In 2022, quite a few events took place in our country. While the economy was recovering from the shocks of the pandemic, the Russia-Ukraine war broke out in February, disrupting the global supply chain and exerting a strong external shock on many countries, including Bangladesh.
Due to the war, there was an abnormal increase in the prices of various commodities in the international market. Bangladesh, being highly dependent on imports for many products, from fuel to daily necessities, raw materials for industries, and machinery, also saw high inflationary pressure in the domestic market. In addition, the fuel price hike contributed quite significantly to the inflationary pressure.
Furthermore, there was a shock to macroeconomic stability. This pressure on macroeconomic stability was created not only due to the Russia-Ukraine war; it actually started in 2021. Fiscal year 2021-2022 saw an abnormal growth in imports, leading to the highest trade deficit in history.
Though there was a sizable growth in exports, growth in remittances was negative. Therefore, with the abnormally high growth in imports, there was a major shortage in the supply of foreign currency, especially the American dollar. That has put a huge strain on the overall economy.
The way Bangladesh Bank had been trying to artificially stabilise the exchange rate of the dollar for the past few years was no longer possible. This also created a cumulative crisis in the economy, the manifestation of which we saw as a major adjustment in the exchange rate of the dollar in a very short time.
If there had been a gradual adjustment over the past decade, we would not have seen such a large jump in the exchange rate. The large and sudden depreciation of the exchange rate contributed to the rise in the cost of imports, which further fueled inflation.
Another manifestation of the macroeconomic crisis was that the foreign exchange reserves, which had grown steadily in 2020 and 2021 due to growth in exports and remittances, also declined by more than a billion dollars per month since January 2022.
While the size of the reserves at the beginning of 2022 could cover six to seven months of import expenses, with the depleted reserves, by the end of 2022, it can now cover around three and a half months of import expenses.
In 2020 and 2021, due to Covid, the labour market in Bangladesh was disrupted quite significantly, and even the poverty situation worsened. The extraordinary inflationary pressure throughout 2022 led to the biggest increase in the cost of living in a decade, and pushed families hit by the pandemic into renewed destitution.
With the stiff rise in the prices of rice and other essential food items, many low-income, lower-middle-class, and even middle-class families were left with limited coping options to deal with the new crisis.
How will the year 2023 go? What kind of changes can we expect in the new year? There is a kind of recession looming in the global market. Forecasts by various international organisations show that major international markets, especially North American and European countries, may experience a recession.
Even economies like China are seeing contraction. In this situation, there are concerns about a negative shock on Bangladesh's exports, especially since the two major destinations of Bangladesh's export market are North America and Europe. However, there is a flip side to the recession too.
In recent times, in international markets, the prices of several products including fuel are decreasing gradually. If the prices of these products continue to decline further due to the recession, it can have a favourable effect on inflation in Bangladesh in 2023.
To contain inflation, it is also necessary to reduce the price of fuel in the domestic market. When the price of fuel rose, the government increased it because the price was rising in the international market. But, when the price of fuel is falling in the international market, there is a need to make a downward adjustment.
However, it is also necessary to keep an eye on the Russia-Ukraine war situation, whether any new crisis may arise and whether the supply system in the global market may be disrupted again. If a new crisis occurs, many of the forecasts that have been made so far will have to be revisited.
In 2022, the flow of remittances through formal channels in the country reduced significantly. It is believed that remittances came into the country through informal channels, namely hundi, which did not contribute to the rise in the inflow of foreign currency.
Migrant workers feel encouraged to send money through hundi for various reasons. However, there is no reason to think that only migrant workers created the demand for the hundi trade.
Those who want to launder money illegally out of the country also exert a strong demand for the hundi business. There is a huge demand for hundi business even among the traders from Bangladesh who smuggle money out of the country by over-invoicing or under-invoicing.
Therefore, to contain the hundi business, it is not only necessary to encourage expatriate workers to use official channels of sending remittances, but also to stop the money laundering routes from the country. Otherwise, the hundi business will continue to remain strongly active.
In conclusion, the crisis the country went through in 2022 was intense. However, there is a hope that inflation can come down eventually. The government should continue its social security programmes for the affected households and also expand the programmes.
However, there are various problems in social security programmes, especially corruption, institutional weakness, and enrollment errors that need to be addressed. Besides, some of the longstanding core economic problems need to be looked at.
Critical reforms in the taxation sector, banking sector, capital market, trade policy, and management of the exchange rate are long overdue. Such reforms, along with the faster and cost-effective implementation of some mega infrastructure projects and some special economic zones, are expected to make the Bangladeshi economy more resilient to shocks.
Selim Raihan is a professor at the Department of Economics, University of Dhaka, and the executive director of South Asian Network on Economic Modeling (SANEM)