Bangladesh’s Inflation Rate is Higher than Sri Lanka’s: Bangladesh on Achieving Macroeconomic Stability

Bangladesh has recently received an IMF bailout loan of $4.7 billion, receiving $689 million of that in the second of the total seven instalments awaiting us. This relatively promising news comes in contrast to the alarming news of FOREX reserves plummeting to less than $16 billion USD in usable reserves, with uproars of depleting reserves happening since 2022, when reserves stood at $33.7 billion USD. Bangladesh hit a peak of 48 billion USD during the mid-COVID pandemic in August 2021. 

We talked to Dr. Ahsan H. Mansur about the current economic condition of Bangladesh since the decline in macro indicators. “Now we want to see how they (the finance wing) are going to proceed. They’re going to set up a task force in three areas: overall macro, financing sector issues, including banking, and tax policies,” said Dr. Ahsan H. Mansur. He further explained why it’s in these three areas. He stated that inflation, the exchange rate, and building up the reserves are necessary. “Without stabilizing the exchange rate, it’s not possible to fight inflation since the exchange rate keeps depreciating,” he added. In terms of bringing in more FDI, he stated that the macro environment has to be stabilized.

If FOREX reserves are low, then foreign investors won’t get their money back, thus diminishing their incentive to invest, he stated. “We can’t bring in machines without FOREX reserves. We need macro-stability.”

Bangladesh and the world as a whole are currently fighting the problem of inflation, with southeast Asian neighbor Pakistan going through a recessionary inflation rate of 29.7%. Bangladesh is currently at a 9.4% inflation rate, even though Sri Lanka brought their inflation rate down to 4%. Dr Ahsan talked about the recent monetary policy release. He asked “whether it’s tight enough” and that it might not be enough to deal with inflation. “The government and Bangladesh Bank should’ve been more aggressive with their policies. More interest rate increases and faster interest rate increases are required until inflation comes down. There’s an interest rate cap that exists right now, which must be lifted.” 

He stated that making taka a more attractive investment would help stabilize the exchange rate. He highlighted that we’re doing poorly in the banking sector, the stock market, the bond market, and insurance highlighting that people who’ve paid insurance premiums,and when the insurance matures, they’re still not getting the money.

Dr Mansur opined that banks can act as intermediaries for insurance as a good alternative for agents and brokers, but banks themselves can’t provide or underwrite it, and it has to be done by insurance companies. “If a company makes a wrong investment and goes bankrupt, then the bank won’t be taking responsibility for this.”

Of course, our banking system is unhealthy for a reason. Bangladesh has the second highest rate of loan defaults in South Asia, at 11.76% for private banks. Logically, a large chunk of money being wiped off the balance sheet won’t make banks healthy anytime soon, especially since this problem has been a long-term one. He stated that this figure excludes loans getting rescheduled. “People show that they can’t pay the interest alone or the principal amount currently and constantly reschedule loans as a result of this. Loans that have been rescheduled three, five, or ten times won’t be returned to the bank. They should also be counted as NPLs.” He also noted the money that banks lose when people fight off loan payments in court. “In total, the figure is probably around 20–40% in actuality.” While refraining from making generalized statements, he stated that there should be a long-term approach to solving this problem. “There are 15 banks, according to Bangladesh Bank, that are illiquid, that need management changes and other changes.”

He further stated that it might bring in investment from outside in terms of investments in treasuries and that foreigners did invest in treasuries( the last time this happened was in December 2018). “But the smart interest rate that was recommended at 6% for Treasury bills and 3-3.5% regular has gone up to 11.5–12%; adding this to 3.5% brings it up to 15%, higher than the interest rate cap of 15%. So the government isn’t following its own principles. They have to follow their own principles,” he added.

But the way that Bangladesh Bank is dealing with the problem of budget financing is by printing money. “Then the government has to go and take the money from Bangladesh Bank to utilize, which it is doing.” “We need to cut the expenditure. How much? Probably around 1 lakh crore from the budget.” was his recommendation to deal with the issue. In terms of areas, he talked about operational activities like reducing paper usage, reducing oil usage, reducing electricity usage, etc. since people are utilizing both these and things like digital versions.

The other area is development, as he stated. “If people have lived without these projects forever, then waiting another year or two won’t do any harm,” he stated, in terms of projects taken up by the government.

He highlighted the skewed nature of the trade relationships that we have. “We export everything from the west; we import everything from the east,” stating that we should focus on the rising markets of India, China, and ASEAN, stating that in India, PRAN products have reached beyond West Bengal and Assam into the South as well, albeit in snacks such as Channachur. “We won’t just buy from here; we also have to see what we can sell to them.” He stressed diversifying exports beyond simply RMG. “Unfortunately, we haven’t succeeded in other areas. The areas that we can focus on are electronics, pharmaceuticals, agro-products, cycles, motorcycles, and light engineering (spare parts like bolts, nuts, etc.). These exist, but they’re focused only on the domestic market.”

Recently, there was a trade settlement with India and China in our local currencies (the rupee and the yuan), allocating 10% of trade for that. That is, if we import, we pay in their currency. If we export, we receive takas. Dr. Ahsan stated that this really doesn’t really have a future. “We import $24–30 billion from China while exporting only $1 billion.” Highlighting the trade imbalance, stating the deficit of their currencies in our reserves regardless. “We’re not going to buy Yuan or Rupee with dollars. The option is for us to receive loans in rupees or yuan. But that’s a loan!”

He stated that certain products require better intervention; for example, in agriculture, we don’t grow the specific potato type (russet potato) that’s used to make fries; the same applies to peanuts and similar crops. And that SMEs (small and medium enterprises) in Bangladesh suffer from a lack of financing, with interest rates being secondary. Many SMEs are willing to pay high interest rates(loan sharks often capitalize on this, charging 30–40% interest rates) but can’t get access to formal credit due to a lack of collateral. “Banks and NGOs can help in collaborations with them.” However it stated that we need to integrate them into the financial sector, and then we can incorporate them into the tax sector.

There’s a system of input tax credit where when a business purchases something, the VAT on it can be claimed in tax filings to be exempt from taxation. “In Bangladesh, when the VAT is reduced from 15% to 10%, companies that purchase products don’t get this input tax credit. SMEs mostly survive by supplying large companies. For example, if they require 10,000 parts, they’ll rely on 500 external vendors instead of manufacturing everything in-house. But now that there’s a 10% tax that they have to pay on the products from these vendors, they reduce their purchases significantly,as they don’t have to pay this to make the product in-house,’ he added.

“This is very inefficient, preventing horizontal integration. All over the world, it’s the SMEs that manufacture these small components like bolts, etc. Mercedes and Toyota have parts made by SMEs.” Of course, the private sector as a whole is suffering from numerous issues. Dr. Ahsan stated that after macro stability is gained footing, other issues must be delved into. “Gas and electricity supplies have to be ensured. Otherwise, it won’t incentivize industrialists. Solar energy costs 4 taka per watt in India and 11 taka per watt in Bangladesh. We need to see why our pricing is so high.”.

He stated that the lax legal framework in the country means that it takes 20 years to resolve a case. There’s no incentive for foreign investors to form partnerships when the Bangladeshi partner can simply seize all assets and the legal bureaucracy is this bad. The land rights issue is another problem, as it takes 5 years to procure land here, making it extremely difficult to establish EPZs.

“There’s no silver bullet in business. We need to find out how and in which places governance can be improved,” says Dr. Mansur highlighting the corruption in the country, that is preventing investment in the state.