Time to hit the reset button

This year was always supposed to be a celebration of Bangladesh's economic progress with the opening of Padma bridge and Dhaka metro rail and 100 percent electrification.

And in the first half of the year, it appeared things were heading that way, particularly with exports roaring louder than ever before.

Then, Murphy's law struck the Bangladesh economy: everything that could go wrong, went wrong.

Remittance, which kept the economy hale and hearty even during the worst of the pandemic, dropped this year.

Foreign exchange reserves, a misplaced source of confidence in recent years, declined at a breathtaking pace, and in so doing, opened a big can of worms and set off a domino effect.

To begin with, it opened the dialogue on whether the country's reported reserves were ever as plentiful as it was made out to be. Turns out it was not.

The value of the taka has never been lower. To arrest the drop in reserves, import controls were put in place. Instead of suppressing the import bill, it ended up suppressing economic activities as factories cried out for energy supply.

And because of that, default loans hit a new record, and banks are now under liquidity stress.

The depreciating taka also tipped over inflation -- which has largely been at a tolerable level in recent memory -- to an excruciating territory and sparked off a cost of living crisis.

The perils of living with low tax revenue and a narrow fiscal space were also exposed -- a development that necessitated austerity measures from the government and knocking at the doors of all development partners for budget support.

In short, 2022 saw the culmination of years of wrong policies, poor planning, inaction and negligence by policymakers.

It is all too tempting to dismiss the economic turmoil on the two-year-long global coronavirus pandemic and the fallout of the Ukraine war. But, these are all legacy issues that would have reared their ugly heads at some point. Coincidentally, they all did in 2022.

Had the Bangladesh Bank calculated its foreign currency reserves as per the International Monetary Fund's balance of payments and investment position manual (BPM6), which is followed faithfully by central banks around the world, would there be a false sense of confidence about the reserve position?

Had the central bank abandoned its policy to defend the exchange rate a few years back, would the reserves contract the way it has in such a short span of time?

Then the taka would not have gotten the hit that it did, this year -- and add fuel to the inflationary fire started by the pandemic and Ukraine war. The remittance diversion to informal channels in such a big way would not have happened, too.

Had the government withdrawn the interest rate cap -- which effectively broke down the market mechanism for money when it was implemented in April 2020 -- as soon as the pandemic waned, would inflation have hit a decade high, or would the import control measures have failed?

Would there be a cost of living crisis now if the government started weaning off energy subsidies and ushered in automated fuel pricing a while back? People would not have gotten the shock of a record fuel price hike on August 5.

Had the government some fiscal space, it could have adequately cushioned the blow of inflation on the poor and the vulnerable.

Would the government need budget support from development partners, which is just creating future debt, if its subsidy burden and expenditure were not so enormous and tax revenue perennially so meagre?

Had the government spread out its energy strategy and sincerely ran its gas exploration activities, the factories would not be starved of gas now.

Would the government have the albatross of capacity payment around its neck now if it were stricter in negotiating its contracts with the power producers and more strategic in achieving its electrification target?

Weeks after announcing 100 percent electrification, the country was back to experiencing hours of power outages, raising questions about the progress made on this front. 

The government's soft touch with the banking sector, the tax administration and project implementation and selection have long been spoken of.

But no action was taken on that front. So, the banking sector continues to be saddled with bad loans, the tax-to-revenue GDP continues to be amongst the lowest in the world, and projects continue to see cost and time overruns.

If there were any resolve to this end, there would have been no need for the austerity measures, which cost the country more in terms of optics than the savings it generated.

In a nutshell, there was a lot of economic mismanagement. But, the government now has a golden opportunity to rectify things by way of the IMF programme.

In return for $4.5 billion over a 42-month period, the Washington-based multilateral lender would be stipulating a host of necessary structural reforms.

It is imperative that the government sincerely commits to IMF's programme conditions -- which are set to be finalised in January -- as a lot depends on it.

Already, global rating agency Moody's has placed Bangladesh's long-held credit rating for downgrade as it fears the "unorthodox policies" to arrest the deteriorating external position and government's fiscal metrics and ease the energy crisis -- would not work.

The rating review will focus on understanding the scope and conditions under which IMF support will be provided as Moody's is doubtful of the government's willingness and ability to consistently meet the programme's requirements given the challenging social conditions.

Alongside placing Bangladesh's rating for downgrade, Moody's has put up seven banks' ratings for review.

Were Moody's to downgrade Bangladesh's rating, the other two major credit rating agencies -- Fitch and Standard & Poor -- will follow suit.

If that happens, the way Bangladesh conducts its foreign transactions and lending will fundamentally change for the worse.

Once a country is downgraded, it takes years -- and even a full decade -- to move back up. In other words, the rating downgrade would set the country back by decades -- and that must be avoided at all costs.

It is time to reset, refocus, readjust and restart -- and let this new resolve begin from the new year.