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Bangladesh: With Trade Deficit & Reduced Forex, Is an Economic Crisis Looming?

One of the highest growing economies in the world is witnessing angry protests due to a sharp hike in fuel prices.

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Video Producers: Shohini Bose, Mamta

Video Editor: Shohini Bose

After massive protests in Sri Lanka for the past many months due to an economic crisis, Bangladesh, which is one of the fast-growing economies of the world, is witnessing protests across the country due to a sharp hike in fuel prices, which, according to local media, is its "highest ever."

The government, on 5 August, increased the prices of diesel and kerosene by 42.5 percent, petrol by 51.1 percent, and octane by 51.7 percent.

According to The Daily Star, one of the English newspapers in the country, "Diesel and kerosene prices have been raised by (Bangladeshi taka) Tk 34, from Tk 80 to Tk 114 per litre. The price of octane has been raised from Tk 89 to Tk 135 per litre, while the petrol price has increased from Tk 86 to Tk 130."

The situation is dire enough for the Finance Ministry to seek a loan of $4.5 billion from the International Monetary Fund (IMF).

"Bangladesh has sought a loan of 4.5 billion USD from IMF to tackle the economic situation in the country with an eye on its declining foreign reserves. The loan has been sought as a balance of payment and budget support as well as to mitigate the effects of climate change. 1.5 billion USD of the total amount sought is likely to be interest free while the rest will be charged at an interest rate lower than 2 per cent," Sohini Bose, Junior Fellow at Observer Research Foundation, Kolkata, told The Quint.

Bangladesh Prime Minister Sheikh Hasina in late July had claimed that no economic crisis is imminent, even stating that "we have money in our hands to import food grains and others (essential items) for at least three months during any crisis."

Despite her assurances, an economic crisis indeed seems to be looming over the country.

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Economy, Trade Deficit, and Forex Decline

Bangladesh's economy, worth $416 billion, is the 33rd largest in the world. When the country was born in 1971, it was mostly reliant on agriculture. More than 50 years on, however, the industry and the service sector accounts for most of the country's economic output.

The share of the agricultural sector to Bangladesh's Gross Domestic Product has dropped to just 13 percent. On the other hand, "the service sector contributes to almost 56 per cent of Bangladesh’s GDP. But this is also the sector which has suffered the worst impact of the pandemic with around 11 lakh unemployed and a consequent reduction in income," Bose explained.

"Bangladesh's readymade garment industry has also been the cause of its rapid economic development as export of ready-made garments account for almost 84 percent of Bangladesh’s trade. But with the lockdowns happening with the onset of the pandemic, the industry faced order reductions, cancellations, payment delays, and renegotiation of terms. Factories were forced to shut down and the competition increased for smaller orders. As the value of exports declined, the revenue losses were significant. Foreign exchange sent by expatriates are also an important part of Bangladesh's economy. This too was significantly hampered by the pandemic."
Sohini Bose, Junior Fellow at Observer Research Foundation, Kolkata

On the role of expatriates, according to the World Bank, Bangladesh is the seventh highest receiver of remittances in the world. Inflow of foreign exchange hit a record high of $24.77 billion during 2020-21 and fell to $21.03 billion the next year.

Due to a trade deficit, which has recorded a high of $33 billion, the country's foreign exchange reserves have fallen to below $40 billion for the first time in two years. It was around $39.48 billion as of 27 July. The war in Ukraine and global inflation are all playing a part in this.

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The Falling Bangladeshi Taka

The value of the Bangladeshi taka against the US dollar has dropped sharply in the recent past, and the Bangladeshi currency is constantly witnessing devaluation. A dollar was worth around 86 takas in three months ago in May, is now worth 94 takas.

Some of the causes of this decline are circumstantial. For instance, the pandemic had substantially disrupted supply chains across the globe, thereby hampering trade and causing inflation in many countries. While the situation was improving, the Russia-Ukraine War has delivered another serious blow to the supply chains, especially with regard to fuel and gas, once again causing prices to soar," Bose said.

She also argues that the US Federal Reserve System's decision to increase its short-term interest rate in order to encourage saving and discourage consumption has in effect decreased the dollar's circulation across the world.

"Consequently, the demand for dollars has risen along with the increase in each nation's import costs, which has added to the inflation. Accordingly, the Bangladeshi taka has been sliding against the dollar."

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Can Bangladesh Go the Sri Lanka Way?

While in both countries foreign exchange reserves are depleting, "Bangladesh has taken a precautionary stance in requesting the loan from the IMF and has already undertaken cost restriction policies," reminds Bose.

On the other hand, Sri Lanka is yet to come to any agreement with the IMF. President Ranil Wickremesinghe recently stated that discussions with the IMF for a four-year programme worth $3 billion would resume in August.

"Moreover, the economy of Bangladesh is largely different from Sri Lanka as the latter is primarily dependent on tourism and which suffered a severe setback during the pandemic," Bose concluded.

Sri Lanka is going through an economic meltdown of a scale unseen since the country's financial crisis of 1948. Prices of essential commodities like rice, milk, and oil have skyrocketed.

The main cause is the shortage of foreign currency, which has led to a huge reduction in imports of essential items like petroleum, food, paper, sugar, lentils, medicines, and transportation equipment.

Tourism contributes to around 10 percent of Sri Lanka's GDP. It was already suffering after the 2019 blasts in Colombo. COVID-19 made it worse. Those sectors that earned foreign currency were devastated, thereby reducing its inflow.

Additionally, government data says Foreign Direct Investment into Sri Lanka has decreased to $548 million in 2020, compared to $793 million in 2019 and $1.6 billion in 2018.

(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

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Topics:  Bangaldesh   sheikh hasina 

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