Bangladesh’s Serious Foreign Exchange Crisis Gets Worse – OpEd

Finally the cat is out of the bag. After months of self-denial, Bangladesh has finally sought support from Saudi Arabia to tackle the country’s ongoing foreign crisis.

“We get 45 days to pay for fuel imports from Saudi Arabia.  But, due to the dollar situation, we told them that it would be good for us if they could give us a year,” Salman F Rahman, the private industry and investment advisor to Prime Minister Sheikh Hasina, said after a  three-day trip to the kingdom. “They [Saudi] said they will consider the matter.” 

There are indications that if energy prices get worse and money laundering continues unabated, PM Hasina may seek Chinese help to shore its forex reserves which in July  2022 had stood at $40 billion but is now below half that figure.

Rahman, whose Beximco conglomerate is seen as one of the worse bank defaulters and stands accused of extensive money-laundering, has used his position as Hasina’s adviser to nor only deflect repayment calls by banks on his corporation but has secured an additional loan of 22000 crores BDTaka before the Jan 2024 parliament elections. 

That confirms the worst fears of Bangladesh businesspersons who have being running around  banks seeking to open Letters of Credits (LC) for critical imports and facing continuous refusal — that “dollars are more difficult to find than a passage to heaven”, as one baby food importer Khalil Ahmed said.

“Why can’t Hasina take the services of a solid economist of integrity snd competence to handle her finances rather than employ controversial figures like Salman Rahman,” said a top garment exporter who did not wish to be named for fear of vendetta. “The Rahmans are the problem and not the solution to our crisis.” 

The Hasina government has claimed Bangladesh’s foreign exchange reserves stood at $17.20 billion at the end of December 2023, falling short of the relaxed target of a minimum of $17.78 billion set by the IMF.

But the situation two months has got worse and the reserves have reportedly dropped below the $ 15 billion mark

The International Monetary Fund (IMF) had approved a $4.7 billion loan for Bangladesh in January last year and fixed a minimum Forex Reserve, also called the Net International Reserve (NIR) of $26.81 billion by December 2023 end.

However, that target was later relaxed to $17.78 billion, $19.27 billion for March and $20.11 billion for June.

The International Monetary Fund (IMF)’s willingness to support Bangladesh’s request for a $4.5 billion bailout package over the next three years confirms that the country’s economy is facing a serious crisis. 

It is the third country in the region, after Sri Lanka and Pakistan, that knocked on the door of the IMF in recent months. “While the economic crises in Pakistan and Sri Lanka were widely reported in international media, Bangladesh’s situation flew under the radar for quite some time thanks to the government’s repeated denial of any impending crisis,” says Bangladesh expert Ali Riaz.” Bangladeshi Prime Minister Sheikh Hasina’s government—for years—touted the economic success of the country and recently celebrated the opening of Bangladesh’s largest bridge as a symbol of its self-reliance. ” 

The government claims that its request for “budget support,” an unrestricted loan with low interest which allows it to use the money as it wishes, is a preemptive measure and that the economy is not, in fact, in trouble. 

This, says Riaz, “could not be further from the truth.” 

The financial crisis

Dhaka’s search for financial support is not limited to the IMF. Besides requesting from the World Bank a one billion dollar loan, an estimated $2.5-3 billion have been solicited from several multilateral agencies and donor nations (such as the Japan International Cooperation Agency, or JICA) just this year.

Considering that ongoing austerity measures including power cuts, restricted use of foreign currency, and fuel rationing are yet to make any major dent in the crisis, the government’s claim—that the country will weather shrinking foreign exchange reserves, a growing trade deficit, record inflation, daily depreciation of the local currency, and an intense energy crisis—is doubtful. 

The Hasina government has argued that the economic slowdown from the COVID-19 pandemic and the global impact of the Ukraine-Russia war are to be blamed for its current plight, but this only tells part of the story. The following statistics paint a far more worrisome picture:

Bangladesh received at least $1.7 billion in loans from multilateral agencies by June 2020, and by October 2021 it had borrowed at least three billion dollars from development partners as budget support to combat the adverse impacts of the pandemic. 

It is reported that budget support received from various multilateral agencies between 2019-2020 and 2021-2022 amounted to $5.8 billion. 

Dhaka received $732 million from the IMF as a balance of payment support and $1.4 billion from the World Bank to implement the countrywide vaccination program. 

It obtained sixty-one million doses of COVID-19 vaccines from the United States, free of cost. 

The government also offered various stimulus packages and repeatedly claimed that its economy not only turned around, but was on the road to a dramatic recovery, with such optimism echoed by the World Bank. 

Bur more than external factors, the present crisis has been by government policies – or lack of a firm picy in tackling bank defaults snd money-laundering. 

Ali Riaz identifies four reasons for this phenomenal downward dive of Bangladesh Economy.

* High cost of infrastructure projects, often described as “mega projects”

* Crisis in the banking sector due to widespread default of loans 

*Waste of resources in the energy sector 

*Capital flight 

*Unsustainable infrastructure spending

Since coming to power in 2009, the Hasina government has undertaken several large infrastructure projects funded by various countries and multilateral agencies. These projects include the Padma Bridge, a nuclear power plant in Rooppur, Dhaka City Metro Rail, and Karnaphuli Tunnel, to name a few. Padma Bridge, one of the largest projects in the country, cost about $3.6 billion, which was previously estimated to be $1.16 billion in 2007. The ambitious nuclear power plant is costing Bangladesh $12.65 billion, and the actual amount to be spent will not be known until it is commissioned. The Metro Rail project ballooned to $3.3 billion from its original estimate of $2.1 billion. The cost of the underwater Karnaphuli Tunnel reached $1.03 billion, though originally estimated at $803 million. 

“Unfortunately, these are not exceptions, but patterns,” says Riaz.

 In 2017, the World Bank noted that the cost of road construction in Bangladesh was the highest in the world. The cost overrun is largely because of overpricing of materials, corruption, and long delays. 

Bangladesh’s  banking sector, has been crippled by large scams and non-performing loans secured by dubious budjnesspersons with politicsl clout who pay important politicians to keep the banks off their backs.

 In 2019, when the Central Bank claimed that the total amount of defaulted loans was $11.11 billion, the IMF disputed this, saying that the true amount is more than double. The current official figure  has also been challenged questioned by many. And instead of chasing defaulters , the Hasina government has hidden offbad loans through write offs explained as restructuring and by changing the official definition of “bad loans” to dodge regulations. 

The  Bangladesh Bank has ended ul  “cooking the books,” both in hopes of providing a rosy but inaccurate picture, as well as to benefit the politically powerful businesspersk s in Hasina’s inner circle.

 Corruption watchdog Transparency International Bangladesh said that “immense political pressure and illegal intervention by some large business groups” are the causes of an unabated increase in loan defaults. 

This is not a new phenomenon, and though experts have been warning of such a situation for years, the Bangladesh Bank has not taken effective steps, instead changing policies to help the loan defaulters.

In March 2022, the government celebrated its success in extending electricity coverage to the entire country. This, however, came at a high price. 

The associated increase in electricity generation was largely due to the establishment of Quick Rental Power Plants (QRPPs) in the private sector. In 2009, it was said that these units were stopgap measures until a comprehensive, long-term solution was found. Increasingly, though, these units have become the mainstay of electricity generation, and not without suspicious beneficiaries. 

In the past decade, the power sector received huge subsidies—between 2010 and 2021, the Power Development Board received $7.1 billion, while the Bangladesh Petroleum Corporation received three billion dollars between 2010 and 2015. Notably, this occurred while the prices of electricity and fuel hiked for consumers. Furthermore, the capacity charge provisions included in the contracts with Independent Power Producers, Rental Power Plants, and QRPPs force the government to pay these companies even when they did not provide any electricity. 

These units are owned by companies connected to the government who are milking the system to their benefit. In the past decade, twelve companies received $5.5 billion as capacity charges. Additionally, the government has signed agreements with Indian energy company Adani which would require Bangladesh to pay annually $423.29 million and $11.01 billion over its lifetime of twenty-five years as capacity for its energy supply.

In the past decade, as rampant corruption allowed a small group of people to amass large sums of money, Bangladesh witnessed widespread money laundering according to watchdog Global Financial Integrity. Between 2009 and 2018, annually $8.27 billion was siphoned through mis-invoicing of the values of import-export goods. The growth of deposits by Bangladeshis in Swiss banks in the past decade is indicative of capital flight. In 2021, it increased by 55.1 percent, reaching 871 million Francs ($912 million).

These factors have contributed immensely to the unprecedented crisis Bangladesh is facing and the global situation has only aggravated it beyond the threshold of impending collapse. 

India’s predicament

India’s Modi government has strongly backed Hasina in the face of sustained Western pressure to gold fair elections to the extent of facing charges of backing the 77 year old increasingly autocratic prime Minister’s sure steps towards turning Bangladesh into a police state. Hasina has delivered on India’s security and connectivity concerns but refused to heed Delhi’s pressure to handle the economy more efficiently by appointing specialist domain experts of integrity as ministers and drop the likes of Salman Rahman.

India gains if Bangladesh grows into an economic powerhouse because that rubs on positively on its Eastern and northeastern states but it simply cannot afford another failed state in the neighborhood.