Economic challenges that Bangladesh’s budget must address in 2022

June 3, 2022

DHAKA – The current global political, economic and trade situation is not favorable for a developing country like Bangladesh. The fallout from Covid and the domino effects of the ongoing Russian-Ukrainian war have had profound impacts on the global economy. These global crises have already put undesirable pressure on the national economy of Bangladesh. The immediate effects are rising prices for food and other essentials. The disruption of supply chains, induced by Covid, is aggravated by the Russian-Ukrainian war. The International Monetary Fund (IMF) and the World Bank are discussing the possibility of a global recession. Bangladesh, like many other developing countries, is vulnerable to the effects of any global recession.

Bangladesh’s macroeconomic challenges manifest themselves in high inflationary pressure, a widening current account deficit, negative remittance growth, pressure on the US dollar exchange rate, and pressure on foreign exchange reserves to sustain a sufficient and comfortable number of months of imports. Moreover, long-standing challenges, such as job creation, remain.

Inflationary pressure, triggered by supply chain disruption and soaring prices of food and essential items in the international market, has led to a situation where marginalized people are suffering the most. A recent study by Sanem showed that low-income groups in Bangladesh face inflationary pressure almost double what government data suggests. Hoarding and manipulation of the market by unscrupulous businessmen taking advantage of the crisis are making the situation worse.

Pressure on foreign exchange reserves is high. The surge in imports, alongside significant negative growth in remittances, led to a large current account deficit despite strong export growth. There are also concerns about increasing imports, especially if illicit money transfers through overcharging are the source of this import growth. The government’s recent decision to lift some restrictions to slow down the import of luxury goods is timely. However, allegations of overcharging exist even in cases of imports of capital goods and raw materials. Regulatory authorities should take the necessary steps in this regard.

A key intervention area to control imports and provide the right kind of incentives for inward and outward remittances is to contain the misalignment of the dollar exchange rate against the taka. The taka exchange rate against the USD has been a relief zone over the past decade with an abundant supply of dollars in the market. However, this comfort has also diminished with the recent shortage of dollar inflows. The depreciation of the taka against the dollar cannot be restrained with force and requires a gradual adjustment. The greater the difference between official and unofficial exchange rates, the more remittances would go through unofficial channels. During Covid, the increase in remittance flows through official channels is largely explained by the fact that many unofficial remittance channels were blocked for months, forcing senders send money through official channels. But with the return to normal economic activities both at home and abroad, as well as the increased premium of the black market, official remittance channels have once again become unattractive.

In terms of debt management, Bangladesh is currently not under pressure like Sri Lanka. However, we must remain vigilant, as many mega-projects in the country are financed by foreign debt, and in recent years the amount of foreign debt has increased. There are also concerns related to the lack of proper feasibility studies and cost and time overruns in many megaprojects. All of this could create unwanted pressure on Bangladesh’s debt burden in the future. Thus, a proper inventory of current megaprojects in this regard is warranted.

Bangladesh is yet to recover from the Covid pandemic. While economic recovery is visible, social recovery in terms of improved livelihoods and jobs for the poor is slow and not visible enough. Several Sanem surveys have shown that, while micro and small businesses have been the first victims of the Covid fallout, they have received the weakest government support and their recovery has remained much slower than that of larger businesses. . Moreover, in the absence of sufficient government support through social protection, affected households resorted to various crisis coping strategies, risking long-term negative consequences for these households. households and the economy. Therefore, while the government’s priority is to focus more on economic recovery and macroeconomic stability at this time, the need to address concerns about poverty, vulnerability and rising inequality is equally crucial.

Over the past two decades, while Bangladesh has performed well in terms of macroeconomic stability, this stability has come at the cost of lost opportunities for social development, as successive governments have continued to spend very little on education, health and social protection. Such low social spending is mainly due to successive failed attempts to raise the miserably low tax-to-GDP ratio. However, there are also concerns that policy makers have not yet defined their priorities in the event of a major investment in education, health and social protection.

There is a need to address the high mismatch between the government’s stated goals, plans and programs mentioned in critical policy documents (such as the Sixth, Seventh and Eighth Five-Year Plans and the Perspective Plan) and the approaches taken in the annual budgets . All critical policy documents have focused heavily on the significant deviation from low public spending in social sectors, substantial improvement in the tax-to-GDP ratio and reforms in some vital economic areas like taxation, banking , capital markets and export diversification. However, the approaches taken in the annual budgets have remained mostly incremental in nature, with no clear links to critical policy documents and no clear direction for change.

Bangladesh faces its biggest macroeconomic challenge in a decade. The country will also face a new set of challenges after graduating from LDC status by 2026. At the same time, Bangladesh aims to achieve major development goals by 2030. Hence, the incremental approaches in national budgets will not help at all. The issue of overcoming the political paralysis in the development and effective implementation of important policies, strategies, plans and programs will remain critical in the days ahead.

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