High oil price and dollar-euro parity |
Events in Sri Lanka and the record current account deficit have pressed the panic button in Bangladesh. Despite repeated claims from the govt, rising fuel and commodity prices in the international market may further worsen the current account deficit. Last week,Bangladesh govt started a negotiation with IMF for a total credit of $4.5 billion for the next 3 years as budget assistance. Argument put forward for taking such a credit is that it bears low interest and it can be availed now before things turn into worse like Sri Lanka.
Despite a record inflow of remittances($900 million approx) in the week of Eid-ul-Azha,things have not improved much. Dollar market is still volatile and Bangladesh Bank regularly intervenes by selling US dollar. Current account deficit now stands at $15 billion. Bangladesh Petroleum Corporation (BPC) requires a subsidy of $2 billion to meet the import need of gas and oil. Bangladesh’s export destinations are mired in crisis. Increase in US policy rates may curb the inflation in United States, but investment in US may take a hit, further worsening the job prospect in US and casting a shadow over export order.Former IMF economist Kenneth Rogoff anticipates a covid recovery in China may push up again the price of oil in international market1. If it happens,then there may be another blow to the inflation situation,tightening the consumer pockets of US consumer. In Europe, fall of euro against US dollar (appreciation of dollar against euro due to rise in policy rate in US) means our exporters will get less Taka against the same volume of exports to Europe. In addition, recession in Europe is more likely as investors would prefer America over Europe due to higher return on dollar there. And Europe will lose its competitiveness due to dollar euro parity and rising inflation at home. New York Times columnist Thomas L. Friedman fears the war in Ukraine may prolong to the winter as it is the best alternative for Russia to get some favorable outcome from this war2. Due to gas supply uncertainty, Europeans have to ration their available supply in this winter.Rising cost at home and harsh winter may push NATO to influence Ukraine to cut a compromising deal with Russia. That means a prolonged war in Europe coupled with rising oil prices cast shadow over our export earnings. As fuel prices may be higher,our import spending may also be higher. This means our Taka may depreciate further. And remember next year(end) is the election year. Years during,before and after election generally witness big depreciation (see table)3.
| Year | Exch.Rate(TK/$) |
|---|---|
| 1990-91 | 35.67 |
| 1991-92 | 38.15 |
| 1995-96 | 40.84 |
| 1996-97 | 42.70 |
| 2000-01 | 53.96 |
| 2001-02 | 57.44 |
| 2008-09 | 68.80 |
| 2009-10 | 69.18 |
Source:Bangladesh Economic Review 2019
As Monsoon is not over ,govt fears further flood across the country by August. If it happens, then it will have further pressure on food security programs,prompting government to increase its spending on food import.Moreover,rising oil price also means we have to increase spending on irrigation during winter. So falling remittances, rising import expenditures may further worsen our current account deficit.
Notes And References
- “Global Oil And Gas Prices Have Been Highly Volatile--- What Will Happen Next?”,Kenneth Rogoff,July 5,2022,The Guardian. For more read https://www.theguardian.com/business/2022/jul/05/global-oil-gas-prices-supply-demand-us-europe
- “Ukraine War Is About To Enter A Dangerous Phase”,Thomas L. Friedman,July 12,2022,New York Times. For more read at https://www.nytimes.com/2022/07/12/opinion/ukraine-russia-putin.html
- Bangladesh Economic Review 2019
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