Weak taka number one risk for macro stability: Finance Ministry

If the local currency loses its value against the dollar by one taka more, the government's subsidy spending for electricity alone will go up by Tk473.6 crore in the upcoming financial year. A 10% depreciation will mean an increase of Tk3,800 crore in government loans and guarantees in the fiscal 2023-24, the finance ministry projects.

In a document it identifies losing value of taka as the number one risk for the macroeconomic stability for the next three years, which is not only fuelling inflation but also causing additional financial cost for the government.

It analyses how the weakening taka will increase the government's cost burden in overall subsidy expenditures, loan repayment and project implementation.

The finance ministry has identified several other risks to Bangladesh's financial stability in the budget document titled "Medium-Term Macroeconomic Policy Statement 2023-24 to 2025-26."

The recent depreciation of the taka has resulted in increased expenditure on imports and scheduled foreign debt repayments. A further depreciation will escalate the government's debt burden and create financial risks to projects taken up under public-private partnership, says the document.

"The devaluation of the currency can lead to a substantial increase in government project expenditure. Many government initiatives, particularly mega projects, rely heavily on imported goods. Consequently, due to the depreciation of the exchange rate, project costs may escalate, resulting in an additional financial burden," it reads.

It also explains how currency devaluation directly influences both government revenue and expenditure, and may cut into the per capita income in terms of dollars. If the decline in the exchange rate of the taka continues, it will not be possible to achieve the annual Gross National Income (GNI) plan as per the target of the eighth five-year plan, the ministry document warns.

In its self-diagnostic document the finance ministry has detailed the adverse impacts of the taka depreciation on import costs, which reduce overall imports, thus resulting in less revenue from import stage. Consequently, if the currency continues to depreciate, the government's revenue from the import sector may further decline and subsidy expenditure can significantly increase.

Bangladesh allocated Tk40,265 crore for subsidies in the food, energy, and power sectors in the budget for the fiscal year 2022-23, says the document of the finance ministry.

The subsidy in these sectors increased to Tk50,926 crore in the revised budget. For the upcoming fiscal year, Tk66,762 crore has been allocated for subsidies in these sectors.

According to data from the Bangladesh Power Development Board, in the fiscal 2023-24, a depreciation of one taka against the dollar will result in an increase of Tk473.6 crore in the power sector subsidy, as reported by the finance ministry.

Low tax collection and tax arrears, additional allocation for pension of government employees, high government interest expenses, the need for recapitalisation of state-owned banks are among the factors posing threats to the country's economy, says the soul-searching document, prepared by a team of the Macroeconomics Division led by Senior Secretary of the Finance Division Fatima Yasmin.

Weak balance sheets and non-performing loans of state lenders could further increase the government's financial burden and limit the effectiveness of overall financial risk management,  it warns,  pinpointing macroeconomic risks for Bangladesh for the next three fiscal years.

The Bangladesh Bank has increased the dollar selling rate from its reserves for the 16th time in the current fiscal year by Tk1.5 – the largest single devaluation of the taka – on 1 June.

The taka has already been devalued by 22.61% over the last one year, which has led to an increase in the dollar rate from Tk86.45 to Tk106.

The central bank is under pressure to devalue taka to save dollars and reach the foreign exchange reserves to the threshold agreed upon with the IMF for its $4.7 billion dollar loan package. There is also an obligation to establish a unified exchange rate, expected to come into effect next month.

The public debt, including guaranteed loan,  is projected to reach Tk36,400 crore in the next financial year, which may increase to Tk36,600 crore in FY25 and Tk37,100 crore in FY26, the ministry says, expressing worries about the impact of depreciation on debt situation.

If the taka depreciates further by 10% against the dollar, the debt amount will increase to Tk40,200 crore by the end of the next financial year and this trend is expected to continue in the coming financial years, it projects.

"The direct costs, as well as explicit and implicit liabilities, associated with PPP projects may create financial risks for the government. This could potentially hinder the government's ability to mobilise funds in the development sector," the document reads.

Salehuddin Ahmed, former governor of the Bangladesh Bank, also pointed to the risks from rapid depreciation of taka.

"If the exchange is not strong, it can make private sector investments more costly. Additionally, imports will become more expensive, resulting in an increase in the cost of doing business," he said.

He further said, "Two years ago, when the value of the dollar started to strengthen, the Bangladesh Bank should have gradually devalued the taka. However, this was not done at that time. Now, with the sudden increase in the price of the dollar, the economy is struggling to adapt."

He pointed out that various countries, including India, have periodically devalued their currencies without adversely affecting their economies.

The former central bank governor said, "Bangladesh Bank artificially maintained the dollar exchange rate for the last two years. Now the government has identified the exchange rate as the biggest risk, but no action is being taken to deal with this risk."

Zahid Hussain, former chief economist of the World Bank in Dhaka, said that the analysis given by the Ministry of Finance on the exchange rate is partial.

"If the currency depreciates, besides increasing the government's spending on foreign debt, the government will get additional money against the foreign debt," he said.

"The revenue from the import sector is supposed to increase due to the devaluation of the taka. But the reason for the decrease in revenue from imports in Bangladesh is that due to the dollar crisis, the Bangladesh Bank is artificially controlling imports to reduce demand," Zahid Hussain said.

The eminent economist further said that for the last one-and-a-half years, Bangladesh had artificially suppressed the currency exchange rate.

"They thought that the dollar crisis would be alleviated by controlling imports rather than devaluing the currency for fear of rising inflation. It is true that imports have decreased, but the dollar crisis has become more severe, and inflation has risen to 10%," he said.

Emphasising on the supply of sufficient dollars to deal with the financial risks related to the exchange rate of money, Zahid Hussain said that the existing cap on the exchange rate of the dollar should be removed.

"Besides, monetary policy and the financial and energy sectors should be reformed. Steps should be taken to increase foreign exchange reserves by strengthening export trade," he added.