Inflation and turmoil challenge Bangladesh’s ‘miracle economy’ – The Diplomat

Rekha Begum was dazed as she stood in line to try to buy food. Like many others in Bangladesh, it struggles to find affordable daily necessities such as rice, lentils and onions.

I went to two other places, but they told me they had no supplies. “Then I came here and stood at the end of the queue,” said Begum, 60, as she waited about two hours to buy what she needed from a truck selling food at subsidized prices in the capital, Dhaka.

The economic miracle in Bangladesh is under heavy pressure, as rising fuel prices amplify public frustration about the rising costs of food and other necessities. Heavy criticism of the opposition and small street protests have erupted in recent weeks, adding to pressure on the government of Prime Minister Sheikh Hasina, which has requested assistance from the International Monetary Fund to protect the country’s finances.

Experts say Bangladesh’s predicament is hardly as dire as the situation in Sri Lanka, where months of turmoil have prompted its president to flee the country and people suffer acute shortages of food, fuel and medicine, and spend days queuing for essentials. But it faces similar problems: excessive spending on ambitious development projects, public anger over corruption and nepotism, and a weak trade balance.

Such trends are undermining Bangladesh’s impressive progress, fueled by its success as a garment manufacturing hub, toward becoming a wealthier, middle-income country.

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The government increased fuel prices by more than 50 percent last month to counter rising costs due to higher oil prices, which sparked protests over the rising cost of living. This prompted the authorities to order the sale of rice and other staples subsidized by government-appointed traders.

Commerce Minister Tibo Munshi said the final phase of the programme, which began on September 1, is supposed to help about 50 million people.

“The government has taken a number of measures to reduce pressures on low-income people. This affects the market and keeps the prices of daily commodities competitive,” he said.

Policies are a temporary solution to larger global and local challenges.

The war in Ukraine has pushed up prices for many commodities at a time when they were already rising as demand recovers as the coronavirus pandemic wanes. Meanwhile, countries like Bangladesh, Sri Lanka, and Laos – among many – have seen their currencies weaken against the dollar, increasing the costs of imports of oil and other dollar-denominated goods.

To ease pressure on public finances and foreign reserves, the authorities have halted large and new projects, reduced working hours to save energy, and imposed restrictions on imports of luxury goods and non-essential items, such as sedans and SUVs.

“The Bangladeshi economy is facing strong headwinds and turbulence,” said Ahmed Ehsan, an economist and director of the Dhaka-based Institute for Policy Research, a think-tank. “Suddenly we are back in the era of blackouts, with the taka and forex reserves under stress,” he said.

Millions of low-income Bangladeshis, like Begum, whose family of five can barely eat fish or meat even once a month, still struggle to put food on the table.

Bangladesh has made great strides in the past two decades in developing its economy and fighting poverty. Investments in the garment industry have provided jobs for tens of millions of workers, most of whom are women. Exports of apparel and related products make up more than 80 percent of its exports.

But with fuel costs skyrocketing, authorities have shut down diesel power plants that produce at least 6 percent of total production, slashing daily power generation by 1,500 megawatts and disrupting manufacturing.

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Imports rose in the last fiscal year ending in June 2022 to $84 billion, while exports fluctuated, leaving a record current account deficit of $17 billion.

More challenges await us.

Deadlines are fast approaching for foreign loans related to at least 20 massive infrastructure projects, including the $3.6 billion Padma River Bridge built by China and a nuclear power plant mostly financed by Russia. Experts say Bangladesh needs to prepare for increasing repayment schedules between 2024 and 2026.

In July, in a move economists see as a precautionary measure, Bangladesh sought a $4.5 billion loan from the International Monetary Fund, becoming the third South Asian country to request its help recently after Sri Lanka and Pakistan.

Finance Minister Ahmed Mostafa Kamal said the government had asked the International Monetary Fund to start formal negotiations on loans “for the balance of payments and budget aid.” The International Monetary Fund said it was working with Bangladesh to develop a plan.

Bangladesh’s foreign reserves have been declining, which could undermine its ability to meet its loan obligations. By Wednesday, they had fallen to $36.9 billion from $45.5 billion a year earlier, according to the central bank.

Zahid Hussain, a former chief economist at the World Bank’s Dhaka office, said usable foreign reserves would be around $30 billion.

I wouldn’t say that this is a critical situation. This is still enough to meet three months of imports, and three and a half months of imports. But it also means… that you don’t have much wiggle room on the reserve front.

However, despite what some economists say is overspending on some costly projects, Bangladesh is better equipped to weather tough times than some other countries in the region.

Its agricultural sector – tea, rice and jute are major exports – is an effective “shock absorber”, and its economy, four to five times larger than that of Sri Lanka, is less vulnerable to external disasters such as the downturn in tourism.

The economy is expected to grow at a rate of 6.6 percent this fiscal year, according to the latest forecast by the Asian Development Bank, and the country’s total debt remains relatively small.

“I think in the current context, the most important difference between Sri Lanka and Bangladesh is the debt burden, especially the external debt,” Hussain said.

Bangladesh’s external debt is less than 20 percent of GDP, while Sri Lanka’s debt was around 126 percent in the first quarter of 2022.

“So we have some space. I mean debt as a source of pressure on the macro economy is not a big problem yet.

48-year-old Muhammad Jamal, who was waiting in line to buy subsidized food, said he didn’t feel like much space for his family.

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“It has become unbearable to try to maintain our standard of living,” Jamal said. “The prices are out of reach for the general public. It’s hard to live this way.”

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