Bangladesh: An economic disaster, not just a forex crisis, is in the making

As the weaknesses of the Bangladesh economy became apparent from the middle of the last year, the unofficial rates of Taka started falling against the US dollar.

The foreign exchange crisis in Bangladesh is going from bad to worse. A state of denial, resistance to structural reforms, questionable policy decisions and, last but not the least,  unbridled corruption of the Sheikh Hasina government in Dhaka, should squarely be blamed for that.

From a peak of nearly $48 billion in 2021, the forex reserve has been following a secular declining trend for nearly two years now and has hit $26.9 billion, as per Bangladesh Bank official records, in September 2023.

This is, however, an inflated number as it includes a $6 billion export development fund (EDF). The money was distributed at soft rates to a handful of business groups, close to the power, with an established track record of defaulting loan repayment.

The rest followed the set pattern. The EDF loans were not repaid. The government and Bangladesh central bank (Bangladesh Bank) are now issuing circulars to commercial banks for recovery. Going by the track record, that’s an eyewash.

“Bank gaming” is an old disease in Bangladesh. However, the situation was never as bad. The state-owned banks, controlled by the finance ministry, are buried under a pile of bad debts. Historically, the central bank-monitored private sector banks were relatively better performers, but no more.

Depleting Forex Reserves

Net of EDF, Bangladesh’s forex reserve plummeted to $20.96 billion in October. This was way below the $25.34 billion benchmark set by the International Monetary Fund (IMF) for September. The IMF agreed to offer a $4.7 billion loan for macroeconomic stability of the country.

Notably, Dhaka imposed stiff import restrictions to restrict foreign currency outflow. From $6.4 billion in 2021 and $7 billion in 2022, the monthly import bill is now reduced below the 2019 level of $5 billion. India has also extended a rupee trade window.

However, the measures didn’t work. Between August and October 2023, foreign exchange reserves eroded by $2 billion. The problem lies with the inflow and is largely created.

Bangladesh has two major sources of foreign exchange: readymade garments – contributing 85 percent of exports – and remittances.

According to available estimates, exports were up by over 9 percent in the September quarter but the remittance earnings were down by 13 percent. The decline came despite a record outflow of 11.37 lakh of migrant workers during 2022-23 (July-June).

Clearly, something is amiss here. The clue lies in the artificially low official exchange rate and distinctly higher value available through Hundi or informal/illegal money transfers.

Exchange Rate Mess

Bangladesh does not have a market determined exchange rate for the local currency, Taka. Worse, it has at least four or five different administered rates for different categories – like exporters, importers, remitters etc.

In the past, the central bank unofficially pegged the Bangladeshi Taka with Indian Rupee at a notional exchange value and changed dollar rates accordingly. The recent topsy-turvy in both the local and the global economy disrupted that design.

As the weaknesses of the Bangladesh economy became apparent from the middle of the last year, the unofficial rates of Taka started falling against the US dollar. Instead of accepting the reality, the central bank tried to keep the local currency artificially strong, leading to wide gaps between official and unofficial rates.

Ideally, a devaluation of Taka should have helped Bangladesh’s export economy. However, the politically powerful ready-made garments (RMG) sector follows a different playbook.

They insist on cheap import of fabric and other inputs. Part of the export revenues are parked abroad. A doctored balance sheet, showing minimal or no returns, helps them extract many benefits – including non-repayment of loans – at home.

Dhaka decided to keep the RMG sector happy by keeping exchange rates low. Bangladeshi workers sent money from abroad through Hundi. The reserves suffered a free fall.

As of date, the official exchange rate of Bangladesh Bank is Taka 110 a dollar. Importers do not get dollars below Taka 112. The rate for remittance inflow was recently hiked to Taka 115. In the kerb market, the dollar is sold at Taka 120 and above.

Doctored Data

Going by the trends, one may question if Dhaka is experiencing a mere foreign exchange crisis or a much wider economic crisis. The concern is fueled by poor quality of data even in areas which are generally considered tamper-proof.

A recent study revealed a $12 billion gap between the shipment value recorded by the Export Promotion Bureau and receipts of export proceeds through banking channels estimated by Bangladesh Bank, during 2022-23.

Considering total exports of only $43 billion, the margin is as wide as 28 percent. Can it be a case of pure error or double counting? Unlikely. Media reports quoting unnamed sources in the central bank held it as a case of parking of wealth in abroad.

But did that make policymakers in Dhaka sit up? Not at all. According to Bangladesh Bank, shipments of garments grew by 17 percent in knitwear (HS 61) and 7 percent in non-knitted or woven (HS 62) segments during July-August this year.

The numbers are starting because competing nations reported a sharp decline in export of similar varieties.

Vietnam reported a 16 percent year-on-year decline in export earnings from garments during January-August. According to ITC Trade Map, exports under both HS 61 and 62 categories declined substantially during July-August. The fall was sharper in August.

India has a similar story to tell. According to the ministry of commerce, knitwear exports were down by 12 percent in August and 20 percent during April-August. In non-knitwear, exports are down by 4 percent and 11 percent, respectively.

So how could Bangladesh remain an exception?

Media reports suggest, even the vice-president of the Bangladesh Knitwear Manufacturers and Exporters Association has no clue. The sector has been facing an order crisis since the middle of last year and most of the factories, including his, are running at low capacity.

Pratim Ranjan Bose is an independent columnist, researcher, and consultant. His X handle is @pratimbose. Views are personal, and do not represent the stand of this publication.