S&P warns Bangladesh of inflationary pressures

Global rating agency Standard & Poor’s (S&P) has warned Bangladesh that further depreciation of its currency will increase domestic inflationary pressures and make external debt service more costly. Bangladesh further liberalized its trade mechanism in June 2022 and since then the nominal exchange rate of the taka, the local currency, has depreciated by around 10% against the US dollar, marking a noticeable change in the dynamics of trade. country changes.

“Currency depreciation will aggravate domestic inflationary pressures and make external debt service costs more expensive,” the rating agency said in its latest research update.

The S&P said the measure weakened Bangladesh’s external profile following a sharp widening of its current account deficit, driven by rising domestic demand and rising commodity prices.

“These trends have resulted in net outflows of foreign currency from the economy, resulting in lower reserves and pressure for depreciation of the taka,” he said.

The S&P report came as the inflationary surge in Bangladesh tends to follow trends in commodity price developments in global and domestic markets.

Bangladesh’s annual inflation rate is supported by soaring food and non-food prices, while the Russian-Ukrainian war and associated sanctions are also contributing to rising inflation in Bangladesh as global commodity prices raw materials increase.

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Simultaneously, remittances from inbound workers, which have long acted as a crucial support to Bangladesh’s external financial flows, fell in the 2021-2022 financial year from June to June, as fewer workers were able to repatriate their assets. with a gradual normalization of global labor markets.

Bangladesh has also seen a decline in rice production this year, which experts say will raise the price of the staple.
Financial analysts said they saw no signs of an immediate respite from the price spiral.

“Trouble times loom on the horizon as headline point-to-point inflation could reach 10% in the coming months,” said the executive director of the financial think tank Policy Research Institute (PRI), Ahsan H Mansur, adding that monetary policy was not working well to contain inflationary pressure.

He said the government was trying to meet the challenges of inflation by stimulating supply, but the balance of payments deficit was unlikely to disappear any time soon, even if export earnings and incoming remittances were increasing, imports were decreasing and a desirable foreign exchange balance. trade could be assured.

The S&P, however, said Bangladesh’s economy accelerated in 2022 and underlying momentum remains strong and added that the normalization of the global economy continued to drive a strong recovery in the manufacturing sector. the country’s apparel industry, contributing to a 12.3% expansion in manufacturing activity in the outgoing fiscal year.

“The recovery in the sector has also supported a sustained recovery in the state of the labor market in Bangladesh, supporting robust domestic demand conditions,” the rating agency said.

“The outlook remains stable (and) the stable outlook reflects our expectation that Bangladesh’s strong growth outlook and policy adjustments will manage the risks associated with a challenging external landscape over the next 12 months,” the S&P noted. .

The rating agency also said that Bangladesh’s economic recovery remains on solid footing and “we expect real GDP growth to average 7.0 per year over the next three years.” But the S&P said it could downgrade Bangladesh’s ratings if net foreign debt or financing metrics deteriorate further.

He said the revised negative rating could come in if external debt exceeds 100% of current account receipts, or if gross external financing needs exceed 100% of current account receipts plus usable reserves, on a sustainable basis.

The S&P warned that while Bangladesh’s private sector banks were in better shape, there were “notable risks” in state-owned commercial banks.
“We can improve Bangladesh if the government significantly improves its fiscal performance, including its very low revenue generation and high fiscal deficits, and experiences substantial improvement in its external metrics. We can also raise the ratings if we observe that Bangladesh’s institutional parameters have improved significantly,” he noted.

The Bangladesh Bank’s chief economist, Habibur Rahman, bluntly admitted that the inflationary pressure would continue as “it was entirely caused by imports”.
But, he said, the central bank has taken various measures to contain inflation by stabilizing the exchange rate as “efforts are underway to control inflation by improving supply without raising the exchange rate. ‘interest”.

Hopefully, Rahman said, the US dollar to taka exchange rate will come down soon and there will be improvement in other sectors as well.

Minister of State for Planning Shamsul Alam, himself an economist, on Sunday criticized his fellow economists in the country, saying they generally tend to voice their concerns but fail to see the achievements and possibilities of the country.

“But, foreign research institutes have highlighted the strengths and potential of Bangladesh’s economy,” he said.

Alam, however, said it was undeniable that people were now suffering from inflation, largely caused by rising fuel prices “but the government has taken various measures and hopefully the inflationary pressure will ease. by October”.
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