Bangladesh has asked the IMF for help: What’s wrong with the country’s economy?

Last month Bangladesh asked the International Monetary Fund (IMF) for help. According to an IMF press release, Bangladesh will receive economic aid worth $4.5 billion (about 37,000 rupees).

This is a significant reversal for an economy that has overtaken India’s per capita income in 2020 due to robust economic growth for most of the last two decades and particularly since 2017.

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To capitalize on the growing economic hardship, the main opposition party, the Bangladesh Nationalist Party (BNP), has organized several protest rallies across the country. She hopes to corner the Awami League government and its leader, Prime Minister Sheikh Hasina, which has dominated Bangladeshi politics for more than a decade.

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What’s wrong with Bangladesh’s economy?

Looking at gross domestic product or GDP growth, Bangladesh continues to show very impressive numbers. For one, Bangladesh’s economy actually grew during this period, unlike many countries including India, whose GDP shrank in 2020 following the Covid-19 pandemic. Its GDP grew by 3.4% in 2020, by 6.9% in 2021 and is projected to grow by 7.2% in 2022.

However, Bangladesh’s problems lie elsewhere.

The IMF notes that “Bangladesh’s robust economic recovery from the pandemic was interrupted by Russia’s war in Ukraine, leading to a sharp widening of the current account deficit, a rapid decline in foreign exchange reserves, rising inflation and slowing growth.”

In other words, while it’s true that Bangladesh has had some very impressive economic growth numbers, the Russian invasion of Ukraine has meant four things:

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* Inflation rose to uncomfortable levels as all types of commodities such as crude oil became more expensive. The inflation rate was 8.85% in November, compared to 5.98% in November 2021. In the 12 months to November, inflation increased by 7.48% – much higher than the 5.48% in the 12 months to November 2021.

* Bangladesh’s current account is in deep deficit – both in absolute terms and as a percentage of GDP (see charts; source IMF). The current account balance looks at the gap between the money that flows into a country as a result of income from the export of goods and services, and the money that leaves the country from the import of goods and services. Bangladesh has traditionally been heavily dependent on its export earnings, but as western economies slow and their consumers postpone their demand, Bangladesh is suffering.

Source: IMF.

* Bangladesh’s currency, the taka, weakened partly under pressure from the strengthening US dollar and partly due to the worsening current account deficit. A weaker taka further exacerbated the spiral of inflation as all imports become even more expensive. In December 2021, it took 86 taka to buy one US dollar. To date, the exchange rate has deteriorated to 105 taka – a loss of more than a fifth of the currency’s value in less than a year.

Source: IMF.

* Weakness on the external front also led to Bangladesh’s foreign exchange reserves being depleted. Last December foreign exchange reserves were valued at $46,154 million. So far, they’re only $33,790 million — down more than a quarter of the total.

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How will IMF monetary assistance help?

“Bangladesh’s request is part of the authorities’ efforts to cushion its economy from the economic disruptions caused by the ongoing war in Ukraine and to manage the macroeconomic risks of climate change,” the IMF said.

But that’s not the only goal.

“Even as Bangladesh addresses these immediate challenges, addressing longstanding structural issues remains critical, including the threat to macroeconomic stability posed by climate change. To successfully achieve least developed country status and reach middle-income status by 2031, it is important to build on past successes and address structural issues to accelerate growth, attract private investment, increase productivity, and build climate resilience,” says the IMF.

Overall, the IMF program aims to achieve the following goals:

* Creation of additional fiscal space by mobilizing higher revenues and rationalizing expenditure. This will allow the government to increase pro-growth spending and mitigate the impact on the vulnerable through higher social spending and more targeted social safety net programs.

* Curb inflation through increased exchange rate flexibility to help the country absorb external shocks.

* Strengthening of the financial sector by improving governance and regulatory aspects.

* Increase growth potential by creating an enabling environment to expand trade and foreign direct investment, among others.

* Strengthening institutions to create an enabling environment will help achieve climate change goals.

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