The Covid-19 pandemic has severely affected the global economy, which has been further disrupted and constricted by the Russia-Ukraine crisis. As a developing country, Bangladesh has not escaped the negative impact. To revitalize the economy, the government adopted a range of measures which have had ripple effects and unwelcome dire consequences that have intensified the socio-economic crisis. Mohammad Rezaul Karim of the Bangladesh Public Administration Training Centre analyzes how Bangladesh is weathering the pandemic-driven and war-worsened economic crisis.
The recovery economy is on the move – but the ride has been anything but smooth: Prime Minister Sheikh Hasina inaugurates the first metro rail service in Dhaka, December 28, 2022 (Credit: Sk Hasan Ali / Shutterstock.com)
A small country without mineral resources other than natural gas and with the eighth biggest population in the world, Bangladesh has flourished as one of the fastest growing economies. The 35th biggest in the world – it reached lower middle-income status in 2015 and is poised to leave the least developed countries list by 2026 – its GDP is expanding by over 7 percent, making it an emerging-market star and pandemic recovery leader.
Yet, the economy is beset by multiple problems including the lingering impact of Covid-19, the effects of the Ukraine crisis, volatility in dollar market, a widening export-import ratio, higher inflation driven in particular by surging energy prices, and increasing unemployment. As the pandemic wore on, Bangladesh pursued a stage-by-stage economic revival strategy, first adopting the humanistic approach – putting people’s survival and health as the top priority – and then gradually moving towards economic reopening, accelerating and expanding exports, reducing imports and imposing austerity measures.
Policy interventions that the government made to address the economic challenges and reboot the economy included taking steps to increase foreign exchange reserves, limiting the supply of local currency, increasing oil prices, offering incentives to encourage inward remittances from abroad, imposing taxes on imported luxury items, and taking out loans from external sources.
The Russia-Ukraine war, which began on February 24, 2022, intensified the pandemic-triggered global socio-economic crisis. Bangladesh did not escape the range of negative effects of the conflict. The global economy entered a new period of uncertainty, particularly because of increasing energy costs, given that sanctioned Russia is the world’s third largest oil-producing country. The Bangladesh government increased the domestic oil price by 50 percent, reducing subsidies. This resulted in savings of about US$8 billion a year.
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.
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.
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.
But these power-saving mechanisms have had negative effects on production, the attempt to reduce imports, and people’s incomes. Longer period of load shedding have become the norm, worsening electricity supplies to industries and hampering people’s daily lives. The government has had to reschedule load shedding to ensure that power is available in certain areas.
To revitalize the economy, stabilize the market and reduce inflation, the government circulated an 11-point declaration aimed at reducing the cost of rural development initiatives. It instructed bureaucrats at the local level to adopt austerity measures to limit spending including the banning of purchases of new vehicles.
All these measures which were deemed necessary but have had intended and unintended consequences have stirred discontent among the people most negatively affected. In December 2022, large anti-government protests erupted in Bangladesh, with tens of thousands marching in the capital Dhaka demanding the resignation of Prime Minister Sheikh Hasina, who has been in office since January 2009. The political opposition, along with civil society organizations staged demonstrations to call for price controls on necessary items.
With a general election scheduled for January 2024, the political climate could become more heated and volatile over this year. The incumbent government in power for 14 years has a track record of strong leadership. It will need to stay the course on major development projects and resolve to ensure that the socio-economic situation in the country does not deteriorate further. Many of its measures to reduce inflation, increase foreign exchange reserves, boost exports and reduce imports did not produce the expected results. The inflation rate has hit record levels creating more pressure on people’s purchasing power and livelihoods.
What is needed is a comprehensive economic plan to control and restore the economy by pursuing strategic interventions at all levels, particularly by applying market mechanism to address the food crisis and increasing social safety net allocations for the poor and low-income people. Economists have emphasized the need for efficient market management through close monitoring and supervision to keep the commodity prices stable as unscrupulous market players may be active in taking advantage of rising prices by stockpiling and creating an artificial crisis. The government must use its foreign currency reserves with care as the import payments may continue to rise and public debt increases due to spending and loans.
Chowdhury, Ashraful Alam. (February 1, 2023) “What Does a New IMF Loan Mean for Bangladesh?”, The Diplomat, Arlington, VA, USA.
Karim, Mohammad Rezaul. (February 8, 2022) “How is Bangladesh streamlining the developmental progress amid pandemic?”, The Daily Observer, Dhaka, Bangladesh.
Khatun, Fahmida. (March 21, 2022) “What the Russian-Ukraine war means for Bangladesh’ economy”, The Daily Star, Dhaka, Bangladesh.
Mohammad Rezaul Karim
Bangladesh Public Administration Training Centre