The Dollar Crisis and Agro Enterprise Management - Agribusiness Education and Research International

The Dollar Crisis and Agro Enterprise Management

Fuel price increases have always been one of the main causes of inflation in the country. In June 2022, Bangladesh’s annual inflation rate was 7.56 percent, and food prices went up by 8.37 percent. 4 People are worried that this will lead to a food crisis in the country. Bangladesh Bank’s foreign exchange reserves fell below USD 40 billion for the first time in two years in July. On August 30, they reached USD 39.04. 6 It is thought that the current reserves can pay for imports for only about 5 months. 7 The country’s exports also took a big hit because the costs of making things went up and the economies in Europe and North America were in bad shape. In order to avoid a situation like Sri Lanka and Pakistan, Bangladesh asked the International Monetary Fund (IMF) for a USD 4.5 billion loan and other international financial institutions for smaller amounts (IFIs). While the loans are being negotiated, the high rate of inflation, power shortages, unstable exchange rate, and quickly decreasing foreign exchange reserves have created one of the worst economic crises the country has seen since the Global Financial Crisis in 2008. The Government of Bangladesh (GoB) and BB have already taken a number of policy steps to deal with the crisis, and more are on the way.

The current crisis started with the Covid-19 pandemic, which messed up production and import-export activities all over the world and caused high inflation rates. As worries about a global recession grew, every economy in the world used stimulus packages or financial aid to boost production and increase the amount of money in circulation. By the end of 2021, things had started to get better, but the Russia-Ukraine war had messed up the supply chains for oil, gas, fertilizers, chemicals, and many other goods used in agriculture. This made inflation go up even more around the world, especially in the US, where it reached 8.5% in March 2022, the highest level since 1981. The US Federal Reserve decided to raise interest rates to stop inflation, which brought investors from all over the world. The Fed’s aggressive monetary policy is to blame for more than half of the rise in the value of the dollar. Also, countries that import more oil and gas, like most of Europe and the developing world (including Bangladesh), have been hurt more by high energy prices than the USA, which imports less oil and gas. As a result, most of the world’s currencies started to lose value compared to the dollar.

Bangladesh’s imports and exports were mostly affected by the rise in the value of the dollar. Even though imports got more expensive, exports should have gone up because prices were more competitive. But as fuel prices went up, production costs went up, and as inflation rates and tighter money policies in North America and Europe slowed demand for most of Bangladesh’s exports, Bangladesh’s exports went down. On the other hand, the volume of imports went up because of the GoB’s post-Covid-19 stimulus package and the Import Policy Order 2021-24, which made it easier to import things and gave more people access to duty-free imports. In FY22, 15% less money came into the country through remittances than in FY21. Since exports went down and payments for imports went up, there was more demand for the dollar and a growing balance of payment deficit (with a trade deficit of USD 33.25 billion in FY2021-22), which had to be paid for by foreign exchange reserves. At the same time, the dollar was getting more expensive and there weren’t enough of them on the domestic market. This made BB put money from its foreign exchange reserves into the market to keep the exchange rate stable.

When a country’s foreign exchange reserves get low, it loses the ability to handle an economic crisis, and Bangladesh is no different. Even though the current crisis was caused by a shock from the outside, it was made worse by problems within Bangladesh’s economy. Some people also say that the dollar crisis is caused by expensive infrastructure projects, widespread loan defaults in the banking sector, overspending in the energy sector, a misaligned exchange rate, capital flight, and low levels of FDI (Foreign Direct Investments). Since 2009, the GoB has used loans from bilateral channels and IFIs to pay for a number of large projects. The Padma Bridge, the Rooppur Nuclear Power Plant, the Dhaka Metro Rail, and the Karnaphuli Tunnel are just some of these projects. Most of these projects are going to cost more than what was first planned. In 2017, the World Bank said that building roads in Bangladesh was the most expensive in the world. This was mostly because materials were too expensive and there were long delays. When a country spends more than it makes, and then has to pay back high-cost loans, it puts more pressure on the country. Also, the GoB has been trying to get loans from IFIs to add to the foreign exchange reserves. With the IMF, talks are going on for a USD 4.5 billion loans that will be paid out over the next three years. The country has also asked for similar kinds of help (loans or aid) from the World Bank (USD 1 billion), the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank (AIIB), and the Japan International Cooperation Agency (JICA). Bangladesh is expected to get between USD 2.5 and 3 billion from multilateral lenders other than the IMF by June 2023.