Better Outlook, Less Optimism

Despite good projection about inflation and growth, Here less optimism is shown for the both.

NBR last week disclosed that around 10 million people registered as TIN holders. But only 3.5 million taxpayers submitted returns till the last day of return submission, which was extended to January 31,2024. Revenue shortfall is becoming the inevitable reality amid a commitment to increase it as part of IMF loan deal. January inflation data has not been published yet. But prices of kitchen commodities and winter fruits have shown no sign to ease. Meat items still remain out of reach to the Middle class. So we may see another hike in interest rate in coming weeks.

Government last week also announced to lower the cash incentives for the export sector. But many exporters did not appreciate it. It is a belated move when govt is increasingly feeling the pressure to cut the spending amid funding crisis.

In my post “Economic Reforms: Morning Shows The Day”, I highlighted how government plans to provide bonds to the banks and power providers instead of the due payments of Taka 220 billion may provoke inflation in the future. Last week, 5 banks received the bonds worth Taka 50 billion as payment to subsidies in fertilizer and power.

Moody’s foresees a 3%-4% depreciation of local currency as Bangladesh Bank plans to adopt “crawling peg” exchange rate mechanism before moving to market adjusted rate. It will definitely make our export items more competitive but the downside is the depreciation pass-through may worsen the inflation.

IMF in its world economic outlook update for January ,2024 sees a global growth rate of 3.1%. But Bangladesh’s biggest apparel destination USA is likely to witness decline in growth in the coming years, resulting from policy rate hikes. Consumer demand in the USA is not bouncing back soon. So uncertainty looms large on apparel export growth in the US market. Meanwhile, euro area is projected to register a positive growth in the coming years. But what political stands the USA and the EU will make following the one-sided election will have a deeper impact on the exports to these markets.IMF anticipates global inflation to fall to 5.8% in 2024 from 6.8% in 2023. IMF also acknowledges that escalation of tensions in the Middle East may cause supply side disruption and worsen the price levels, delaying the economic recovery.Downward growth projection is reported for Russia, China and Japan. India is projected to achieve 6.5% growth for this year and next year. Apparel exports to India and Japan have already reached the $ 1 billion mark. And any fall in consumer demand will likely to impact our export.

In brief, falling revenue, not-so-optimistic inflation situation cast shadow over Bangladesh’s economic recovery amid a positive global growth projection of 3.1% in 2024. Unless miracle happens in export order ,bumper crop harvest and spike in remittance inflow, Bangladesh GDP is likely to shrink in terms of USD estimates. Govt's delay in starting bold reforms throws weight behind such possibility.

Tight Credit And Inflation Cast Shadow Over Economy

Huge pressure of debt obligation, Govt is in a precarious position.

Downgrading of Bangladesh's credit rating by Moody’s and S&P cast shadow over economy. In addition, Fed's policy rate hike also contributed to raise the international lending rate. Many Bangladeshi companies borrowed heavily from international banks at market rate.

Several news reports indicate that Bangladesh has to pay $12 billion this year alone to respect its debt obligation. Govt has to pay $3 billion and the rest will be paid by the private sector. Dwindling reserves, now stand somewhere around $20 billion, gives little room for optimism that Bangladesh will overcome the debt hurdle¹.

Meanwhile, govt keeps raising the fuel price but it is unlikely to get the next tranche of IMF credit package.

Earlier Bangladesh’s repeated failures to clear energy dues had drawn media attention. Govt intervened to settle the matter. This ultimately led to downgrading of credit rating.

Bangladesh Bank removed all kinds of cap on lending and deposit rates in the midst of soaring inflation, aggravated by macroeconomic mismanagement. Consequently, SME credit rate has also increased. Being one of the crucial sectors for creating jobs and economic activities, SME sector also witnessed slow down in growth.

More recently, a series of scam in Islami Bank,one of the biggest provider of SME credit,cast shadow over SME business. One little known Nabil Group swallowed taka 9.5 billion.Apart from that upstart companies and employees took loan in the name of other people who do not know nothing about the loan. In addition, directors of the bank are also accused of corruption and money laundering.So the management board decided to curb the power of branch manger and made it mandatory to take board's prior approval in taking loan excess of taka 5 million. This will evidently lower the pace of credit to SME sector, which is getting less credit as govt and public institutions borrow heavily from the banks.

Meanwhile, harsh climatic conditions augur ill for food security. India banned export of all kinds of rice except basmati. It may also stop exporting sugar as heavy downpour cast a bad spell for sugarcane cultivation. Thailand refused to make early commitment as it anticipates further rise in price of rice.

Despite this upward pressure on price levels, many countries managed to contain the inflationary pressure. In Bangladesh ,inflation shows no sign to abate.

Since govt has huge debt obligation, there is no other option to print money. Loan gets costlier due to credit rating downgrade. So inflation may soar further,which may be ensued by further rise in interest rate. One silver lining is that a participatory election may improve the situation. But if no drastic reform program is taken, economic situation may further deteriorate. Big depreciation of taka may also happen.

Limited access to foreign credit and rising inflation may put further hurdle in economic recovery. Tougher economic policies lie ahead whatever political creed will form the govt.

Notes And References

1. ”Agami Char Mashey Baro Billion Dollar Shodh Korte Parbe Bangladesh?(Can Bangladesh Pay $12 billion In The Next Four Months?)”,BBC Bangla,August 2023. https://www.bbc.com/bengali/articles/ck7v03wz00vo

Another Blow To Credit Ratings

Long-term credit outlook is in decline Hints that economy is not doing fine.

Recently credit rating agency Standard and Poor Global Ratings has lowered Bangladesh’s long-term outlook to negative in the wake of government’s inability to clear dollar payments to international clients¹. Earlier, Moody’s had downgraded Bangladesh’s credit rating. Back then, government labelled the move as geopolitical one. But Dubai and Singapore based private banks made strict loan conditions following the rating.

Earlier a news report divulged that Petrobangla, a public corporation for extracting and procurement of fuel and energy, is facing difficulty in clearing dues of foreign energy companies. A Singapore based company and Total Energies owe a total of $110 million to Petrobangla. In addition, Chevron owes $280 million². They threatened to stop furnishing gas if the dues are not cleared soon.

Bangladesh has not increased its capacity to extract more gas and oil and to refine crude oil. Even former Chinese envoy to Bangladesh in a press conference wondered why Bangladesh wanted to buy oil from China when it is a net importer of oil. Saudi government on several occasions proposed the government to set up a new refinery. Only recently BPC installed oil pipeline and storing facilities for crude oil in Moheshkhali , a tiny island off the coast of Chattogram.It will save the govt Taka 8 billion annually.

Prior to this latest incident of payment debacle in energy sector, government had earlier intervened to clear dues of $293 million to Chinese government for smooth operation of Payra thermal power plant. Rampal power plant had also gone through similar intervention.

Back in April, a news report said that Facebook’s Bangladeshi public relation firm decided to limit its operation of collecting ads for Facebook. In a letter addressed to its clients, the firm put the blame on acute dollar crisis and obstacles in repatriating the ad revenue to the USA.

It was not the first incident of dollar crisis faced by private firm. Earlier, news report also surfaced claiming private companies who had borrowed from foreign institutions face uphill task to pay back instalment and interest as most banks refused to sell dollar crossing some limit. At the end of December 2022,commercial borrowing stood at around $8 billion and total credit stood at around $92.7 billion.³

In the first two weeks of current fiscal year,government borrowed Taka 10 billion from the central bank by purchasing treasury bonds and bills,which is literally printing money and injecting into economy⁴.

Back in April, in a piece titled “Food Security Under Scanner”,I wrote: “Another thing I have recently noticed that this year alone govt has to pay Taka 1 trillion as interest payments. This means it has to compromise spending on other sectors or to print money to meet the debt obligation. As this is an election year,govt may also embark upon politically motivated development projects to unite the loyalists. Often the money may stem from printing more money. This will push up the price level further, depreciating Taka further and increasing the woes of consumers.” ⁵

There is no surprise in S&P's pessimistic rating. Telenor Asia's head in an interview to a local daily has made it clear winding down of their investment in Bangladesh hinges on political situation⁶. Beximco Group,which earlier took over the operations of Glaxosmithkline here,has offered Telenor to purchase all its shares if it departs from Bangladesh. According to a report by UNCTAD, investment on relocating factories from Occidental countries to Bangladesh was declined by 59% in 2022.

Fed's policy rate hike, rising inflation, tensed political atmosphere, huge debt obligation offer dismal picture in investment. In general, investors' confidence reflected in these recent ratings. More quickly we resolve our political differences ,earlier will be our economic recovery.

Notes And References

1. “S&P Lowers Bangladesh’s Outlook To Negative,Credit Rating Unchanged “,Jebun Nesa Alo,The Business Standard, July 25,2023. For more read at https://www.tbsnews.net/economy/sp-lowers-bangladeshs-outlook-negative-credit-rating-unchanged-671570
2. ”Dollar Er Obhabe Gaser Daam Bokeya,Ditey Hocchey Jorimana(Gas Bill Due Because Of Dollar Crisis,Fines Keep Rising)”,Daily Prothom Alo,July 25,2023.
3. “Rising Debt Says It All”,Rezaul Hoque,April 22,2023.https://hoquestake.blogspot.com https://hoquestake.blogspot.com/2023/04/rising-debt-says-it-all.html?m=1
4. “Record Poriman Taka Chhapiye Sorkar Ke Dichhey Kendriyo Bank(Central Bank Printed Record Money And Handed To Government) “,Rakib Hasnat,BBCBangla,July 23,2023. For more read at https://www.bbc.com/bengali/articles/c4nr8j9vjn4o
5. “Food Security Under Scanner “,Rezaul Hoque,April 07,2023.https://hoquestake.blogspot.com. For more read at https://hoquestake.blogspot.com/2023/04/food-security-under-scanner.html?m=1
6. “Rajnoitik Poristhitir Upor Nirvar Korchhey Bangladesh e Telenor Er Babshyaik Bhobishot(Telenor's Business Future Hinges On Political Situation) “,Bonikbarta, July 27,2023. For more read at https://tinyurl.com/2kymfpse