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Dhaka

Making of a Crisis

Some wrong policies in an otherwise fast-progressing country brought it to the verge of disaster.

By Waseem Shabbir Arain | October 2022

Fast pace for over a decade. This country earned tremendous applause. Everything was smoothly moving in the right direction. The unemployment rate was slightly above 5%. Even in per capita income it had surpassed India. Then what happened which caused an economic crisis in Bangladesh and slowed down its rapid progress?

According to leading economists, there are many factors behind this emerging economic meltdown; however, the most prominent is the abrupt increase in fuel prices that is up to 52% which viciously impacted the industrial sector.

It started with Covid-19 and then the Ukraine war which badly affected global supply lines causing food and fuel price hikes. lt further led to dwindling foreign exchange reserves and lengthy power outages. Bangladesh could also not escape the repercussions the global economic turndown and rising inflation.. It is now the third country in South Asia after Sri Lanka and Pakistan to bear face economic woes. However, the scale of economic crisis in Bangladesh is not as severe as in Sri Lanka.

The ountry’s 93% power production is based on thermal sources. About 63% electricity is generated from natural gas alone. while 10% comes from Diesel, 5% is from coal, 3% from heavy oil and 3.3% from renewable resources.

Currently, more than 80% of Bangladesh’s economy is based on the garment industry. It is the second biggest export garments industry in the world, after China.. The actual fault lines behind the emerging economic turmoil became more prominent after disruption in the global supply chain of oil and gas following the Russia-Ukraine war. Fuel prices jumped by more than 50% across the globe. This is what caused Bangladesh to import less fuel and gas than what was actually needed for power and energy generation. Secondly, Bangladesh could not afford to pay more than double for oil imports which eventually hampered and lowered power generation. The breakdown in power supply to the garment industry ultimately caused it to halt is operations countrywide impacting the economy severely.

Bangladesh’s economic overdependence on the garment industry brought in a very bad financial crisis. Had the country diversified its economy in vatious industrial sectors, the fallout would not have been so severe. Now Bangladesh is paying the cost of focusing more on one sector and ignoring all other options.

Economic experts are of the view that only Covid-19 and the Ukraine war cannot be held accountable for the spiking financial crisis in Bangladesh. They say, there are myriads of other factors which have led to the sorry economic fate.

Bangladesh’s economic overdependence on the garment industry brought in a very bad financial crisis. Had the country diversified its economy in vatious industrial sectors, the fallout would not have been so severe.

The high cost of infrastructure projects has mpeded upward economic growth. The Padma Bridge, one of the largest projects in the country, cost about $3.6 billion, which was previously estimated to be 1.16 billion. The Rooppur Nuclear Power Plant cost Bangladesh $12.65 billion; however, the actual price of the project will be unknown until it becomes fully operational. Similarly, the Dhaka City Metro Rail Project reached $3.3 billion while the original estimate was $2.1 billion.

Another factor behind the crisis is the crash of the banking sector due to endless default of loans. The central bank claimed that the total amount of defaulted loans was $11.11 billion, which was contradicted by the IMF, saying the actual amount was even more than double. The corruption in the power sector further triggered the economic crisis. Between 2010-2021, the Power Development Board received $7.1 billion, while the Bangladesh Petroleum Corporation got $3 billion between 2010-2015. Regrettably, these gigantic amounts were not fully spent on power generation.

Capital flight from the country also contributed to the crisis. According to the Global Finance Integrity Report, between 2009 and 2018, some $8.27 billion was illegally laundered by Swiss banks by mis-invoicing the values of imports and exports. In 2022, it has been increased by 55.1%, reaching $871 million. Economists say the Bangladeshi Taka has effectively slid against the US dollar by approximately 20% in just the past three months. Moreover, due to the Russia-Ukraine war, imports have jumped to 39 percent and exports could hardly grow by 3 or 4 percent during the fiscal year ended on June 30.

Currently, numerous austerity measures are being taken in order to alleviate economic woes. The Cabinet Secretary Khandker Anwarul Islam says that in Bangladesh most schools are closed on Fridays but now will also close on Saturdays to reduce electricity use amid concerns over rising fuel prices. Government offices will cut their workdays to seven from eight hours but private offices will be allowed to set their own schedules. Tens of thousands of mosques around the country have been asked to curtail their use of air conditioners to ease pressure on the electricity grid.

In addition to electricity rationing, Diesel power plants across the country accounting for 1500 megawatts of generation capacity have been taken off the grid. In order to overcome the lengthiest blackouts in the country, the government is struggling to source enough Diesel and gas to meet the demand. As per reports, the government is planning to hold negotiations with Russia for oil deals in order to mitigate the energy crisis.

Bangladesh’s leading newspaper, The Daily Star has reported that the country has sought a bailout package of $4.5 billion from the International Monetary Fund in order to cope with mounting pressure on its economy. Funds will specifically be used for balance of payments and budgetary needs to bolster the big garment-exporting industry..

If a deal is struck between Bangladesh and the IMF, the country will be in a position to escape the impending economic crisis. Bangladesh needs to revisit its economic policies according to changing global trends and focus on diversification of the economy.

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