Bangladesh economy had been doing remarkably well before the Covid-19 pandemic. The economy had expanded, per capita GDP had increased, forex reserves had grown, inflation was low, electricity production capacity had increased and poverty levels were decreasing. Bangladesh's economy had also begun to recover well from the COVID-19 economic shock, and the economy had gradually returned to its pre-COVID path in 2021. However, since mid-2021, global commodity prices, especially of oil, have begun to rise. This was intensified by the Russia-Ukraine war, which has disrupted the global supply chain, as well as rising commodity prices worldwide. Bangladesh, as a major energy importer, has faced a number of challenges. Now, in Bangladesh the price of essential commodities is rising, foreign currency reserve is declining, the value of Taka is weakening, current account deficit is increasing, load shedding is getting worse, and people's misery is deepening. This has caused widespread concern throughout society. Within just a short time span - how it happened, what went wrong? To understand this, we need to look at the changing global economic conditions as well as their implications for the Bangladesh economy.

Changes in the global economic and political situations

Bangladesh's economy is well integrated into global economy and the present economic crisis in Bangladesh is driven primarily by global economic and political crises. After Covid-19 economic recovery, global commodity market become volatile. Particularly after Russia and Ukraine war the international commodity market became unstable. The war, trade embargoes and financial sanctions against Russia have disrupted global supply chains and increased the prices of many essential commodities as well as the cost of shipping. Food, fuel and feed prices have risen significantly on the global market. This has affected Bangladesh economy and its terms of trade.

Affecting Terms of Trade

Because of increased commodity prices, the cost of imports in Bangladesh has increased significantly in recent years while earnings from exports have increased just moderately. In FY22, the expenditure on imports increased by 36%, compared to 20% in FY21. The high import cost is due in part to increased demand for imported goods and in part to higher import prices on the global market. While the prices of imported goods (such as wheat, edible oils, and fuel) have risen significantly, the prices of Bangladesh's exports have only increased slightly. As a result, the terms of trade has gone against Bangladesh. During 2021-22, the import-price index increased by 5.06 %, while the export-price index increased by 3.23%.

Disturbing macro-economy

The change in terms of trade has adversely affected the current account balance, balance of payments and other macroeconomic variables. In FY22, the current account balance reported a greater deficit of USD 18.70 billion compared to FY21's deficit of USD 4.57 billion (Table 1).

Table 1: Trends of exports, imports, balance of payment, remittances and foreign currency reserve, exchange rate and inflation (All figures are in Billion USD)

In Bangladesh, the current account deficit is generally met by worker remittances from abroad. Remittances have also decreased significantly in FY22. Remittances fell by 14% in FY22, following a 36% increase in FY21. This has affected the balance of payments, foreign currency reserves, and weakened Taka against USD.

Weakening Taka

The Bangladesh Bank continued to sell dollars from reserves to keep the Taka stable without adjusting the exchange rate to match market demand. As a result, reserves fell further, and the dollar crisis began. Foreign currency reserves fell to USD 39.77 billion on July 14, 2022, from USD 46.39 billion on July 14, 2021. Despite receiving relatively large remittances from expatriates in July 2022 due to Eid festival, the Taka's value against dollar is deteriorating. Foreign exchange reserve is not only critical for maintaining exchange rate of domestic currency but also contribute significantly to increased capital investment and long-term economic growth. The ongoing depreciation of Taka compelled the Government to seek a loan from the International Monetary Fund. Just one year ago, Bangladesh supported Sri Lanka with USD 250 million, and just one year later, Bangladesh approached IMF for a loan to support its budget.

Rationing electricity

The Government of Bangladesh and Bangladesh Bank have taken various measures to reduce imports and increase the flow of dollars in order to retain Taka's value. Government has discouraged the import of luxury items. The government was compelled to reduce energy imports due to the dollar crisis. Despite having the capacity to produce electricity, the government was unable to do so due to higher oil and liquefied natural gas (LNG) prices. Since the Russia-Ukraine war, the price of LNG has increased significantly on the international market as European countries attempt to reduce their reliance on Russia and diversify their energy sources. Because of high-energy prices, Bangladesh has had to reduce its energy imports significantly, which has had a significant impact on electricity production. As a result, electricity production has decreased significantly, compelled the government to impose electricity rationing and frequent power outages.

Rising inflation

The weakening of the Taka against the dollar made imports more expensive and raised domestic prices of imported goods and other non-imported goods due to substitution effect. This exacerbates the inflationary situation. Inflation had been fairly under control over the past few years in Bangladesh, but it began to increase in 2021 and has now risen to 7.56% according to official accounts, even though the actual rate is thought to be much higher. The prices of rice, wheat, edible oil and other essential commodities are rising and inflation rate has climbed to 9- year high. While the income of the poor remained same, the increasing prices has put common people in extreme hardship. A number of studies indicate that low-income people are struggling to cope-up with the high prices of essential commodities and compromising on their food and nutrition.

Increasing price of fuels and fertilizers

To reduce current account deficits and balance of payments imbalances, the government recently raised urea fertilizer and fuel oil prices significantly without taking any serious measures to improve energy sector management, reduce inefficiency, and system loss in the energy sector. When the government is unable to import an adequate amount of fuel to generate electricity, it has to pay large amount of money as capacity charges to quick rental power plants while keeping them mostly idle. The government could have avoided the massive loss if it had planned ahead of time and cancelled some of the contracts earlier.

High fuel prices come at a time when people are already struggling to keep up with rising food prices. This has further increased the costs of transportation of goods and fueled the prices of almost all essential consumer goods. As the price of fuel rises, it contributes to cost-push inflation and the cost of daily commodities including transportation will rise, causing misery for the common people. Moreover, millions of farmers use diesel for irrigation. As such, the increased price of diesel will have an adverse impact on all sectors of the economy including agriculture and food security. The increased diesel price will increase irrigation costs even further and may affect food security if we do not take necessary measures to support farmers.

Deepening suffering of the people

The rationing of electricity and frequent load shedding have further worsened the suffering of people. Electricity is essential for productive activities that support a country's economic growth. In Bangladesh, the recent frequent power outages, both announced and unannounced, caused by load shedding have severely hampered production and business activities. While large industries have their own generators, the majority of small and micro industries do not have enough capital to purchase backup generators. As a result, when load shedding occurs, their operations are halted, which lowers productivity, sometimes damages equipment, and even degrades production quality.

Rising threats of sluggish economic growth

Given the high inflation, low foreign currency reserves, weakening Taka, tightening imports, and higher fuel and fertilizer prices, manufacturing and agriculture productivity may suffer. Additionally, a volatile global market, especially the current recessionary trends, may dampen demand for Bangladesh export items, posing a number of potential downside risks to the Bangladesh economy. Together, the current situation indicates that if we do not act strategically, the Bangladesh economy may suffer from slow economic growth in coming years and unable to return to pre-Covid growth rate in the near future. A slower economic growth could have adverse effect on job market and increase unemployment of the youth.

Growing need for strategic actions

Strategic planning and decisive action are required to ensure power supply and improve energy sector management, eliminate expensive rental power systems, and gradually reduce dependency on external sources. Energy and food price increases will disproportionately affect low-income households, exacerbating already-growing inequalities. Social protection measures need to be strengthened further to protect the poor from high inflation. Exports are crucial to reduce trade deficit and build up foreign exchange reserves, which in turn will help to manage exchange rates and weakening Taka. To cope with the current economic crisis and managing balance of payments, it is important to continue the existing restriction on imports of luxury goods and accelerate promotion of exports. However, when tightening imports, we must be careful not to restrict imports of raw materials and intermediary goods, as Bangladesh's exports rely heavily on imported inputs. Special attention must be paid to increasing remittances and foreign direct investment and preventing capital flight from the country.

Golam Rasul, PhD, Professor, Department of Economics, International University of Business Agriculture and Technology, Dhaka, Bangladesh. E-mail: dr.rasul.econ@iubat.edu and golam.grasul@gmail.com