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Bangladesh - January 1, 2024

Geopolitical conflicts increase pressure on Bangladesh economy

Rabiul Haque: In the new year, the overall economy of the country will face new challenges. Bangladesh will be under geo-economic pressure especially due to geo-political conflicts. Already this pressure has started coming in limited form. In the coming days, this pressure may increase through various processes. Such pressure will increase as the upcoming national elections are not participatory. Dealing with this pressure will be the biggest challenge for the economy. The most negative impact is on exports. As a result, the pressure on reserves will increase. There will be volatility in the dollar market. Apart from this, foreign investment, employment, and trade may also have a negative impact.
At the same time, the policy of reducing the flow of money in the market should be tightened to control the rise in inflation in the country and to implement the terms of the International Monetary Fund (IMF) loan. Interest rates should be increased further. The exchange rate of money against the dollar should be left to the market. This will increase the value of the dollar. As a result, the cost of the industry will increase and the price of the product will also increase. All these will increase the suffering of especially low- and middle-income people.
But hopefully, the downward trend in inflation may moderate by March. Remittances may increase throughout the year. However, inflation may increase again from April. Prices of rice, sugar, fuel are increasing in the international market. Due to these effects, the price of products may increase in the country’s market. Instability may increase in the garment industry, the main export sector.
These data were obtained by analyzing the reports of Bangladesh Bank, IMF and international credit rating agencies. These reports have recently been published by the concerned agencies.
According to sources, there is a disagreement with the current government with the United States, United Kingdom, European Union, Australia, Canada on the issue of upcoming national elections. They want a participatory election. They do not consider the upcoming elections to be participatory. With this, the United States has threatened to impose visa bans, trade sanctions on the issue of undermining labor rights. There is widespread talk that such a ban could come after the elections. Due to such an attitude of the United States, there is a danger that Bangladesh’s economic activities with its allies European Union, Canada and Australia will come under question. The country’s economists and civil society have already warned about this.
According to recent Central Bank reports, the United States used to be the top recipient of remittances. Now down to fourth place. Remittances fell by 41 percent. The single largest exporter is the United States. Income from the country fell by 7 percent. Imports from the US fell by 46 percent. Their investment in Bangladesh has decreased by 4 percent. Along the way of the United States, it may also affect its allies. However, exports have decreased due to the domestic policies of their countries. Investments have fallen in the global recession. Imports of Bangladesh decreased due to dollar crisis.
According to a recently published report of the Central Bank, Bangladesh is under the pressure of geopolitical conflicts for the first time. Its negative impact has not yet hit the economy. But the economy is under pressure. They mentioned that steps should be taken with caution in this regard.
A large part of Bangladesh’s foreign trade is done with the United States, Canada and the European Union. Most of the foreign investment in Bangladesh came from these two regions. About 82 percent of exports go to these countries. On the other hand, 72 percent of imports are coming from India and China. Majority of remittances are coming from those regions.
Those concerned think that most of the foreign exchange income is coming from America and Europe. And they are being spent more in China and India. Income can be spent. If there is no income, spending will not be possible. In this regard, the government should proceed cautiously.
In this context, former president of Bangladesh Economics Association and former professor of Economics Department of Chittagong University Moinul Islam said that preparations should be made to face two types of challenges in the economy. One is to address ongoing challenges. These include increasing reserves, stabilizing the dollar, controlling inflation – these will be difficult to control. Because increasing remittances and exports will not be easy. If it does not increase, the reserves will have to be tapped to meet the import costs. Then the loss of reserves will increase. The price of the dollar will also increase. Then the inflation rate will rise. To deal with this situation money smuggling from the country should be stopped urgently. The price of the dollar should not be allowed to rise in any way in the country’s existing crisis. All sectors of the economy are affected because of the dollar.
He also said that if there are any restrictions due to political reasons in the post-election period, then there will be a big problem. Care should be taken to ensure that no such ban comes.
The implementation of the IMF’s loan conditions in the new year will appear as a new dagger. Because, although it is not possible to implement the previous conditions, the company released the second installment of the loan by relaxing the conditions. The third installment is scheduled to be released in June and the fourth in December. Before this, some strict conditions of the loan have to be implemented. Among these are tightening the flow of money through contractionary monetary policy, increasing interest rates, leaving the dollar exchange rate entirely up to the market, and increasing revenue. These steps will have an immediate negative impact on people’s livelihood. But may be somewhat positive in the long run. Credit flow will decrease due to reduction in money flow. As a result, the manufacturing sector will suffer.
The dollar crisis has been going on for almost two years. This is hampering commercial imports. As a result, import dependent industries have been adversely affected. Its intensity may increase further this year. Meanwhile, the import of medical equipment, industrial machinery, raw materials, intermediate raw materials, commercial products, manufactured products, essential products is being obstructed. Due to dollar crisis, many institutions including Bangladesh Petroleum Corporation (BPC) are not able to pay their import and related liabilities. As a result, the supply of these products has decreased again. Due to these reasons the production of the industry is already in a downward trend. There may be more negative impact in this sector this year.
As the flow of credit to the business sector declines, consumption will increase due to the policy of reducing the flow of money into the market and raising interest rates. This will hinder new investment. The IMF has recommended that the policy be tightened and continued. As a result, following these policies in the next year will increase the negative impact on business. It will reduce the new industrial business. As a result, there will be a negative impact on employment. However, on the occasion of the upcoming election, Awami League’s election manifesto has promised to increase employment. In this context, the central bank said, despite the contractionary monetary policy, the supply of credit to the manufacturing sector is being increased.
In this context, the executive director of the Policy Research Institute (PRI) Ahsan H. Mansoor said that major reforms should be brought in the economy after the election. Remittance should be increased. New export markets should be explored. Inflation should be reduced. If not, the suffering of low- and middle-income people will not be reduced.
He also said that there is some apprehension in the economy due to geopolitical reasons. Reforms must continue to address these concerns. Then the geopolitical pressure will reduce to some extent.
According to sources, net foreign exchange reserves will have to increase further this year to meet IMF conditions. But there is no dollar surplus after clearing the import and foreign debt liabilities with the foreign currency earned from exports and remittances. As a result, the central bank is not able to take dollars in reserve. This trend has been going on since August 2021. There is no prospect that there will be a surplus of dollars to meet the expenses this year as well. As a result, it will be difficult to add dollars to the reserves this year as well. Increasing the reserves will also be challenging. On the other hand, essential goods including fuel must be imported with dollars from the reserve. This will increase the loss of reserves. But the IMF said the reserves could not be depleted any further.
Former Chief Economist of World Bank’s Bangladesh Residential Mission Zahid Hossain said that the challenges in the economy will remain. They must be faced and moved forward. The economy will be better in the new year than the last year unless there is a big shock due to geopolitical reasons. Globally, interest rates will no longer increase, but will decrease, and commodity prices will also decrease. 2024 will be better than 2023. It will have a positive impact on the economy of Bangladesh. But the condition of the fragile banking sector could worsen. The dollar price should come out of the way it is. Then stability can come in the market.
He also said that control over the market should be increased to control the rate of inflation. Red card should be arranged against product syndicates.
According to sources, according to the IMF conditions, the exchange rate of the dollar should be market based. This will increase the price of the dollar. Then the value of money will decrease and pressure on inflation will come. This will increase the suffering of low- and middle-income people.
New volatility has been added to the dollar market at the end of the off year. Central bank control over the market is very loose. Because, the dollar is not being sold in the bank at the fixed rate. Tk 12 to Tk 16 more dollar is being traded. Through this, the central bank is walking towards leaving the dollar price to the market.
The inflation rate is still 9 and a half percent. Among them, the food inflation rate is 10.76 percent. Food inflation has been above double digits since last August. Due to the decrease in the prices of various products including fuel in the international market, this rate will decrease slightly this year, the central bank has predicted.
The government has planned to automatically adjust fuel oil prices in line with the international market from March under the terms of the IMF. If this is implemented, the price of fuel oil will increase further. Then the inflation rate will rise again. There are multi-faceted challenges in inflation this year as well.
The report of the central bank has indicated that there was a mixed trend in the outgoing year in the banking sector. From this year, various discounts are increasing in repayment of loans. Meanwhile, due to the recent political agitation, business has suffered a lot. Due to global recession and geopolitical pressure, the repayment capacity of entrepreneurs may be reduced and debt collection may be hindered. It is feared that defaulted loans will increase. However, according to the IMF’s conditions, defaulted loans should be reduced.
Repayment of foreign debt has emerged as another major challenge. In the outgoing year too, the pressure on the reserves has increased to repay short, medium and long term loans. This pressure will increase in the new year. Because, the debt that was postponed earlier has to be paid now. Long-term debt is the most to be repaid in the current year. Short-term debt standing is $1.5 trillion. Almost all of it has to be paid. In this, some loan repayment period of back to back LCs has been extended till next June. As a result, if these loans come due after June, the pressure on the reserves will increase. All in all, there is no sign of relief in the reserve and dollar market this year.

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