Harsh months for economic indicators

Inflation, though slightly lower from a decade high in the month before, still remains close to 10% in September. Exports fell to five-month low, remittance was the lowest in 41 months, private sector credit growth dips to 22-month low in August, imports are 35-month low in September, yet financial account – a key component of balance of payment is in $2 billion deficit at the end of August; bank spread – the gap between deposit and lending rates – shot to 3.33% in August, which is 41 months' peak.

These are among the shocking numbers released in the first week of October alone. What these numbers tell us is that the economy was better a year ago than it is today in almost all aspects – export, import, remittance, inflation, foreign exchange market, and external fiscal balance.

The real health of the economy has been reflected in the outlooks of major global lenders. Taka losing value and depleting foreign exchange reserves are unstoppable; they are now old news. Rating agency Fitch forecast a higher debt-GDP ratio for Bangladesh this year.

Trail of bad news

The trail of bad news continues in the second week, which marked the escalations between Israel and Hamas, causing deaths and ringing another alarm bell for the global economy from which Bangladesh is not immune to.

A week after the World Bank lowered its previous growth forecast for Bangladesh for the current fiscal year (FY24), the International Monetary Fund also came up with a downward revision of its previous projection. The two global lenders began their annual meeting in the Moroccan city of Marrakech amid concerns over rising oil prices and inflationary pressure as a "new cloud" darkening for the world economy from the fresh escalations between Israel and Hamas.

Crude oil rose 4.2% to $88.15 a barrel last week as the conflict intensified.

IMF Managing Director Kristalina Georgieva said they are closely monitoring how the situation evolves and how it is affecting oil markets.

World Bank President Ajay Banga warned that the Israel-Hamas conflict, if spread, would make it harder for central banks to help many economies avoid a recession through soft landings.

An IMF team has been in Dhaka to review the progress on agreed tasks to cure the wounds in banking and revenue sectors before recommending the release of a second tranche of a $4.7 billion loan in December. On the very day they met Bangladesh Bank officials and found the central bank's steps to manage lending and exchange rates were "not adequate and effective", a sharp hike in policy rate was announced on 4 October aiming to make loans costlier and tame inflation.

Rising bad loans

The wounds in the banking sector continue to turn worse with rising bad loans. Senior economist Professor Rehman Sobhan told an event last week how defaulters have become powerful within the government. "Loan defaults have become the new normal…Reschedules and write-offs are happening, but not repayment."

WB predicts sticky inflation

In its latest outlook, the World Bank, while revising down its forecast for Bangladesh for the current fiscal year, projected that inflation would stay higher – at average 9% – throughout the fiscal year because of factors such as high energy prices and their spillover effects on other sectors, weakening taka, continued restrictions on imports, insufficient US dollars in the banks, and sluggish monetary tightening.

Despite the government's efforts to provide essential food items to low-income groups at subsidised rates, inflation is anticipated to disproportionately affect the poor, it observed.

A slight drop in monthly inflation seen in September was far from having any impact on the life of people, the low-income ones in particular, struggling to buy anything they need from green chilli to chicken.

Benefits of fixed price and import decision elude the consumers, who are still buying egg, onion and potato at higher than fixed rates as traders defy the official instructions in most cases.

The much anticipated imported egg failed to materialise in more than three weeks. Importers now say high import duties on eggs remain a problem for them.

Late measures

In a case of too little, too late, authorities are applying measures – monetary, fiscal and administrative – to bring prices under control, with little or no effect as those were taken only after the situation went out of hand.

Higher interest on consumer loans reduce the money supply to the market and the costly dollar slows down reserves' erosion. The Bangladesh Bank did those over the last year or so, but on several attempts instead of taking strong measures at one go which could have been more effective.

Now with policy rates hiked by a big margin and dollar made stronger against taka– Tk96 a dollar in October last year to Tk110.50 in September – more steps are needed to have the desired impacts.

Hiking repo rate 'not enough'

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, feels hiking the policy rate would now not be enough to tame inflation if the ceiling over treasury bills and bond rates is not removed.

A similar view was expressed by Syed Mahbubur Rahman, managing director of Mutual Trust Bank, who said, "The treasury rate should be hiked according to the market. Only then would it be helpful in controlling inflation." He commented that the repo rate hike by the central bank now should have been done in 2022.

The Bangladesh Bank also increased the lending rate by 50 basis points on 3 October. Now banks can add 3.50% with SMART – it was 3% earlier.

Intended to make loans costlier to tame inflation, interest rate hike has alarmed bankers. Syed Mahbubur Rahman said, "Money will become dearer due to the hike in the repo rate. As a result, banks will reduce credit flow."

It is a warning in the backdrop of steep fall in private sector credit growth.

Slowing consumption

In its latest outlook, the World Bank revealed significant supply side constraints from slower industrial production caused by import curbs, higher price and shortage of energy. The demand side is also under pressure due to slowing growth in private consumption and investment as a result of high inflation and rising uncertainty, it said in its Bangladesh Development Update, titled "New Frontiers in Poverty Reduction".

It said private consumption and investment growth slowed in the last fiscal year while the growth in industrial production also went down as a result of import restrictions, rising raw material costs, increased energy prices, and electricity and gas disruptions.

The World Bank found high inflation and rising uncertainty behind the slowing consumption growth.

Better year ahead?

Despite the difficulties, the next fiscal year might look better.

The World Bank projects inflation to ease to 8.5% in the next fiscal and 7.7% in FY25.

Amid all these numbers of doom and gloom, there are instances that keep hopes alive for better days ahead.

The consecutive good harvests of major paddy seasons have enabled the government to build a safe buffer stock for food, facilitating to continue its massive food subsidy scheme for one crore family card holders.

Armed with a stricter anti-hoarding law passed in April this year, the government saw some success in containing illegal stockpiling of rice.

All these worked in keeping the price of rice stable for the last one year. If rice joined the basket of other food items spiralling beyond the reach of the majority population, their sufferings could be even worse.

The same could happen in case of other items, like potato, egg and onion as well if measures such as market raids, setting prices and opening imports were taken before the market turned volatile, consumer rights campaigners and traders believe.

On 3 October, the National Board of Revenue announced withdrawal of regulatory duty on the import of poultry feed raw materials, whose high price was one of the reasons to drive small-scale family owned poultry farms out of business. This may help cut feed prices, but consumers will have to wait to get some price benefit for egg or chicken. Still, poultry feed ingredients are subject to 10% tax at import level when such taxes are waived or cut for many inputs for export sectors.

Day-old chicks remain another worry for poultry farmers, as corporate hatcheries regulate the price, which soared further, making business unviable for small farm owners.

Potato traders said the high charge of cold storages raises their storage cost. They need low-cost loans and subsidised electricity rates.

These are not very big issues if we want to see prices not going out of hand for most people.

But these are not all. A lot more needs to be done, which can be possible only when authorities walk the talk.

While forecasting a better FY25, the World Bank in its latest update on Bangladesh, stressed some structural reforms – of course not being heard for the first time – in monetary and fiscal policies to address fiscal vulnerabilities.

The first two weeks of this month ended with some happy notes.

Bangladesh Prime Minister Sheikh Hasina and Russian President Vladimir Putin virtually joined the handover event of Certificate and Model of Nuclear Fuel, an event that in fact ensured uninterrupted supply of uranium to nuclear reactors, the country's first in electricity generation, expected to start trial run next year before going into commercial production in 2025.

Meanwhile, the prime minister opened the Third Terminal of Hazrat Shahjalal International Airport and the Padma Rail Bridge—two landmark infrastructures expected to give a boost to the country's air and land connectivity, vital for future growth.   

Now it remains a question whether the economic growth will still continue to leave marginalised groups behind, as pointed out by economist Dr Debapriya Bhattacharya last week.