Is Bangladesh The Next Pakistan In The Making?
Ayussh Sanghi
What we don't discuss, we never understand. | A CA turned Educator | Ex Unacademy, Grant Thornton, PwC |
Shortly after India helped Bangladesh gain independence, Ex-PM Indira Gandhi said,
“If we offer something to Bangladesh, it's obvious that Bangladesh is offering something to us. And why shouldn't Bangladesh be able to keep its promises? Economically it's full of resources and can stand on its feet…”
It’s over 50 years since this statement, but how much has Bangladesh grown in this period? And the more pressing question is… why do they need IMF’s help now?
Let’s start with the first question,?
The Post-independence Bangladesh Economy??
The 1971 war for Bangladesh’s liberation resulted in victory for its people and government but left them with nothing. Everything was brought to ashes in this new nation and without India’s $232 million aid in January 1972, it wouldn’t have survived.?
However, following India’s footsteps, it declared itself a socialist economy. The state nationalized all banks, insurance companies, and 580 industrial plants. And just as it was for India, socialism proved to be a huge blunder for Bangladesh. The inflation on essential consumer goods ran between 300 to 400% in this period.
To give a perspective, inflation above 6% is a sign of trouble in today’s time. Imagine the chaos 400% would’ve brought?
Even after independence, Bangladesh’s huge 80% poor population remained poor. That was until 1975 when its Awami League government decided to go away from socialism with these changes;??
All this meant, Bangladesh slowly attained a GDP growth of 4% from 1980 to 1991 when further economic liberalization opened Bangladesh’s economy to foreign direct investments(FDI). The imports and exports showed a good balance in this period and poverty almost halved to 44.1% from 80 in 1991.
Since 2009, the GDP growth rate for Bangladesh is at least 6% making them one of the fastest-growing economies. For a nation that was in complete ruins roughly 3-decades back, this is huge!
It even showed a positive growth rate of 3.4% in 2020 when all the other economies, including the superpowers, were in complete disarray.
With all these numbers, you won’t be criticized to think that Bangladesh is now a superior economy to Pakistan. The latter is going bankrupt while Bangladesh’s economy is booming, right?
WRONG!
Bangladesh Calls For IMF’s Help!?
Mustafa Kamal, the Finance Minster of Bangladesh, said in March 2022 that he’s expecting Bangladesh to grow at over 7% in 2022-23. Well, that hasn’t happened. Instead, Bangladesh is closer to bankruptcy now.??
Why??
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1) The Russia-Ukraine War
The Russia-Ukraine war has led to a spike in all commodities globally, especially in oil. Bangladesh, amid western pressure, ain’t importing cheap Russian oil and still buying the expensive Gulf oil. This has massively inflated its import bill which grew by 21% in September 2022 compared to September 2021.?
To import this much, you need foreign exchange, which takes us to the second reason.
2) Export Troubles
Bangladesh comes 2nd in world textile imports and most of that went to the US and Europe. Not just garments but 64% of Bangladesh’s export is dependent on the US and EU. Right now, the products manufactured in Bangladesh are expensive because of high inflation (expensive Gulf oil), so it’s being exported expensively too.?
The US and EU, both in a recessionary phase, have cut down massively on such expensive imports, leaving Bangladesh with no reliable source to earn their dollars.?
3) Weakening ‘Taka’?
Bangladesh’s currency ‘Taka’ has weakened massively against the dollar. Earlier, 86 Takas would’ve given you $1. Now you’d pay 105 for it. And since imports are expensive, so what you used to get for $1, you are now paying $1.05 for it. That is drying its Foreign reserves even faster.??
These three factors ensured that Bangladesh is left with just $32 Billion worth of Forex which is insufficient for an economy needing $82 Billion of yearly imports. For context, India has over $550 Billion in Forex reserves.?
Its current account deficit(CAD) is at an all-time high of $18 Billion, which is a huge sign of worry. And that is why our eastern neighbors have asked for IMF’s help. They want some immediate Forex influx and loans from international banks.?
IMF has committed $4.5 Billion to Bangladesh right away and overseeing its government in building long-term capital & infrastructure while lowering expenditure.?This will help them attract foreign direct investments(FDI) and create more export avenues for a rainy day ‘dollar buffer’.??
The question, however, looms large on whether Bangladesh can come out of this economic crisis to grow stronger in the future.
Ending Note
I started with a recognized quote, and to end my analysis, I’ll again use a famous quote. This time from Sheikh Mujibur Rehman, the founding father of Bangladesh;?
“I have given you independence, now go and preserve it.”
The people of Bangladesh did that successfully. But can they preserve a “still-weak” economy that’s overly dependent on global events? Or, is Bangladesh the next Pakistan in the making??
Only time will tell. ?