Crisis and measures: past and present
Bangladesh has been facing a major economic crisis for several months.
Macroeconomic stability has weakened, due to volatility in global energy and commodity markets for increased demand during the post-Covid recovery period and sanctions on energy and commodity trading. raw materials from Russia since the start of the war in Ukraine in February.
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This economic crisis is distinctively different from those that Bangladesh has faced in previous decades: first, the crisis due to the global financial and economic crisis of 2008-09, and second, the covid-related economic crisis of 2020-22 .
Bangladesh has successfully weathered previous crises, either due to its lesser integration into the global economy or due to cautious measures. How well would Bangladesh be able to weather the crisis this time around? Will the measures that have been taken adequately address the concerns related to the crisis? Will the measures taken during the previous crisis be effective in dealing with the current crisis? A simple answer is: No.
Previous crises have had negative effects mainly on the micro and meso levels of the economy. On the other hand, the current crisis has a negative impact mainly at the macro level and partly at the meso level. Therefore, the measures that were taken earlier to address the micro and meso levels are likely to have limited positive impact in dealing with the adversity of the current crisis.
Bangladesh should aim both to stabilize the foreign exchange market and to undertake reform measures responsible for the weakening of foreign exchange reserves. This is mainly related to the energy market where medium to long term reform measures are essential.
One of the main areas of focus of policies and operational measures during this period should be to ensure macroeconomic stability, which has been affected due to foreign exchange reserve crises.
GLOBAL FINANCIAL AND ECONOMIC CRISIS IN 2008-09
During the global financial and economic crisis of 2008-2009, Bangladesh’s economy was badly hit in the external sector, mainly exports and remittances. Due to the limited integration into the global market, the impact has been rather limited, mainly in case of loss of jobs and incomes in certain export-oriented sectors and the demand for migrant workers has been weaker.
The micro and meso levels of the economy have been affected, although on a limited scale. Therefore, the policy measures that had been taken during this period to create new jobs in rural areas, especially in agriculture, were considered timely.
Although fiscal support was announced for the export sector, targeting in particular SMEs, there was no need to use it at that time. The macroeconomic impact was rather limited and the national economy recovered quickly. The world’s major economies took individual and collective action, which eased the adversity, although a few major economies needed time to fully recover.
CRISIS INDUCED BY COVID IN 2020-22
During the covid crisis of 2020-22, the economy of Bangladesh was affected both internally and externally.
The impact has been a loss of jobs, income, decline in remittances and export earnings, and a slowdown in domestic services and manufacturing activities. Also this time, global commodity and energy markets collapsed due to lower demand and the supply chain crisis.
The government has taken fiscal and monetary policy measures, including various stimulus packages, targeting the national economy to support those who have lost their jobs, investments and production. The national vaccination program against infections at the micro level has been well appreciated. Despite various shortcomings, the support measures are considered effective for the people, sectors and activities targeted.
Global economies, individually or collectively, have taken action to deal with the crisis. Thus, the recovery phase of the crisis began quite quickly, in particular thanks to the successful implementation of the vaccination program throughout the world. However, the covid challenges are still not over.
CURRENT MACROECONOMIC ENERGY CRISIS
The macroeconomic crisis has had a negative impact on world economies mainly at the macroeconomic level, with destabilizing elements. Unlike in the past, a major element of the crisis is the volatility of the energy market.
Rising commodity prices around the world due to disruption in the raw material supply chain, rising shipping costs and a surge in demand for finished consumer goods have had an inflationary impact on global economies.
The crisis has hit developing economies hard, threatening their macroeconomic stability, while the crisis in developed economies is rather limited in nature.
In addition, economies face the challenges of inflationary pressure. However, the current macroeconomic instability in developing countries due to the weakening of foreign exchange reserves has overtaken the countries’ inflationary fears. In other words, the challenges associated with the crisis are largely macro in nature and the measures to be taken must be targeted accordingly.
WHAT IS BANGLADESH DOING TO DEAL WITH THE CURRENT CRISIS
In Bangladesh, most of the measures that have been taken are micro or meso level measures. Micro-level measures include discouraging the import of expensive consumer products, domestic load shedding, and reducing export retention quota to improve the domestic supply of foreign exchange.
Measures at the meso level include discouraging importation by requiring prior approval of an import worth at least $5 million, discouraging the public sector from purchasing vehicles, and inducing government officials to to travel abroad on official trips, and to plan to ration energy consumption in the transport sector.
Many of these measures could address the micro- and meso-level concerns of the current crisis. Moreover, these measures are short-term in nature, unless designed properly.
There is a popular belief that increasing domestic production through import substitution measures would contribute significantly to domestic production. It is important to understand whether Bangladesh really has comparative advantages in producing all kinds of crops.
For example, Bangladesh does not have sufficient comparative advantage in soybean production.
Another proposal is to opt for the currency swap to avoid the use of US dollars. Such measures would not be effective given the volatility of currency exchange rates. More importantly, such measures are largely unwelcome in times of crisis.
We can encourage sectoral measures such as increasing domestic production to reduce dependence on the global market for raw materials. However, we have to import some of the essential consumer goods due to a lack of domestic production. Therefore, our main objective should be to ensure a stable foreign exchange reserve and to take measures accordingly.
Bangladesh should aim both to stabilize the foreign exchange market and to undertake reform measures responsible for the weakening of foreign exchange reserves. This is mainly related to the energy market, where medium and long-term reform measures are essential.
In order to stabilize foreign exchange reserves, long-term credit support was sought from the International Monetary Fund ($4.5 billion), budgetary support from the World Bank ($1 billion), but also from the Asian Development Bank or Asian Infrastructure Investment Bank. These measures will respond to the crisis in the medium term.
To qualify for the loans, Bangladesh needs to undertake long-term reform measures such as managing subsidies, withdrawing capacity payment for power generation, developing clean energy and ensuring market-based operation in exchange rate and interest rate.
But instead of doing this, the government raised the price of urea fertilizers, diesel, gasoline and kerosene as part of the subsidy rationalization. Such measures would partly reduce subsidy pressure at the expense of rising production costs in agriculture, manufacturing, services and power generation and hence higher inflationary pressures on consumers. .
The rationalization of the subsidy should be done by removing the payment for capacity by moving towards the principle of ‘no electric no pay’. Moreover, the production of electricity using LNG, which is very expensive and is likely to be more so in the months to come, should be discouraged. A significant amount of foreign exchange reserves is required to purchase LNG.
Alternatively, the government should opt for electricity generation from renewable energy on the basis of foreign investment or loans.
The author is the Research Director of the Center for Policy Dialogue.