Finschool By 5paisa

FinSchoolBy5paisa

Bangladesh needs IMF to overcome Deficit

Bangladesh

Bangladesh has sought a $4.5 billion loan from the International Monetary Fund. It has joined South Asian Neighbors Pakistan and Sri Lanka in seeking help from IMF.

Before we get in to this topic Lets Understand Bangladesh Economy

  • Bangladesh is  characterized as a developing market economy. It is the 41st largest in the world in nominal terms .
  •  It is 30th largest by   purchasing power parity , international dollars at current prices.
  •  It is classified among the Next Eleven emerging market middle income economies and a frontier market. In the first quarter of 2019, Bangladesh’s was the world’s seventh fastest-growing economy with a real GDP or GDP at constant prices annual growth rate of 8.3%.
  • Bangladesh also has substantial reserves of natural gas and is Asia’s seventh largest gas producer. It also has large deposits of limestone.
  • Bangladesh is strategically important for the economies of Nepal and Bhutan, as Bangladeshi seaports provide maritime access for these landlocked regions and countries.

How Bangladesh has grown over the years?

  • Bangladesh has an impressive track record of growth and development.
  • It has been among the fastest growing economies in the world over the past decade, supported by a demographic dividend, strong ready-made garment (RMG) exports, remittances, and stable macroeconomic conditions.
  • The country made a strong economic recovery from the COVID-19 pandemic.
  • With nearly 6.9 million girls in secondary schools in 2020, Bangladesh is among the few developing countries to achieve gender parity in school enrollment and has more girls than boys in secondary schools. Improving the quality of education at all levels remains the largest challenge for Bangladesh.
  • Despite high population density, decreasing arable land, and frequent natural disasters, Bangladesh has made remarkable progress in achieving food security and reducing poverty.
  • Almost half of the population are employed in the agriculture sector.
  • In Chattogram, the second largest city in Bangladesh, almost 780,000 people now have access to water supply, including those in the urban slums.
  • With IDA support, Bangladesh introduced an electronic government procurement (e-GP) system in 2012 that transformed the public procurement process into one that is more efficient, transparent, and accountable.
  • Bangladesh spends about $25 billion on public procurement annually—equivalent to roughly 40% of its annual budget—the country’s e-GP system has contributed to average annual savings of $1.1 billion, enough money to build over 10,000 km of rural roads or 8,000 primary schools.
  • The Bank has been a long-time partner, providing financing and technical support to help Bangladesh strengthen and modernize social protection programs.
So what went wrong at Bangladesh?
  • Bangladesh’s foreign exchange reserves fell to $39.67 billion as of July 20 – sufficient for 5.3 months’ worth of imports – from $45.5 billion a year earlier.
  • Reserves had fallen nearly 10% to $41.82 billion at the end of June from over $46 billion a year earlier.
  • Bangladesh’s central bank has said a decline in the inflow of remittances by Bangladeshi workers and a rise in import payments have put pressure on the foreign reserves, leading to a depreciation of the country’s Taka currency.
  • The central bank spent nearly $5.7 billion in 11 months through May of the 2021/22 fiscal year trying to support the Taka.
  • Foreign direct investment flows declined 18.65% to $888.5 million during the Jan-March period from a year earlier.
  • The trade deficit widened to $27.2 billion in the July 2021-May 2022 period as imports surged to nearly $59 billion while exports rose at a slower pace to $31.5 billion.
  • Retail inflation hit an 8-year high of 7.56% in June, driven by rising food and energy prices following a spurt in global commodity prices after Russia’s invasion of Ukraine in February.
  • Remittances from overseas Bangladeshis fell 5% in June to $1.84 billion, the central bank said, as many migrant workers lost their jobs because of the COVID-19 pandemic.
  • Prime Minister Sheikh Hasina has imposed curbs on imports of luxury goods such as sedan cars, gold jewellery and non-essential items, and on fuel imports including liquefied natural gas (LNG) despite frequent “load-shedding” to contain capital outflows.

Challenges for Bangladesh

  • Production and distribution of goods and services was repeatedly disrupted over the past two years. As a result, shortage of supply has been observed in almost all sectors of the economy. The ongoing economic and political instability in the international arena, especially the protracted Russia-Ukraine war, has severely disrupted the supply chain again.
  • Consequently, prices of industrial and essential consumer goods, including raw materials, have skyrocketed worldwide. The same is observed in Bangladesh.
  • The country imports fuel and foodstuffs such as wheat, edible oil from Russia and Ukraine. The Consumer Price Index (CPI) rose from 6.17 per cent in February 2022 to 6.22 per cent in March, the highest since October 2020.
  • However, the real inflation is believed to be much higher than the officially stated rate because the food basket, based on which current inflation is calculated, has changed in the last couple of years.
  • Hence, the government of Bangladesh must fight the soaring inflation if it aims to avoid a nationwide drop of purchasing power.
  • Second, the country has been experiencing a tumultuous foreign exchange rate, which is closely linked to inflation. The upward trend in the value of US$ against Bangladeshi Taka (BDT) is currently at the center of discussion in the country.
  • When inflation rises, the purchasing power of the domestic currency decreases. Like other markets, the value of the dollar against BDT rises when the demand for the dollar in the domestic market increases. At present, the primary reason for the increase in demand for dollar is the mounting import costs due to the upward trend in the prices of major commodities.
  • On the other hand, despite the boom in export earnings, Bangladesh’s export items are limited. The readymade garments sector is certainly the largest sector for earning foreign currency. However, the value added of the readymade garments sector is not that high.
  • Therefore, to get all the benefits from the ready-made garment sector, the country can emphasize on setting up backward and forward linkage industries.
  • Remittance remains a noteworthy and stable source of foreign currency for the country. However, a large number of expatriate Bangladeshis returned to the country during and following the pandemic. As a result, foreign remittance inflow dwindled significantly.
  • Compared to 2020, the expatriate income has increased by only 2.2 per cent in 2021, amounting to US$22 billion.
  • Moreover, monthly remittance inflows have been declining since the beginning of 2022, except for the month of Ramadan, which usually experiences an influx of remittance during the festive month.

Bangladesh seeks help from IMF

  • Bangladesh has formally requested for a USD 4.5 billion loan from Washington-based multilateral lender International Monetary Fund (IMF) to combat the ongoing financial crisis in the country.
  • Bangladesh asked for loan from the IMF in view of rapidly declining foreign exchange (Forex) reserves.
  • In a letter to IMF Managing Director Kristalina Georgieva, the government sought the loan as a balance of payment and budget support as well as to mitigate the effects of climate change on Bangladesh.
  • According to Finance Ministry officials, USD 1.5 billion of the USD 4.5 billion, which the country has sought to mitigate the on-going crisis, would most likely be interest-free and the remaining amount would come at an interest less than 2 per cent.
  • An IMF mission is expected to visit Bangladesh in September to negotiate the terms and conditions for the loan.
  • A deal is expected to be locked by December, and to be placed before the global lender’s board meeting in January, the officials added.
  • Renowned economist Debapriya Bhattacharya, however, said Bangladesh will have to go through several conditions to get a loan from the multilateral lender, which puts harsh conditions in front of the borrower country to get the loan.

Recommendations by IMF

  • The IMF has recommended removing the interest rate caps on lending and borrowing. Apart from a market-based floating exchange rate of Taka or foreign currency exchange rate system, the organisation has also suggested resetting the methodology on foreign currency reserves.
  •  In South Asia, Sri Lanka, facing its worst economic crisis in seven decades, is currently in negotiations for an IMF bailout.
  • The island nation ran out of foreign currency to import, even its most vital essentials, triggering long queues at petrol stations, food shortages and lengthy power cuts.
  • Pakistan, whose foreign exchange reserves are rapidly depleting, reached an agreement with the IMF earlier this month to pave the way for the release of an additional USD 1.2 billion in loans and unlock more funding.
View All