While the higher fuel price eased the government’s budget shortfall, it led to higher inflation, which had a negative impact on people’s livelihoods. The cost of necessary commodities and goods including edible oil, vegetables and baby foods increased, as did transport fares, accommodation rates, healthcare charges, and school tuition. This happened at the time when the purchasing power of general people was already constricted because of inflation induced by Covid. Most negatively affected were lower-income people, who faced severe difficulties.
Pitfalls of borrowing
The government viewed external borrowing as a key way to revive the economy. The oil price hike met the requirements for the International Monetary Fund (IMF) to open up a new borrowing window that enabled Bangladesh to secure a US$4.5 billion loan. The country has already received the first installment of US$476 million, with six tranches of US$704 million to go. The government was also successful in negotiating a US$6.05 billion loan from the World Bank. External borrowing is seen as the means to revive the economy.
The loans, however, came with conditions such as maintaining a minimum level of net foreign reserves, a minimum level of domestic revenue collection, and a ceiling on the government’s budget deficit, as well as implementing structural reforms in financial sector governance, fuel pricing, and banking and corporation laws. The government has had to set up an asset management company to dispose of non-performing loans. These measures, while beneficial in terms of improving public finances and the resilience of the financial sector, heightened pressure on the purchasing power of citizens.
The government was also strongly advised to cut unnecessary spending on development projects by shelfing low-priority public works. In an effort to reduce public expenditure further, the government placed restrictions on foreign study tours by officials and state-owned institutions. In the 2020-21 fiscal year, this produced saved the government US$250 million but was a significant blow to public-sector capacity building.
The government also levied import taxes on 300 luxury items including cars, air conditioners, cosmetics, flowers, fruits and furniture, and on a range of finished goods such as ICT products. The effort to give a boost to local industries has failed as yet to produce new employment opportunities. The unemployment rate has been rising.
Impact of the Ukraine crisis
Meanwhile, as the Ukraine-Russia war has raged, the resulting higher oil and gas prices have severely hampered electricity production, consumption and costs in Bangladesh, where 52 percent of the electricity is produced from natural gas. To save electricity, government has taken some initiatives including shortening office hours, fixing air conditioners thermostats to below 25 degrees Celsius in offices, and controlling power use in social establishments.