| Welcome to Global Village Space

Tuesday, July 16, 2024

How Bangladesh is handling economic turmoil

Bangladesh is seeking a zero-interest loan of more than $1 billion from the World Bank in addition to the IMF as part of a wise policy. To aid lower-middle-income nations like Bangladesh in coping with pandemic shocks, the World Bank has for the first time opened up the short maturity lending window without interest.

There is no denying that Bangladesh’s economy is under stress, but it is not in a critical situation. Bangladesh is not an exception to the global economic turmoil that has been caused by everything from the Covid-19 pandemic to the most recent invasion of Ukraine. Despite being the 41st largest economy in the world with a $416 billion GDP and one of the fastest growing economies, Bangladesh’s balance of payments and current account deficit have been hampered by the tension in the world and rising food and fuel prices.

The Bangladeshi government has implemented national austerity measures to limit the flow of foreign reserves, which have already had a good impact on the economy.

Read more: Takeaways from Bangladesh’s leadership

Understanding the matter better

Bangladesh Bank (BB), the country’s central bank has introduced a policy that required importing luxury and non-essential items requires a margin of at least 75%, Provisional figures from BB show that the number of new LC (Letter of Credit) openings decreased by 31% in July, resulting in a reduction in the payment pressure on imports.

Remittance inflow grew by 12% to $2.09 billion in July, the first month of the new fiscal year 2022–2023, from $1.83 billion in July of the fiscal year 2021–2022. According to BB officials, the government’s policy of increasing monetary incentives for remittance senders caused a rise in remittance inflow. In July, Bangladesh’s foreign reserves were $40 billion. Honorable Prime Minister Sheikh Hasina claimed that her nation’s current foreign exchange reserves could cover 6 to 9 months’ worth of import costs.

To reduce the expense of importing fuels, the Bangladeshi government prioritizes industrial areas for planned load shedding. Bangladesh now has sufficient fuel supplies, therefore there is no need to be concerned, according to the chairman of the state-owned Bangladesh Petroleum Corporation (BPC).

Import schedules have also been set for the upcoming six months

Due to the volatile European market – the largest export destination of Bangladeshi garments export, the government is planning to diversify the export basket with the export destinations.

Despite all pre-planned successes in tackling the global negative wave towards the economy, the recent seek for a $4.5 billion IMF loan by Bangladesh caught the frown of critics citing the Sri Lanka syndrome and the Pakistan paradox.

There is little point in contrasting Bangladesh’s economy with those of Sri Lanka or Pakistan, two of its neighbors in south Asia. Sri Lanka, a struggling south Asian neighbor of Bangladesh, is in desperate need of an IMF loan to survive due to its depleted foreign reserve ($1.92 billion) and skyrocketing inflation (60.08 percent). Pakistan, another neighbor, is also experiencing a high-tension economy with depleted foreign reserves ($8.57 billion) and hard-hitting inflation (24.93 percent).

But many of us are puzzled as to why Bangladesh, like Pakistan and Sri Lanka, is seeking an IMF loan when it has $39.79 billion in foreign reserves and an inflation rate of 7.48 percent. According to officials, Bangladesh is considering an IMF loan as a preventative measure rather than to put pressure on the economy. A. H. M. Mustafa Kamal, the finance minister of Bangladesh, stated that the nation has applied to the IMF to begin a formal negotiation to receive loans for balance of payments and budget assistance, despite the fact that its macroeconomic condition was “no way in a crisis.” The amount of assistance will be discussed as part of the program design. Bangladesh is not in a crisis, and because its external debt is just about 14% of GDP, it is “quite different from numerous countries in the region,” according to Rahul Anand, division chief in the Asia and Pacific Department of the IMF.

Read more: Pakistan’s trade race with India and Bangladesh!

“The main reason to seek a loan from the IMF is to create some buffer in the foreign exchange reserves,” said Zahid Husain, a former lead economist at the World Bank in Dhaka. “The IMF support comes in the form of balance of payments support and maybe some budget support as well, which will boost foreign reserve that is not tied to any specific expenditure.”

If the government pays attention to necessary reforms, budget support from the IMF will be available before the country falls into any crisis, according to Ahsan H. Mansur, former IMF official and executive director at the Policy Research Institute. Once the crisis begins, he said, it will be difficult to get support.

Government’s strategies

Officials from the Economic Relations and Finance Division said that the government will borrow money from the Extended Credit Facility, Extended Fund Facility, and Resilience and Sustainability Facility of the IMF. On the loan obtained through the Extended Credit Facility, there are no fees of any kind, not even interest. Bangladesh will have 5.5 years of grace to pay back this loan over a 10-year term. Two other packages have interest rates that range from 1.54% to 1.794%.

Bangladesh is seeking a zero-interest loan of more than $1 billion from the World Bank in addition to the IMF as part of a wise policy. To aid lower-middle-income nations like Bangladesh in coping with pandemic shocks, the World Bank has for the first time opened up the short maturity lending window without interest. Under the 20th International Development Association replenishment (IDA20), the largest financing package to date totaling $93 billion, the loan window will be available for three years, from July 2022 to June 2025. Twelve years are allotted for repayment, including a grace period of six years. An IDA member country will be able to borrow up to 25% of the IDA20 package’s funds in the form of short-term loans.

Bangladesh has began working to obtain the zero-interest loan as soon as possible because the IDA20 package will go into effect in July and the country will leave the list of least developed nations in 2026. If the loan is secured and used in the initial phase, there will be a chance to receive more from the fund that will remain unused for not taken by other IDA members.

Read more: How Bangladesh outpaced India and Pakistan economically?

Bangladesh has a Ba3 credit rating and has never previously missed a payment on an international obligation. Due to Sri Lanka’s delay in requesting a loan, they suffered a significant loss; Pakistan did so after a serious problem began. While Bangladesh is taking a calculated, preventative approach to benefit from loans from the IMF and World Bank to ease the pressure on its foreign reserves in light of a potential future global crisis.

 

 

The writer is a Researcher and freelance writer (Economic Affairs) based in Dhaka, Bangladesh. The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy.