Bangladesh tightens its belt as the forex crisis approaches – The Diplomat

Amid falling foreign exchange reserves due to rising import bills, Bangladesh has sought a $4.5 billion loan from the International Monetary Fund (IMF).

According to economists who took part in a recent discussion at the Center for Policy Dialogue in Dhaka, Bangladesh is facing an “economic crisis” that will not end soon with the global economy also in turmoil.

The crisis was not apparently unexpected. According to a sovereign analyst at Moody’s in Singapore, “We expected a deterioration in the current account deficit due to lower remittances, lower export demand, and of course higher fuel and food prices.”

On July 27, Bangladesh Prime Minister Sheikh Hasina claimed that a crisis was not imminent. She said the country has sufficient foreign exchange reserves to import food for a period of six to nine months. “We have money on our hands to import food grains and other (essential items) for at least three months during any crisis.”

However, the signs of an economic crisis are obvious. The cost of the US dollar against the Bangladeshi taka has risen sharply and the Bangladeshi currency is devalued almost every week. A dollar, which was worth about 85-90 taka in May, is sold at 112 taka in the sidewalk market.

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Bangladesh’s foreign exchange reserves fell below $40 billion recently for the first time in two years. Amid the COVID-19 pandemic, foreign exchange reserves exceeded $48 billion in August 2021, the highest ever in the history of Bangladesh. It has been regressing ever since.

This is largely due to the trade deficit. Although export earnings hit a record high of $52.08 billion in the 2021-2022 fiscal year, the trade deficit also hit a high of $33 billion. The high trade deficit is to some extent a fallout from the Russo-Ukrainian War, which has affected food and fuel supplies around the world. Global inflation has affected Bangladesh’s reserves as well.

Foreign remittances are the lifeblood of Bangladesh. According to the World Bank, Bangladesh is the seventh largest remittance recipient country in the world. Remittance inflows hit a record $24.77 billion in the 2020-2021 fiscal year, but fell to $21.03 billion the following year.

Bangladesh is listed as one of the 30 leading money laundering countries in the world. Some analysts describe this problem as the cancer of its economy. According to the US-based Global Research Center for Financial Integrity (GFI), Bangladesh is among the countries hardest hit by the scourge of trade-based money laundering. GFI statistics show that Bangladesh launders an average of $7.53 billion each year through international trade.

A recent report by the Swiss National Bank (SNB) stated that “the amount of money deposited by Bangladeshis in various banks in Switzerland amounted to 871.1 million Swiss francs” (about $916.92 million) at the end of 2021. The report reveals that the amount increased by $310 million in one year Just.

At present, Bangladesh has more than $90 billion in foreign debt. Its debt has doubled over the past five years due to the implementation of huge infrastructure projects. These projects, which are part of the Awami League government’s strategy of “more development less democracy”, enabled the university to manipulate and win general elections in 2014 and 2018.

These mega projects could now become a major concern for the government. It will have to find foreign exchange to pay off the debts incurred on these projects.

According to Debabria Bhattacharya, CPD Distinguished Fellow and Advocate of the Citizens Platform for Sustainable Development Goals, “Bangladesh may face major shocks in 2024 and 2026 in terms of repaying its external debt for 20 mega projects.” That amount comes to about $43 billion, owed mostly to Russia, Japan and China.

With an economic crisis approaching, the government of Bangladesh has started taking measures to reduce foreign exchange spending. The Bangladesh Bank has tightened the import policy for luxury and non-essential goods such as sports cars, washing machines, and air conditioners.

Meanwhile, Hasina’s government is reducing the expenses of its officials. Government officials’ foreign trips have been cancelled. They have been asked to cut their electricity use by 20 per cent and limit the number of vehicles they use.

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As part of austerity measures, Hasina called for scheduled power outages across the country, despite her government celebrating 100 percent electricity coverage for the first time in Bangladesh’s history in March. Some power plants have been closed to reduce fuel consumption.

In addition, the government classified its development projects into three groups. Semi-completed projects (Class A) will continue, while Class B projects can only use up to 75 percent of their budget. Category C projects will remain suspended until the economic crisis subsides.

AL government began to take measures in anticipation of an economic crisis. Will you prevent Bangladesh from going the way of Sri Lanka?

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