Contagion from Ukraine causes disruption to the global economy, which severely impacts Bangladesh: Reuters Ukraine
By Duncan Bartlett
The most serious economic problem is inflation. Even before the sharp increases in oil prices which have resulted from sanctions on Russia, inflation in Bangladesh was running at 5.8% in January of 2022 according to the National Bureau of Statistics, down only a touch from 6% in the previous month.
A key driver is the rising cost of fuel, which is connected to an increase in the price of food. Bangladesh faces considerable difficulties in sourcing sufficient energy to meet the demands of its growing population. Global energy prices are elevated due to an imbalance between supply and demand, as the world recovers from the pandemic.
Higher fuel costs place a particular burden on people in developing economies, such as Bangladesh, which is a net importer of both crude oil and petroleum products.. Food and fuel make up a larger share of household consumption costs in developing countries than they do in more advanced economies.
The central bank of Bangladesh has warned that inflation poses a threat to economic growth. In the bank’s latest monetary policy review, the risks are spelled out clearly: Inflationary pressure both in local and international markets, as well as the ongoing pandemic, may undermine Bangladesh’s growth prospect of 7.2%.
This could set back progress in many areas and reverse some of the gains towards developmental goals achieved in the last decade.
The World Bank notes that inequality in Bangladesh increased during the pandemic and records that the poverty rate in 2020 increased from 14% to 18%. Unfortunately, it is the people in this poorest bracket in society who face particular difficulties as a result of inflation.
What should the central bank do?
Its monetary policy review is circumspect on future actions, noting that base rates have been kept relatively low by domestic standards, with the repo rate held at 4.75%. This is much higher than the near-zero or negative interest rate environments which the US, the Eurozone, and Japan have experienced in recent years.
In other emerging markets, central banks have started to combat inflation by raising interest rates, even if that leads to slowing growth.
Crucially, the US Central Bank, the Federal Reserve, plans to increase its key interest rate this month, pushing up the value of the dollar. Rising US interest rates tend to suck money out of emerging markets. A strong dollar also raises the financing costs for developing countries and saps investment.
Furthermore, people who work abroad and send their money home in the form of remittances are impacted by fluctuations in exchange rates. So are the friends and relatives back in the expats’ communities of origin who receive the money.
In the open market, the Bangladesh taka has weakened against the US dollar, with $1 selling for around Tk86 in early March 2022.
The Ukraine crisis has created an emergency which is having a huge impact on the global economy. As a country which is dependent on the stability of other nations for its development, this period of crisis inevitably presents many dilemmas for Bangladesh.
Duncan Bartlett is the Editor of Asian Affairs magazine and is currently teaching diplomacy and international relations with The Economist.
Dhaka Tribune
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