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Lack of transparency can worsen the economic situation in Bangladesh

By on August 12, 2022 0

No government is perfect and every economy has its share of skeletons in the closet. However, for a democratic nation, Bangladesh has made it a standard to remain opaque in its economic affairs. The lack of transparency is now proving to be the biggest stumbling block for the country to avoid a crisis and get back on the path to growth.

The problem starts with basic economic data. Even a simple question like devaluation has no easy answer. If you take the official Dhaka version based on the interbank exchange, the taka depreciated by 10% from 86.27 to 94.95 between May 4 and August 10.

This is the rate at which the government imports essential products like energy, fertilizers, etc. Naturally, this directly and indirectly affects key macroeconomic fundamentals involving the country’s fiscal position, inflation, foreign reserve adequacy and growth potential.

However, the official rate is a figment of the imagination, as revealed by the recent crisis and which raises questions about the authenticity of many lofty claims Dhaka has made lately.

Between July 21 and August 10, the official value of the taka depreciated by 1.06%, but the (unofficial) brake rates fell by 14% to 120 taka. The gap between official and unofficial rates widened from 12% to 26%. percent.

Between official and unofficial is the rate at which banks open LCs (letters of credit) for private importers. Since July 21, the LC rate has fallen by 6.7%, from Taka 103 to Taka 110.

However, the LC rate is not representative, as Dhaka has imposed heavy import restrictions for almost a month. Moreover, the central bank is doing everything to keep the optics intact. Treasury chiefs of at least six banks were sacked last week, allegedly over high rates.

Lack of transparency

Dhaka blames hoarding for rapidly falling curb rates. But even an undergraduate economics student will understand that the key problem is the lack of transparency. Beyond the field of exchange rates, this is exactly the problem of the Bangladeshi economy, and it is not new.

If the exact value of the import in local currency is not reflected on the government’s books, then who is mitigating the discrepancy? Apparently, the government resorted to this tactic to make its accounts more presentable. But what happened to the monetary and financial system?

Part of the answer is now known. The same government that boasted of an “adequate foreign exchange reserve” and reported GDP figures well above World Bank projections even in the Covid year is now running from pillar to post for the rescue plans.

According to newspaper reports, Dhaka has so far requested support worth $7.5 billion – $4.5 billion from the IMF and $1 billion each from the World Bank, Asian Bank Agency (ADB) and Japan International Cooperation Agency (JICA) – the equivalent of one month’s import bill.

The desperation of Sheikh Hasina’s government can be understood from the recent decisions to increase the prices of urea fertilizers by 25% and the sharp increase in motor fuel prices by more than 50%.

The revision was due as automotive fuel prices in Bangladesh were among the lowest in Asia. However, the whole episode lacked transparency.

Global crude prices surpassed the five-year high in October 2021 and breached the ten-year high in March this year. As a result, pump prices for gasoline and diesel have skyrocketed everywhere. But Dhaka sat happily posting the lowest inflation figures on the subcontinent.

Now that crude prices have fallen 30% in the past two months amid fears of a global recession and inflation, numbers are down in major economies. At such a time, the government of Sheikh Hasina raised car fuel prices on August 6.

There is no way of knowing how the wild devaluation of the taka, the severe import restrictions and the sharp rise in fuel and fertilizer prices are impacting the economy. Growth figures are released once a year and June inflation is pegged at 7.5%, which no one trusts.

Unofficially, everyone can see the impact. Prices are skyrocketing in local markets, and although there hasn’t been much public protest so far as the main opposition Bangladesh Nationalist Party (BNP) has become too weak, people are reportedly furious .

The situation can get worse

Bangladesh is far from safe and the situation could get worse in no time. If this is not reflected in the official data, the fault lies elsewhere. The stock market was in freefall in July. The decline was interrupted by the imposition of artificial barriers (price floor).

Such shortcuts won’t take the economy too far. Beyond the recessionary trends in Western markets, rising costs and the artificially high Taka are rapidly eroding the cost competitiveness of the export-oriented garment industry.

The area is known for its twisted arms. During the first phase of the Covid lockdown in 2020, they sent workers packing to extract cash donations from the government. Such a trick can create a serious problem this time.

Bailout packages could help Bangladesh survive short-term problems. But an in-depth reform is mandatory to avoid the snowball effect of the crisis.

Dhaka has racked up huge debts over the past decade. According ‘Prothom Alo‘, loan agreements worth $36 billion have been signed with China ($17.54 billion), Russia ($11.38 billion) and India ($7.36 billion). dollars). Indian loans are the cheapest.

This goes beyond the huge funding from multilateral agencies in infrastructure projects. Commercial deals — like $1.6 billion of easy Indian financing in the 1,320 MW Maitree ultra-supercritical thermal power plant project in Bangladesh — are extra.

A good part of the loans is intended for prestige projects (read white elephant) like the next nuclear power station of 12 billion dollars of Rooppur. Built with the support of Russia, the production cost of the plant is currently estimated to be 70% higher than that of comparable Indian projects.

China is funding 12 exorbitantly expensive infrastructure projects. Some of them, like the Karnaphuli Undersea Tunnel, have already seen a 20% cost increase, which is the norm in Bangladesh.

Long story short, Bangladesh is looking at an exponential increase in its loan repayment obligations over the next two to three years.

Between FY 2016-17 (FY 2017) and FY 22, the country’s annual repayment (compared to past long and medium term loans) increased by 80% to $2 billion. Exports increased by 30%, indicating a structural strain on the system. According to the World Bank, the stock of external debt to exports ratio was 174 in 2020.

On average, lenders now disburse $4 billion to $5 billion in loans per year. With the end of the grace period for new loans, repayment is now expected to increase sharply.

“Prothom Alo” (August 1, 2022) estimated repayment obligation for FY23 at $2.78 billion (39% YoY), $3.28 billion for FY24 (18% ), $4.02 billion in FY25 (22.5%). Assuming Bangladesh takes no new loans, repayment obligations will peak at $5.15 billion in FY30.

A potential drag force

Over the past decade, Bangladesh and the CLMV region (Cambodia, Laos, Myanmar and Vietnam) have together been seen as a pull factor for the regional economy. The dream is now shattered. Myanmar has exhausted its foreign exchange reserve. Laos is on the verge of collapse and Bangladesh is facing failures.

This is not a happy time for the regional economy. Bangladesh is crucial for India because of its high degree of exposure (total aid including sovereign loans, commercial loans and aid will approach $10 billion), huge exports ($14 billion dollars in 2021) and its geographical location.

Unguided, this economy can be a serious drag on India’s growth ambition. Any disruption in Bangladesh will spill over to eastern and northeastern India in no time. It is therefore imperative that India diversify its economic risks and stop taking Dhaka at face value.

For the regional good, Bangladesh must reform.

Read also : Bangladesh’s finance minister warns countries against lending to Belt and Road projects just days after Chinese foreign minister’s visit