Weak batch of data paints economy’s deepening woes

Bangladesh wrapped up the last fiscal year of 2022-23 with slower economic growth. A similar trend has persisted in the ongoing fiscal year as portrayed by at least three key indicators: exports, remittances and imports.

The growth of export receipts, the biggest foreign currency earner for Bangladesh, decelerated to 9.5 percent in the first quarter of 2023-24 from 13.3 percent in the identical three months of FY23.

Remittances, the cheapest source of foreign exchanges, dipped 13 percent although a record 11.37 lakh of migrant workers went abroad in the previous fiscal year.

Imports, through which the country brings in industrial raw materials, intermediate goods and capital machinery, continue to face downturns as well.

The opening of letters of credit declined 18 percent year-on-year in July-August while settlement dipped 22 percent. It dropped 15 percent in FY23 amid a dollar shortage and discouragement from the central bank as it desperately tried to save the reserve.

This has slowed the momentum in industrial production and fresh investment by entrepreneurs, an unwelcome development.

The general index of industrial production (medium and large-scale manufacturing) showed that manufacturing output grew at a slower pace of 8.93 percent until May of FY23 compared to a year prior, data from the Bangladesh Bureau of Statistics showed. Factory output rose 11.19 percent in FY22.

Overall, the prospect of a recovery from the current economic woes in the short term seems unlikely because the factors behind the crisis such as higher inflation, the volatility in the foreign exchange market, and the Russia-Ukraine war shows no sign of disappearing soon. Besides, the growing political tension centring the general election, due in January, has deepened uncertainty.

"The degree of political uncertainty is high," said Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development, a state-run think-tank.

"Amid persisting uncertainty, the economy may slow further and the downward trend may deepen. The implication is reduced scope for employment and a decline in income. So, people's suffering will be more acute."

People in Bangladesh have been in a tight spot for more than a year as inflation exceeded historic trends.

There has been a tendency at the policy level to blame external factors for the current situation, but the former chief economist of the central bank says there is nothing to gain by laying the blame on the global crisis caused by the war.

Countries including South Asian neighbours India and Sri Lanka have brought down the inflation rate and managed their economies better amid the tempest.

"The problem lies in our internal policies. We have not been able to manage inflation. Our internal policy failure is responsible for much of the problem."

Remittance was supposed to increase after a large number of people went abroad for jobs. However, a large gap between the dollar rates offered by banks and other formal money transfer channels and the kerb market is holding Bangladesh from benefiting from a higher transfer of funds from expatriates.

The gap, which can be as much as Tk 8 per dollar, has diverted the mainly poor migrant workers to hundi operators or unofficial channels when it comes to sending the money to their families and relatives.

A market-based exchange rate could narrow the difference, but it is yet to be in place despite repeated calls from experts.

Sadiq Ahmed, vice-chairman of the Policy Research Institute of Bangladesh, thinks it is difficult to generalise the broader economic effects from three months' data.

"However, the slowdown in exports and import growth in the first three months is consistent with the pattern observed in FY23. This means that there is a need for stabilisation measures and structural reforms to revitalise the economy."

Ahmed, who served in various positions at the World Bank, including as the chief economist for the lender's South Asia region, says the export slowdown is also indicative of the continued inability to boost non-RMG exports, which suffer from serious disincentive problems caused by an overvalued real exchange rate and heavy trade protection that favours import substitutes.

Md Deen Islam, an associate professor of economics at the University of Dhaka, said many market players think since the exchange rate has been kept artificially low, the central bank would eventually be compelled to adjust it.

"Consequently, the supply of foreign currencies is dwindling as individuals prefer to hold onto foreign exchanges."

Other conventional factors, including capital outflows preceding the election cycle and the prevalence of illegal or informal channels for remittance transfers, have also taken a toll on remittance receipts, he said.

Historically, Bangladesh has grappled with a negative trade balance where import payments outweigh export receipts. Under such circumstances, funds sent by migrant workers have acted as a crucial buffer.

"Unfortunately, in recent months, remittances have seen a concerning decline. This presents a worrisome scenario," Islam said, warning that without the cushion of remittances, the exchange rate will rise.

The taka has lost its value by about 28 percent against the US dollar in the past one and a half years.

According to Islam, if the government or the central bank opts to control exchange rates, it will need to impose restrictions on imports.

In either case, inflation will surge, eroding the purchasing power of the populace and dampening economic activities, which, in turn, could lead to slower economic growth.

He said the recent plummet in remittances can also be attributed to the prevailing uncertainty surrounding the election.

"This uncertainty has cast a shadow on people's expectations about the country's future economic prospects."

A noted entrepreneur says businesses are facing difficulty in importing goods even for industrial use.

"The price of gas is high while there is no assurance of uninterrupted supply of electricity. People are more concerned about carrying out their regular activities smoothly, rather than political uncertainty."

He called for business-friendly attitudes of the revenue authorities and the Bangladesh Bank.

WHAT COULD BE DONE?

The return of the export growth to double digits will require export diversification focused on non-RMG shipments, according to Sadiq Ahmed.

He said some correction of the over-valuation of the real effective exchange rate has happened in recent months, especially in FY23.

"But trade protection continues unabated. In addition to the market-based exchange rate, this will require a sharp reduction in import duties and other para-tariffs like supplementary duties and regulatory duties. Improvements in trade logistics will also be necessary."

The economist suggested lifting the exchange rate and import restrictions to allow importers to buy necessary raw materials and goods used in production.

"Demand management should be used to lower imports rather than through import controls."

Ahmed thinks flexible management of the exchange rate and lowering of credit demands through higher interest rates will stabilise the balance of payments and allow growth momentum to accelerate without destabilising the macroeconomy.

However, Deen Islam does not see any solution to the current predicament in the short term.

"Expectations concerning the economy are intertwined with political stability. Nonetheless, the situation could be improved if certain market-oriented policies are adopted."

Firstly, the central bank should embrace a flexible exchange rate regime, allowing market forces to determine the prices of foreign currencies.

"This move would likely stimulate more exports and reduce the likelihood of speculative behaviour and currency manipulation by vested groups in the foreign exchange market," he said.

Secondly, there is a pressing need to bolster customs operations to effectively curtail foreign exchange outflows through under- or over-invoicing, he said.

"Thirdly, while the garment industry remains the dominant foreign exchange earner, it heavily relies on imported materials. In order to address this, efforts should be initiated to diversify exports and incentivise the sectors with lower import contents."