan and Sri Lanka who were facing severe economic stress. However, experts say Bangladesh's predicament is nowhere nearly as severe as Sri Lanka's, where months' long unrest led its long-time president to flee the country and people are enduring outright shortages of food, fuel and medicines, spending days in queues for essentials. Bangladesh's economy is in better shape than Sri Lanka and Pakistan. These countries got bailouts when they were in danger or actually defaulting on their debt. Bangladesh is not.

But it faces similar troubles: excessive spending on ambitious development projects, public anger over corruption and cronyism and a weakening trade balance. Such trends are undermining Bangladesh's impressive progress, fuelled largely by its success as a garment manufacturing hub.

Bangladesh is ultimately an example of how interconnected the global economy is, and how the global slowdown is hurting poorer countries most. Even "economic miracles" are not immune from the pain.