The head of the International Monetary Fund made headlines this week, by saying the global economy has shown "remarkable resilience'' but still bears deep scars from the coronavirus pandemic, the war in Ukraine and rising interest rates.

"While the recovery from the shocks of the past few years continues, it is slow and it is uneven,'' IMF Managing Director Kristalina Georgieva said in a speech in Abidjan, Ivory Coast, ahead of next week's fall meetings of the IMF and the World Bank.

Global economic growth is likely to remain well below the 3.8% average of the past two decades and the world has lost $3.7 trillion in economic output from successive shocks since 2020, Georgieva said.

The government is hoping to return the economy to its pre-COVID growth momentum by the end of the current fiscal (2023-24), although that presents a significant challenge in the face of a clutch of economic headwinds.

Meanwhile the Bangladesh government's vision for economic recovery is outlined in the "Medium Term Macroeconomic Policy Statement 2023-24 to 2025-26," prepared by the Macroeconomy Wing of the Finance Division, under the Finance Ministry.

It maintains that with the onset of the pandemic in 2020, the economy was knocked off its fast-paced growth trajectory for large parts of the last three years. The first confirmed cases of Covid-19 in Bangladesh were reported in March 2020, less than three months after the outbreak in Wuhan.

Recently published quarterly GDP data (in keeping with a condition set by the IMF) bears this out. It reveals that the economy contracted by a massive 7.86 percent in the last quarter of the 2019-20 fiscal (April to June 2020), as the virus spread throughout the globe.

According to the quarterly data released retrospectively by the Bureau of Statistics (BBS) last month, GDP had grown by between 6.5 to 8 percent in the first three quarters of 2019-20. That reflects the extent to which the wind was knocked out of the economy by the negative growth (contraction) in the fourth quarter.

The slump induced by Covid would keep economic performance depressed through the first two quarters of the next fiscal (2020-21). It wasn't until the 3Q (January to March, 2021) that the first signs of a recovery would become visible.

As the 2021-22 fiscal kicked in, Bangladesh looked ready to put Covid-19 behind it, having implemented a successful vaccination programme and lifted lockdown restrictions. The economy rallied robustly, and GDP growth touched 10 percent in the third quarter (January to March 2022).

Yet even as the recovery was underway, the seeds for it to stumble were sown halfway across the globe, with Russia going to war in Ukraine in February 2022. The resulting volatility in international energy markets and supply chain disruptions would knock the momentum out again of the country's post-Covid recovery.

Although there was nothing like the contraction precipitated by Covid-19, the economy did experience a severe slowdown in the last quarter of FY22, slipping to just 2.6 percent from the previous quarter's high of 10 percent.

"Bangladesh also braced for impacts on its economy. However, actual data shows that Bangladesh did impressively even during the height of the Covid-19 outbreak and is expected to return to pre-Covid growth trajectory by the end of FY 2023-24," the statement surmises.

If everything goes according to plan and 'assumptions hold', it says that 8 percent GDP growth rate can be attained again in 2025-26. "Therefore, the deviation of the actual from the planned growth envisaged in the 8th FYP (Five Year Plan) remained small," it said.

The Macroeconomic Policy Statement mentions capital accumulation is key for development and hence the government aims to foster private investment along with public investment towards fulfilment of its goals.

Total investment in FY 2021-22 stood at 32 percent of GDP in which the contribution of the private and the public sectors were 24.5 and 7.5 percent, respectively. To achieve the long and medium-term growth targets, the level of investment will need to be increased further.

The statement points out that there is room to increase the implementation rate of public investment. If the pace of implementation of development projects can be increased, the required level of investment can be attained.

"Recognising this, the government has taken steps to bring about some structural changes in both project design and implementation levels," it says in the statement.

The Finance Division document said that the Russia-Ukraine war has put global energy supplies at risk. Russia is a major global supplier of energy and hence when the war broke out, commodity prices spiked fast.

Bangladesh started to suffer from this like almost all other countries. By December 2022, point-to-point inflation rose to 8.7 percent and then further rose to 9.3 percent by March 2023.

However, global commodity prices are already falling, and central banks have raised policy rates and because of this it is expected that inflation will come down in the coming months.

The IMF has projected that the measures taken by the governments will help reduce inflation in the medium-term. The Finance Division has projected that average inflation will fall significantly to 6.0 percent in 2023-24, although there has been no indication of it through the first quarter (July to September).

In order to tame inflation and protect the incomes of the poor, the government has emphasised increasing the domestic production of essential items, while gradually tightening monetary policy.

The document states axiomatically that food inflation hurts the poor the most. Keeping this in mind, the government through various measures, including subsidies and incentives, encouraged the growth of agricultural output.

To support the agriculture sector, disbursement of credit to the sector has been increased.

By the end of February 2023, the disbursement of agricultural credit and non-farm rural credit amounted to Tk. 210.66 billion in the first 8 months of the last fiscal, which was almost 14 percent higher, year on year.

With the help of supportive policies of the government, the general index of industrial production (medium and large-scale manufacturing) has been on the rise, reflecting expanded industrial production.

Dr Masrur Reaz, a prominent economist and public policy analyst, believes it would be very challenging to regain the pre-Covid momentum within the current fiscal, since a number of macroeconomic indicators have become unstable.

Talking to Dhaka Courier, he suggested the government focus on stabilising the macroeconomic situation first, which would make the economy more sustainable in the long run.

Dr Reaz pointed out that high inflation, severe foreign exchange/dollar crisis preventing, among other things, opening of LCs, and the fluctuating value of domestic currency taka, should be resolved first.

"To bring the economy back to its pre-Covid growth rate, these issues should be resolved first, which itself would be very challenging and difficult in a short time," he opined.

Explaining further, Dr Reaz said: "The time is to stabilise the economy rather than focus on growth. In the long run, the economy will grow through reducing the high rate of non-performing loans, keeping inflation within reasonable limits and achieving exchange rate stability."

All the Fund's concerns

The International Monetary Fund staff mission, in Dhaka to carry out a scheduled assessment, raised four burning issues in their meetings with the Bangladesh Bank and the Finance Ministry. During the meetings, the IMF mission, led by its chief Rahul Anand, presented reports in which they highlighted the government's progress under the $4.7 billion loan programme and also the country's recent economic development.

At the meetings, the IMF team wanted to know the reasons behind Bangladesh's high inflation rate when many countries around the world managed to bring down their price levels. The concerns were raised mainly focusing on the dwindling foreign currency reserves, persistent inflation, the state of the banking sector and the lag in revenue collection.

In the first three months of the fiscal year, inflation averaged 9.75 percent, according to data from the BBS. Finance Ministry officials, led by Finance Secretary Khairuzzaman Mozumder, pinned the blame for prolonged high inflation on the steep currency devaluation, import controls and high commodity prices in the international market.

In order to tame inflation, it was explained that the government has introduced 'market-based' interest rates, and raised the policy rate in July as part of that move. This may have been too little too late of course, and the the IMF officials correctly pointed out that many countries raised their interest rates much earlier. They also called for further rate rises (they got it too, as we'll see).

The IMF mission also wanted to know the reasons behind the failure to maintain the stipulated minimum net international reserves of $24.46 billion on June 30 - listed as a mandatory requirement to get the second tranche of the loan authorised. In response, the Finance Ministry officials said the reserves were depleted due to fulfilling payment obligations for essential imports as well as for loan servicing.

Bangladesh Bank Governor Abdur Rouf Talukder, who held a separate meeting with the IMF delegation, also gave similar explanations for failing to meet the minimum requirement on the reserve amount. What we didn't get from either the central bank or the ministry was any assertion that the stipulated target was unrealistic to begin with, in the prevailing circumstances.

"We informed them that Bangladesh has successfully brought down the current account balance deficit, but there was a big deficit in the financial account, which is the major reason for the decline in reserves," Bangladesh Bank spokesman Md Mezbaul Haque told journalists, after the meeting in Motijheel.

The central bank has initiated reform measures as per the IMF's timeline. Both the Finance Ministry and the central bank discussed banking sector reforms in their meetings with the IMF mission. All banking sector reforms have been fulfilled, they said.

However, the IMF raised concerns over Bangladesh's high rate of default loans. At the end of June, the banking sector's defaulted loans hit a record Tk 156,039 crore, which is 10.11 percent of total credits disbursed.

The IMF also asked about the government's failure to collect a minimum of Tk 345,630 crore in tax in fiscal 2022-23. This was one of the six quantitative targets set for the first half of 2023 by the IMF as conditions for the authorisation of the second instalment.

In response, Finance Ministry officials said that while revenue collection fell short of the IMF's floor, it was within 'touching distance'. This issue will be discussed at length when the IMF mission sits down with the National Board of Revenue later during their stay here.

The Finance Ministry also suggested reworking some of the targets for December and June next year that were agreed with the IMF staff mission last year, before the $4.7 billion loan was approved by the lender's board in January.

One of the targets that has been proposed for reassessment is the minimum reserve requirement. Bangladesh needs to have at least $26.81 billion in net international reserves by the end of the year, as per the conditions agreed. This is clearly unachievable - in fact, the target may need to be significantly revised downwards.

As of September 26, gross foreign exchange reserves stood at $21.15 billion. The IMF mission will meet with different government bodies, including the power, energy and mineral resources ministry, the Economic Relations Division, and BBS during their tour.

For a few (billion) dollars more

To make matters worse, the reserves may even be significantly less than the official figure we have, according to Zahid Hussain, former lead economist at the World Bank's Dhaka office.

"If the central bank's liabilities are taken into account, then the net foreign currency reserve would be less than $18 billion," he said this week, causing alarm bells to go off. "Although the reserve situation has not reached an alarming level yet, it is now a matter of concern."

This is because Bangladesh Bank is selling more than $1 billion worth of US dollars each month. Besides, the country's foreign currency expenditure against income has remained at a $1 billion deficit for the past 24 months.

"We are not at the satisfactory stage that we were in the recent past," the economist said, warning that if forex usage continues at the current rate, the country would run out of foreign currency at some point in the foreseeable future.

"Then, the exchange rate can't be contained at the current level and it will go out of control," he added.

Hussain made these comments while speaking to reporters after the annual conference of the International Business Forum of Bangladesh (IBFB) at the Gulshan Club.

The reserve situation isn't helped of course, by the continued downward slide witnessed in the flow of inward remittances, which in September fell by a whopping 12.7 percent ($ 196 million) year-on-year, to a paltry $1.34 billion - the lowest in almost 3-and-a-half years.

It will lead to further concern over the declining trend in remittances, even as the country sends more and more workers abroad. The remittance flow in September decreased by $255.79 billion compared to August, Bangladesh Bank's latest remittance data reveals.

The expatriates sent close to $1.6 billion in remittances in August, itself the lowest in six months, since February when it was $1.56 billion. Yet the flow decreased even further to $1.34 billion in September, the lowest in the last 41 months.

That dates back to when Bangladesh received $1.09 billion in remittances in April 2020. After that, the flow of inward remittance increased sharply even during the COVID-19 pandemic time.

Bangladeshi expatriates sent $2.19 billion in remittances in June this year and in July it was $1.97 billion. The sector insiders said that when the exchange rates available in the Kerb or the open market become higher than in the banking channel, transactions in Hundi increase. And when demand for hundi increases, remittances decrease.

Last month, the dollar exchange rate was Tk 6-7 higher in the open market than in the banking channel. Therefore, expatriates naturally reduced sending remittances through legitimate channels in the hope of more profit, they said.

In the last fiscal (2022-23) Bangladesh received total remittances of $21.61 billion. In the previous fiscal year 2021-22, the expatriates sent $21.03 billion. The country received the highest remittances ever in the fiscal year 2020-21, which was $24.77 billion.

Recipe for mismanagement'

Tasked by the central bank, the Bangladesh Foreign Exchange Dealers Association (BAFEDA), and the Association of Bankers Bangladesh have been fixing the price of the US dollar under three different headings since September 2022.

Currently the banks are giving a price of Tk110.5 for every dollar of expatriate income. Export Bill Cashing is offered at Tk109.5 per dollar. And Tk110.5 is given for import and interbank transactions.

Economist and Chairman of Policy Research Institute (PRI) Ahsan H. Mansur told our sister news agency UNB that it is a 'recipe for mismanagement of the economy'.

He said the expatriates are sending remittances through the illegal channel (Hundi), as the rate of the US dollar is comparatively higher. The situation may not improve soon till the rate of the dollar is similar in the kerb market and banking channel.

Mansur said, "Lack of confidence in the state systems, Bangladeshi expatriates are sending lower remittance in the country, as the money smuggling is happening randomly from the country."

Despite exporting a record number of workers in different countries, the volume of remittance is decreasing continuously, which does not match the statistics, he said.

Perhaps stung by the IMF team's criticism over its reluctance to use monetary policy to fight inflation, Bangladesh Bank decided to increase the policy rate, also known as repo rate - the rate at which the central bank lends to the banks - by 75 basis points to 7.25%. It was the largest increase in a decade. According to the latest guidance from Shapla Chattor, banks can provide loans in the month of October by adding a maximum of 3.5 percent to the reference rate - i.e. 10.75%.

The decision was taken at the Monetary Policy Committee's meeting on October 4, held after the meeting with the IMF team, which certainly considers it a key instrument to tackling inflation globally.

Kristina Georgieva said the world economy has proven unexpectedly sturdy in the face of higher interest rates, engineered by the U.S. Federal Reserve and other central banks to fight inflation that surged over the past two years. She said the odds are rising that global economy can manage a "soft landing'' - avoiding recession even while bringing down inflationary pressure.

"Fighting inflation is the number one priority,'' she said, urging central banks to keep interest rates "higher for longer. It is paramount to avoid a premature easing of policy, given the risk of resurging inflation.''