In a conversation, Dr Nazneen Ahmed, Country Economist and Head of Policy & Strategic Advisory Unit at UNDP Bangladesh, explicates the country’s current economic situation, the challenges ahead, and ways to catalyse recovery.
Our economy has been under tremendous pressure for the past few months due to mounting external and internal forces. What factors have led to this crisis?
Due to a multitude of interconnected reasons, all the countries in the world are currently going through some sort of economic stress. Of course, the intensity of the problem has varied across countries. We are witnessing countries like Pakistan and Sri Lanka being paralysed by the crisis; at the same time, some are facing minor inconveniences and have put contingency measures in place. Like the entire world, Bangladesh has also found itself in choppy waters, but I wouldn’t term the situation a crisis. We are all aware of the challenges Bangladesh had to go through over the past couple of years due to the pandemic. The economic instability due to the lockdowns, enhanced by the disruption in the supply chain, has already put a lot of pressure on our economy. However, Bangladesh did a remarkable job in minimising the economic impact of COVID-19 and was among the countries that were making a recovery at an impressive pace. Unfortunately, the synchronised global recovery catalysed a chain of events that has led to the situation we are in right now. As economies worldwide started recovering, the abrupt rise in economic activities initiated a surge in demand both at the individual level and across industries. The surge in such pent-up demand leads to a rise in price levels. Therefore, the global economy was under significant inflationary pressure towards the end of 2021 and the start of 2022.
Furthermore, the Ukraine-Russia crisis pushed the global economy into a dire situation. On top of the supply chain disruptions from the crisis, the US-led sanctions have directly impacted the international price levels. Thus, the inflationary pressure from the COVID-19 recovery and the Ukraine-Russia crisis are the primary reasons behind the global economic instability. As a result, the cost of our imports rose significantly while our income from exports and remittances did not change much. All of these resulted in the widening of the current account gap. At the same time, the amount of investment and other capital entering the country was insufficient to cover the current account gap. That’s why Bangladesh’s foreign exchange reserve went down from nearly USD 48 billion to USD 37 billion (September 2022) within a few months. So the current economic stress can be traced back to the COVID-19 recovery and the Russia-Ukraine crisis that has seriously disrupted sensitive supply and caused the dollar price to rise sharply compared to our local currency.
Continuing on the first question, some are drawing parallels between the economic instability with what’s unfolding in Sri Lanka. What is the likelihood of Bangladesh facing a similar scenario?
In a word, No! It is improbable that we might face a situation like Sri Lanka. However, there is no room to let our guards down as the entire world is going through aggregate economic turmoil. On top of that, any economic recovery depends on many uncertainties. No one knows when the Ukraine-Russian crisis will end. Therefore, there are reasons to worry, but drawing parallels with what’s unfolding in Sri Lanka is a bit far-fetched. The best course of action at the moment for us is to take lessons from Sri Lanka and avoid any mistake that might lead us to a challenging development path.
If we take a deep dive into Sri Lanka’s economic implosion, there were a few factors at play. Firstly, one of the primary pillars of the Sri Lankan economy, tourism, took a significant blow during the pandemic. At the same time, the country borrowed a lot of money for megaprojects which failed to generate substantial returns. As a result, the unproductive megaprojects caused the country’s debt to pile up, putting further pressure on an already fragile economy. Also, Sri Lanka preferred costly bilateral credits over loans from multilateral sources. On top of that, the Sri Lankan government made an abrupt decision to phase out chemical fertilisers in favour of organic ones with loans from bilateral donors. The move fatally backfired not just because bilateral loans are more expensive but also because it resulted in poor yield. These factors ultimately contributed to Sri Lanka’s economic implosion and led to its bankruptcy.
So, the Sri Lankan example can be a cautionary tale for Bangladesh’s policymakers. As we are all aware, Bangladesh is set to acquire a total of USD 4.5 billion in loans from the IMF(International Monetary Fund). As a precautionary measure, it is a welcome move, but we must be aware of the lessons from Sri Lanka. We must ensure the loan proceedings are invested in projects that can generate the revenues required to pay it off. Therefore, usage of the loan amount must accompany a proper and thorough analysis of prospective projects. So while we say that Bangladesh’s economy is not comparable to the Sri Lankan economy at the moment, we have to be cautious about utilising our loan money for various projects.
Dr Nazneen Ahmed
Country Economist and Head of Policy & Strategic Advisory Unit
UNDP Bangladesh
Given the current economic stress, how can we keep a balance between lowering inflationary pressure without hampering employment?
It is a million-dollar question right now. Theoretically, measures of reducing inflationary pressure lead to a reduction in employment levels. Therefore, we need to be careful and first understand the underlying reasons behind the current inflation. Currently, we are experiencing inflation that is caused by the sudden rise in demand. With easing health restrictions, an increasing number of people resumed travelling or sending abroad for education. Consequently, the abrupt rise in activities initiated and catalysed the inflationary pressure. Therefore, at the moment, controlling inflation would necessitate reducing aggregate demand. However, doing so might lead to an increase in unemployment levels, so it’s a double-edged sword. So, it goes without saying that controlling inflation will be a tedious job for the government as it will not want to hurt employment levels.
Alternatively, we can try a mixed approach that includes a combination of direct social safety nets and strategic market interventions rather than drastic measures against inflation. The Bangladesh government has already facilitated a few support mechanisms for the marginal and impoverished communities across the country, such as expanding the open market sales, and access to credit for micro and small enterprises without a formal trade licence. I think these are welcome moves as inflation hurts the low-income segments of the population unequally. However, I would love to see the safety-net programs cover the lower-middle-income segment of our population too. Unlike the impoverished section, they are unable to seek any help from the government or the public. I think this segment of the population is in dire need of government support as they are being crushed by inflation with minimal fixed income. Social protection measures for vulnerable non-poor could take the form of strategic employment generation in development work, paid voluntary works, etc.
Facilitating a stable market for essentials targeted to the aggregate population would be wiser than trying massive control of inflation and jeopardising employment levels. The government has increased the capacity of OMS (Open Market Sales) centres to ensure the accessibility of essential goods for the impoverished population. However, the operating hours of the sales need to be looked at in order to allow the working class to purchase essential goods at a subsidised rate after office hours. Concurrently, the government should explore other measures to provide further support to low-income people, including cash incentives, reducing tariffs on the imports of essential products and reducing fuel prices. At the same time, the government gradually has to move toward interest adjustment.
Currently, we are experiencing inflation that is caused by the sudden rise in demand. With easing health restrictions, an increasing number of people resumed travelling or sending abroad for education. Consequently, the abrupt rise in activities initiated and catalysed the inflationary pressure.
After the successful realisation of the ‘Digital Bangladesh’ in 2021, the Bangladesh government has taken the initiative to implement the ‘Smart Bangladesh’ vision by 2041. Why is the ICT sector so crucial for Bangladesh’s sector? Are there any challenges in the sector that are impeding growth?
I think the development of the ICT sector in different spheres has been a major driver of our economic growth over the last decade. It has revolutionised a number of sectors like the financial industry and facilitated the inclusion of the mass people through online banking and MFS (Mobile Financial Services). The proliferation of the ICT sector has enabled businesses to expand outside the urban areas and provide services to the wider rural population. It has also allowed our rural infrastructures to be more competent and efficient. At the same time, it has facilitated a swifter flow of wealth from urban to rural areas through MFS and agent banking. Perhaps, ICTs’ most significant contribution over the past decade is creating new employment opportunities for the country’s expanding young population segment. E-commerce and F-commerce have unleashed a new era for our aspiring female entrepreneurs. According to the ADB (Asian Development Bank), Bangladesh is currently the second largest source of online labour in Asia. Recently, the health ministry’s Surokhha platform won recognition for facilitating the immunisation process efficiently with complete transparency. Therefore, it goes without saying that the ‘Digital Bangladesh’ vision has been instrumental in transforming Bangladesh from an impoverished nation to one of the world’s fastest-growing economies. So I think with our Vision 2041 to become a developed nation, this vision of a smart Bangladesh goes hand in hand with that. If we can make this vision come true, it will facilitate our process of becoming a developed nation.
