After the collapse of the Sri Lankan economy, attention has turned to the state of affairs in other South Asian countries such as Pakistan, Bhutan and Bangladesh. All three countries have either curtailed imports or are planning to do so, to salvage their fast-depleting foreign exchange reserves and avoid a Lanka-like forex crisis.
While the presence of Pakistan, which is deeply indebted to China like Lanka, and tourism-dependent Bhutan has taken a massive blow from the pandemic-induced travel restrictions on the list of troubled economies is not surprising, that of Bangladesh is. Just last year, the tiny nation was celebrated for beating India in per capita income.
And the UN decided to graduate it from the least-developing country category to the developing country grouping by 2026.
Bangladesh seems to have lost that momentum as Dhaka is now beseeching the IMF for a $4.5 billion bailout package to tide over its deepening economic crisis.
It has also knocked the doors of the World Bank and Asian Development Bank seeking immediate relief of $1 billion from each.
So, what went wrong? Bangladesh’s $ 416 billion economy is heavily dependent on its garment industry which survives on exports mostly to Europe, the US and Latin American countries.
It has been supporting the country’s growth for years but things changed dramatically following the Ukraine war pushing the prices of everything up. In response to the soaring energy prices, the Sheikh Hasina-led government was forced to introduce scheduled outages that directly impacted the textiles industry which relies on an uninterrupted power supply.
On the other hand, demand also dwindled as retailers in the US and European markets — the biggest customers of Bangladesh’s garment products — started holding or cancelling orders due to disruptions and uncertainties in their own economies due to the war in Ukraine.
According to the latest available data, Bangladesh’s foreign exchange reserves stand at $39.67 billion as of July 20, which is sufficient for just four months’ worth of imports — slightly higher than the IMF’s recommended three-month cover.
Just for comparison, the forex reserves were $ 45.5 billion in the year-ago period.
The country is reeling under inflation, too. In June, price rise hit a nine-month high of 7.56%, taking the average inflation for 2021-22 to 6.15%, overshooting the revised annual target of 5.9%.
Bangladesh’s imports stood at $81.5 billion between July 2021 and May 2022, up 40% from a year earlier, according to Bangladesh Bank data.
As a result, the current account deficit — the shortfall between exports and imports — widened over six times to $17.2 billion in the first 11 months of fiscal 2021-22.
While the Bangladesh finance minister A H M Mustafa Kamal is confident that the IMF aid will help the country tide avoid a crisis, such bailouts always come with strings attached. The Washington-based multilateral lender is known to put stringent conditions for its loans.
According to a report in The Daily Start newspaper, the conditions could include withdrawal of energy subsidies, implementing a fuel pricing mechanism, removing interest rate caps on lending and borrowing, resetting the mechanism to calculate foreign currency reserves, taking steps to increase revenue base, and strengthening corporate governance in the banking sector.
Of these, removing energy subsidies for consumers will be a major challenge for the government as it could trigger public anger. Negations on this clause is likely to drag the process.
Obtaining IMF loans is a long process. An IMF delegation is expected to visit Dhaka in September to discuss the terms and conditions.
By December, the deal is expected to be locked in for placing at the IMF’s board meeting in January. The question is, will Dhaka be able to manage things till then.
After the collapse of the Sri Lankan economy, attention has turned to the state of affairs in other South Asian countries such as Pakistan, Bhutan and Bangladesh. All three countries have either curtailed imports or are planning to do so, to salvage their fast-depleting foreign exchange reserves and avoid a Lanka-like forex crisis.
While the presence of Pakistan, which is deeply indebted to China like Lanka, and tourism-dependent Bhutan has taken a massive blow from the pandemic-induced travel restrictions on the list of troubled economies is not surprising, that of Bangladesh is. Just last year, the tiny nation was celebrated for beating India in per capita income.
And the UN decided to graduate it from the least-developing country category to the developing country grouping by 2026.
Bangladesh seems to have lost that momentum as Dhaka is now beseeching the IMF for a $4.5 billion bailout package to tide over its deepening economic crisis.
It has also knocked the doors of the World Bank and Asian Development Bank seeking immediate relief of $1 billion from each.
So, what went wrong? Bangladesh’s $ 416 billion economy is heavily dependent on its garment industry which survives on exports mostly to Europe, the US and Latin American countries.
It has been supporting the country’s growth for years but things changed dramatically following the Ukraine war pushing the prices of everything up. In response to the soaring energy prices, the Sheikh Hasina-led government was forced to introduce scheduled outages that directly impacted the textiles industry which relies on an uninterrupted power supply.
On the other hand, demand also dwindled as retailers in the US and European markets — the biggest customers of Bangladesh’s garment products — started holding or cancelling orders due to disruptions and uncertainties in their own economies due to the war in Ukraine.
According to the latest available data, Bangladesh’s foreign exchange reserves stand at $39.67 billion as of July 20, which is sufficient for just four months’ worth of imports — slightly higher than the IMF’s recommended three-month cover.
Just for comparison, the forex reserves were $ 45.5 billion in the year-ago period.
The country is reeling under inflation, too. In June, price rise hit a nine-month high of 7.56%, taking the average inflation for 2021-22 to 6.15%, overshooting the revised annual target of 5.9%.
Bangladesh’s imports stood at $81.5 billion between July 2021 and May 2022, up 40% from a year earlier, according to Bangladesh Bank data.
As a result, the current account deficit — the shortfall between exports and imports — widened over six times to $17.2 billion in the first 11 months of fiscal 2021-22.
While the Bangladesh finance minister A H M Mustafa Kamal is confident that the IMF aid will help the country tide avoid a crisis, such bailouts always come with strings attached. The Washington-based multilateral lender is known to put stringent conditions for its loans.
According to a report in The Daily Start newspaper, the conditions could include withdrawal of energy subsidies, implementing a fuel pricing mechanism, removing interest rate caps on lending and borrowing, resetting the mechanism to calculate foreign currency reserves, taking steps to increase revenue base, and strengthening corporate governance in the banking sector.
Of these, removing energy subsidies for consumers will be a major challenge for the government as it could trigger public anger. Negations on this clause is likely to drag the process.
Obtaining IMF loans is a long process. An IMF delegation is expected to visit Dhaka in September to discuss the terms and conditions.
By December, the deal is expected to be locked in for placing at the IMF’s board meeting in January. The question is, will Dhaka be able to manage things till then.
