At the start of the 2023-24 financial year, there was an expectation that the country’s economy would recover from the shocks of the Covid-19 pandemic and other external pressures.
However, things did not turn out that way as almost all economic indicators remained subdued throughout the year due to some key issues.
Inflation remains above 9 percent, there are concerns about declining foreign exchange reserves, lower-than-expected remittances, slower export growth, negative import growth and record levels of non-performing loans (NPLs) in the banking sector.
The central bank’s liquidity support to weak Islamic banks and hasty consolidation efforts and volatility in the foreign exchange market further intensified the crisis in the financial sector in FY24.
One of the biggest setbacks of the fiscal year came in the form of a „negative” outlook for Bangladesh by international credit rating agencies Moody’s and Fitch.
The Consumer Price Index (CPI) has been above 9 percent since March last year and the central bank’s monetary policy has not been able to bring it down. However, most countries, including the US and India, succeeded in controlling inflation.
Bangladesh’s inflation stood at 9.89 percent in May, above the government’s target of 6 percent for FY24.
As a result, the lower and middle income groups bear the brunt of the price hike, adding to the woes of managing the cost of living.
The central bank adopted a tighter monetary policy by raising the policy rate, but the lack of a market-based interest rate system did not have much success in curbing skyrocketing inflation.
In April 2020, BB first introduced a 9 percent interest rate cap.
Although it was withdrawn earlier this fiscal, the banking regulator introduced a new interest rate system based on the six-month moving average rate of Treasury bills, abbreviated as SMART, which is another limitation.
Finally, in May this year, the Bangladesh Bank allowed banks to set market-based interest rates as recommended by the International Monetary Fund (IMF).
Despite continuous efforts by the government to address the decline in foreign exchange reserves that started in September 2021, foreign exchange reserves did not increase, which was an area of concern in FY24.
Abdur Ruf Talukter has said that the foreign exchange crisis will be resolved by January 2023 after he joins the central bank governor in mid-2022.
However, the banking regulator failed to maintain minimum foreign exchange reserves as per the IMF target.
Since August 2021, foreign exchange reserves have declined by $24 billion. As per IMF calculation, total foreign exchange reserves stood at $22 billion on June 26 this year.
Despite the austerity measures taken by the government, including curbing import payments, the foreign exchange market remained volatile throughout the year due to high US dollar outflows.
There was no good news on exports, as while export growth slowed, import growth remained negative due to import control measures.
During the July-March period of this financial year, import growth was negative at 15.54 percent.
Meanwhile, exports grew by only 2.01 percent in the July-May period. Export growth was 7.11 percent during the same period of the previous fiscal.
Exports and remittance earnings are the two major sources of foreign exchange earnings.
Although remittance inflows increased by 10.10 per cent in the July-May period of this fiscal year, the inflow fell short of expectations when compared to manpower exports.
The gap between official and unofficial exchange rates is also a big reason for slow remittances.
However, BB recently introduced flexibility in the exchange rate by introducing the crawling peg system.
Throughout FY24, the fiscal account remained negative, at $9.25 billion in the July-March period of this fiscal, BB data showed.
Private sector credit growth stood at 9 percent in FY24, indicating a subdued private investment scenario in the country.
The volume of bad loans, which rose to Tk 182,000 crore at the end of March this year, or 11.11 per cent of the total disbursed loans, high stressed assets and weak banks were the main talking points in the banking sector during the fiscal year.
The central bank’s hasty bank consolidation efforts and continued financial support for some weak sharia-based banks drew heavy criticism, both accused of fueling inflation.
Besides, external factors such as supply chain disruptions have caused commodity prices to rise globally.
Mismanagement of Bangladesh’s foreign exchange market, frequent policy changes by the central bank and lack of good governance in the financial sector have given a gloomy outlook for the country’s economy.