Inflation, Unrest Challenge Bangladesh’s ‘Miracle Economy’

Queuing to try to buy food, Rekha Begum is distraught. Like many others in Bangladesh, she is struggling to find affordable daily essentials like rice, lentils and onions.

“I went to two other places, but they told me that they have no supplies. Then I came here and stood at the end of the line,” said Begum, 60, as she waited nearly two hours to buy what he needed from a truck selling food at subsidized prices in the capital Dhaka.

Bangladesh’s economic miracle is under severe pressure as rising fuel prices amplify public frustrations over rising costs for food and other necessities. Fierce criticism from the opposition and small street protests have erupted in recent weeks, adding to pressure on Prime Minister Sheikh Hasina’s government, which has sought help from the International Monetary Fund to safeguard the country’s finances.

Experts say the situation in Bangladesh is not as dire as that in Sri Lanka, where months-long unrest prompted its president to flee the country and people face stark shortages of food, fuel and medicine, and spend days in line. to get the essentials. But it faces similar problems: excessive spending on ambitious development projects, public anger over corruption and cronyism, and a weakened trade balance.

Such trends are undermining Bangladesh’s impressive progress, driven largely by its success as a garment manufacturing hub, to become a more prosperous middle-income country.

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The government raised fuel prices by more than 50 percent last month to offset soaring costs due to high oil prices, sparking protests over rising cost of living. That prompted authorities to order subsidized sales of rice and other staple foods by government-appointed traders.

The latest phase of the program, which began on September 1, should help some 50 million people, Trade Minister Tipu Munshi said.

“The government has taken a series of measures to reduce the pressures on low-income people. That is affecting the market and keeping the prices of daily staples competitive,” he said.

Policies are a stopgap for larger global and domestic challenges.

The war in Ukraine has pushed up prices for many staples at a time when they were already rising as demand recovered as the coronavirus pandemic subsided. Meanwhile, countries like Bangladesh, Sri Lanka and Laos, among many, have seen their currencies weaken against the dollar, driving up the costs of importing oil and other dollar-denominated goods.

To relieve pressure on public finances and foreign exchange reserves, the authorities imposed a moratorium on large new projects, reduced office hours to save energy and imposed limits on imports of luxury goods and non-essential items such as sedans. and SUVs.

“Bangladeshi’s economy is facing strong headwinds and turmoil,” said Ahmad Ahsan, an economist and director of the Dhaka-based Policy Research Institute, a think tank. “Suddenly we are back in the era of continuous power outages, with the taka and foreign exchange reserves under pressure,” he said.

Millions of low-income Bangladeshis like Begum, whose family of five can barely afford to eat fish or meat even once a month, still struggle to put food on the table.

Bangladesh has made great strides in the last two decades in growing its economy and fighting poverty. Investments in garment manufacturing have employed tens of millions of workers, most of them women. Exports of clothing and related products account for more than 80 percent of its exports.

But with fuel costs so high, authorities have shut down diesel-powered power plants that produced at least 6 percent of total output, cutting daily power generation by 1,500 megawatts and halting manufacturing.

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Imports in the last fiscal year, which ended in June 2022, rose to $84 billion, while exports have fluctuated, leaving a record current account deficit of $17 billion.

There are more challenges ahead.

Deadlines for repayment of foreign loans related to at least 20 mega-infrastructure projects, including the $3.6 billion Padma River Bridge built by China and a nuclear power plant financed mainly by Russia, are fast approaching. Experts say that Bangladesh needs to prepare for when payment schedules increase between 2024 and 2026.

In July, in a move economists see as a precautionary measure, Bangladesh requested a $4.5 billion loan from the International Monetary Fund, becoming the third South Asian country to seek help recently after Sri Lanka and Pakistan.

Finance Minister AHM Mustafa Kamal said the government has asked the IMF to start formal negotiations on loans “for balance of payments and budget assistance.” The IMF said it was working with Bangladesh to come up with a plan.

Bangladesh’s foreign exchange reserves have been falling, which could undermine its ability to meet its credit obligations. By Wednesday they had fallen to $36.9 billion from $45.5 billion a year earlier, according to the central bank.

Usable foreign reserves would be about $30 billion, said Zahid Hussain, a former chief economist at the World Bank’s Dhaka office.

“I would not say that this is a crisis situation. This is still enough to meet three months of imports, three and a half months of imports. But it also means that… you don’t have a lot of room to maneuver on the reserve front,” she said.

Still, despite what some economists say is overspending on some expensive projects, Bangladesh is better equipped to weather tough times than other countries in the region.

Its agricultural sector (tea, rice and jute are the main exports) is an effective “shock absorber” and its economy, four or five times the size of Sri Lanka’s, is less vulnerable to external calamities such as a recession in the sightseeing.

The economy is forecast to grow at a 6.6 percent pace this fiscal year, according to the latest forecast from the Asian Development Bank, and the country’s total debt is still relatively small.

“I think in the current context, the most important difference between Sri Lanka and Bangladesh is the debt burden, particularly the external debt,” Hussain said.

Bangladesh’s foreign debt is below 20 percent of its gross domestic product, while Sri Lanka’s hovered around 126 percent in the first quarter of 2022.

“So, we have some space. I mean debt as a source of stress in the macroeconomy is not a big deal yet,” he said.

Waiting in line to buy subsidized food, Mohammed Jamal, 48, said he didn’t feel as free for his own family.

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“It has become unbearable trying to maintain our standard of living,” Jamal said. “The prices are beyond the reach of ordinary people. It’s hard to live this way.”

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