#1Independent Review of RBD Bangladesh's Development বাংলাদেশের উন্নয়নের স্বাধীন পর্যালোচনা Recent Challenges Facing the Bangladesh Economy: A Brief Overview Dhaka: 24 July 2022 POLICY DIALOGUE CENTRE FOR www.cpd.org.bd#2Independent Review of RBD Bangladesh's Development Introduction □ In the recent months, Bangladesh was forced out of the comfort zone enjoyed earlier in terms of overall macroeconomic management The macroeconomic stability considerably deteriorated owing to challenges originating from both domestic and external fronts ➤ Besides available data and information, the recent government policy measures bear testament to this notion It must be acknowledged that a significant number of other countries are going through similar challenges - both as a consequence of the COVID-19 pandemic and due to the aftershocks of the Russia-Ukraine conflict In this context, we focus on four critical areas of current policy discourse: ➤Inflation ➤ Public finance management External sector ➤ Power and energy sector CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 2#3Independent Review of RBD Bangladesh's Development Inflation In June 2022, the inflation rate in Bangladesh has reached 7.56% which is highest in nine years Item Aata Table: The price of some basic food items which increased this past year Price in BDT as of 7/20/2021 Price in BDT as of 7/20/2022 Percentage increase in price 51 50.00 34 Maida 44 66 51.72 Soyabean oil (1 litre) 145 190 31.03 Moshur Daal (lentil) 75 105 40.00 Eggs (per hali) 32 39 23.81 Dried Chilli (imported) 260 375 44.23 Turmeric powder (imported) 160 215 34.38 Miniket (rice) 63 70 11.20 Mutton 850 950 11.76 Broiler chicken 128 145 13.73 Onion (imported) 43 48 11.76 □ The price of almost every food item is increasing at a higher rate than the food inflation rate published □ The consumption basket used to calculate overall inflation was created in 2005, so it does not represent the current consumption patterns, and therefore needs to be updated ☐ Rising inflation has a more adverse impact on people with lower income, so they need to be protected CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 3#4Independent Review of RBD Bangladesh's Development Inflation Recommendations The money supply has to be controlled to contain high inflation through increasing lending rate Monetary policy should be made more effective through a market determined interest rate regime Poor households should be provided with support Micro and small businesses should be provided stimulus since most of them could not access the credit support provided during the COVID Austerity measures announced by the government should be continued CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 4#5Independent Review of RBD Bangladesh's Development 50.0 Target 33.6 4.0 FY20 5.6 10.3 7.3 42.2 35.2 23.2 Figure: Growth of selected fiscal indicators (in %) Target Actual FY21 Expenditure 23.6 9.5 Public finance management -14.8 16.5 Jul-Mar 2.0 -62.7 18.4 31.263.3 20.6 11.1 Actual -121.7 Target Jul-Mar FY22 Revenue Source: Calculated from MoF data ■Deficit (excluding grants) During the first nine months of FY22, the growth in revenue mobilisation surpassed the annual growth target. On the other hand, public expenditure growth was substantially below its annual growth target The government has a budget surplus during the first nine months of FY22 (excluding grants) – not desirable in the present context - CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 5#6Independent Review of RBD Bangladesh's Development Public finance management Recommendations The already introduced austerity measures such as stoppage in vehicle purchase by government entities, reduction in foreign travels by government employees, stoppage in providing honorarium for attending meetings, pause in the implementation of C-category ADP projects (i.e., low priority projects) and reduction in expenditure (by 20-25%) owing to fuel and electricity by government agencies should be continued ☐ Subsidy on fuel, power and agriculture should be continued for the next few months. It must be taken into cognisance that any hike in the administered prices will have adverse impact on inflation Tax evasion should be restrained by all means to generate resources for the priority sectors ➤ To this end, the NBR should promote electronic-based measures, including e-TDS, e- filing and cross-checking transaction data from multiple sources Transfer Pricing Cell (TPC) should work closely with Bangladesh Financial Intelligence Unit (BFIU) and Customs Intelligence and Investigation Directorate (CIID) to curb trade-based money laundering CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 6#7Independent Review of RBD Bangladesh's Development External sector Table: Trends of key external sector indicators Unit Indicators Jul-Jun FY21 Jul-Dec Jul-May FY22 FY22 Trade balance -23,778 -15,616 -30,816 Current account balance -4,575 -8,183 -17,233 Capital account Million 221 138 173 Financial account USD 13,093 6,676 13,352 Overall balance 9,274 -1,791 -4,300 Forex reserve 46,391 46,154 42,202 Forex reserve in months of imports Month 6.9 5.6 4.6 Source: Compiled from Bangladesh Bank data □ Despite a robust growth in export earnings, current account deficit reached to a whopping USD 17.2 billion at the end of May FY22 owing to higher import growth and negative growth of remittance inflow Rapid depletion of forex reserve has become a major concern ➤ From USD 46.4 billion in June FY21, forex reserve plummeted to USD 42.2 billion in May FY22 which further decreased to USD 39.8 billion in early July FY23 - equivalent to about 4.3 months worth of import payments CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 7#8Independent Review of RBD Bangladesh's Development External sector However, in this connection it needs to be recalled that the IMF has raised question as regards the accuracy of accounting practices associated with estimation of foreign exchange reserve Several media outlets, citing a draft IMF report, mentioned that the foreign exchange reserve at the end of FY21 was overstated to the tune of about USD 7.2 billion (15% of the total) ➤ The major part - more than four-fifths of the overstated reserves - was on account of foreign currency loans to local banks; other parts being in irredeemable claims in non-convertible foreign currencies CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 8#9Independent Review of RBD Bangladesh's Development External sector Recommendations Bangladesh Bank has taken four measures, such as halving the dollar holding limit (Net open position- NOP) of banks, monetising 50% of dollar holdings in Export Retention Quota (ERQ), halving the deposit limit as ERQ and transferring foreign exchange funds of offshore banking units to domestic banking units. While these are positive moves, but these will not dent much into the problem In the short term, tightening the imports should be the main strategy. Priority should be given to the import of essential commodities and inputs for production Given the current situation, trade misinvoicing should be restrained at any cost There is an urgent need to revisit the various incentives prevalent in the external sector CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 9#10Independent Review of RBD Bangladesh's Development Power and energy ☐ Global energy market has experienced a rise in prices in 2022 mainly due to post- Covid economic recovery followed by sanctions over Russian oil in view of Ukraine war ➤ Given the uncertainty in future trends in war, the price of energy is likely to reduce at a slower pace in the coming months of 2022 which would continue in 2023 A considerable time would be required for stabilisation in global energy price - a warning for Bangladesh! Price of Energy in Global Market: Current and Projected Crude oil price, avg ($/bbl) Coal price, South Africa ($/mt) Projected Price, Crude oil, coal 150.00 300.0 110.0 450.00 100.0 250.0 100.00 90.0 200.0 250.00 80.0 50.00 150.0 70.0 0.00 50.00 100.0 60.0 M01 M02 M03 M04 M05 M06 M01 M02 M03 M04 M05 M06 2022f 2023f 2021 2022 2021 2022 Coal, Australia 2024f Crude oil, Brent Natural gas price, Europe ($/mmbtu) LNG price, Japan ($/mmbtu) 40.0 Projected Price, Gas 30.00 60.00 40.00 20.00 0.00 20.00 10.00 20.0 M01 M02 M03 M04 M05 M06 2021 Source: World Bank, Pink Sheet 2022 0.00 M01 M02 M03 M04 M05 M06 2021 2022 CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 2024f 2022f 2023f Natural gas, Europe Liquefied natural gas, Japan 10#11Independent Review of RBD Bangladesh's Development Power and energy ☐ A significant amount of foreign exchange was spent in FY22 for importing energy ➤ The spending would be much higher for FY23 - A considerable rise is observed in LC opening and settlement in FY22 (in terms of USD) This is observed for all imported energy - refined and crude petroleum and import of coal For example, an additional USD 3.7 billion had to spent for settlement of LCs in FY22 for importing energy (except LNG) Such a high spending is likely to continue for energy import in FY23 Import of petroleum goods (in million US$) 2021-22 July-May 2020-21 July-May 0 853 6392.6 5468.2 2575.1 2000 4000 6000 8000 POL Crude petroleum Source: Bangladesh Bank LC Opening and Settlement for Importing Energy (million USD) July-April July-April Refined Fresh Outstanding Settlement Crude oil Petroleum opening of LCs at the of import import LCs end period FY20 3782.09 275.03 FY21 2839.59 72.49 FY22 5636.18 492.9 LCS 3573.76 2777.4 5742.43 Fresh Outstandin Settlement opening of g LCs at the of import import LCs end period LCs Coal of July-April Fresh Outstan opening ding LCs at Settlem ent of FY20 383.03 93.33 287.14 FY21 551.42 6.23 583.79 FY22 967.96 63.18 1004.57 FY 20 FY 21 LCS 396.21 import the end period import LCS 11.59 337.04 316.05 % changes % changes 9.37 281.26 FY 22 741.09 132.03 614.48 FY20-FY21 -24.92 FY21-FY22 98.49 -22.28 106.76 FY20-FY21 43.96 103.31 % changes FY21-FY22 75.54 71.08 FY20-FY21-20.23 FY21-FY22 141.8 -19.15 118.48 CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 11#12Independent Review of RBD Bangladesh's Development Power and energy ☐ Due to pressure on import with limited available forex reserve, domestic energy supply and power generation have been started to be curtailed ➤ This is evident in case of less supply of LNG ➤ Maximum load curve indicates a fluctuating trend in power generation in recent months (June-July,22) ➤ The amount of load shedding is likely to be higher than what is officially announced (1500-2000 MW) - it was 2556 MW in 18 July, 2022 ➤ The burden of capacity payment has emerged as an added tension as a significant part of it needs to be paid in USD At present payment due is USD 1.5 billion 2500 2000 1500 1000 500 Gas production (MMCFD) Jul-21 Aug-21 Sep-21 Oct-21 14000 13500 13000 12500 12000 11500 11000 10500 Nov-21 Dec-21 Jan-22 Feb-22 Apr-22 Mar-22 May-22 Jun-22 Jul-22 ■Gas R-LNG Source: Petro Bangla Power Generation: Maximum Load (MW) 13696 21-Jun-22 23-Jun-22 25-Jun-22 27-Jun-22 29-Jun-22 CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 01-Jul-22 03-Jul-22 13619 13765 12242 11847 11981 05-Jul-22 07-Jul-22 09-Jul-22 11-Jul-22 13-Jul-22 15-Jul-22 17-Jul-22 19-Jul-22 21-Jul-22 Source: BPDB 12#13Independent Review of RBD Bangladesh's Development Power and energy □ Government has undertaken measures to address the energy crisis ➤ Country wide load shedding in power supply ➤ Planning to shut down petrol pump one day per week ➤ Planning to control transport use □ Countries have undertaken various kinds of austerity measures ➤ Pakistan has imposed restrictions on power usage through load shedding, energy consumption and by slashing usage of motor gasoline and gas oil in offices ➤ Vietnam emphasised on reducing power use specially during the peak hour Indonesia has increased the energy subsidy to maintain a balance between economic improvement and Indonesia's commitment to a green energy transition CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 13#14Independent Review of RBD Bangladesh's Development Power and energy Recommendations ➤ The global energy crisis is likely to continue in the medium term ◉ Higher energy price is likely to continue in the global market in the coming months though it may recede to some extent ➤ Bangladesh continues to spend a substantial amount for import of crude and refined oil and LNG Necessary forex needs to be arranged for energy import. Government may borrow from Islamic development bank, IMF, World Bank and bilateral sources (KSA, Kuwait, Qatar) ➤ Depending on imported LNG alone would be too burdensome and would be too uncertain to ensure uninterrupted gas supply for domestic industry and power sector ■ Immediate measures in exploring gas in old gas exploration sites is required ➤ Government should realise that renewable energy can play a vital role in energy diversification in the current fossil-fuel based energy crisis CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 14#15Independent Review of RBD Bangladesh's Development Concluding remarks A) The crisis is not of short term in nature B) The crisis may ease but at a slow pace C) Any short term measure would not be able to address the current concerns properly D) It is important to take into account both macro and micro concerns in short to medium term E) Government's current measures are mostly of short term nature F) At present macro stability in the medium term should get priority. Need to find out effective instruments on austerity measures which would be able to ensure macro stability G) This includes stable forex reserve, inflation management, enhanced revenue generation, ensuring electricity and gas supply for economic activities, extended social safety net programmes Bangladesh is in medium term crisis. Current measures are inadequate. So measures should be both short and medium term in nature CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview 15#16Independent Review of RBD Bangladesh's Development Thank You cpd.org.bd fcpd.org.bd cpdbd You Tube CPDBangladesh CPD (2022): Recent Challenges Facing the Bangladesh Economy: A Brief Overview