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Baba’s Explainer – Bangladesh’s Economic Distress and IMF

  • IASbaba
  • December 24, 2022
  • 0
International Relations
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Syllabus

  • GS-2: India and its neighbourhood
  • GS-3: Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: Bangladesh reached out to the International Monetary Fund (IMF) seeking help. According to an IMF press release, Bangladesh will receive economic assistance worth $4.5 billion (around Rs 37,000 crore).

  • This is a significant reversal for an economy that overtook India’s in terms of per capita income in 2020.
What happened in 2020?
  • In 2020, the per capita income of an average Bangladeshi citizen was more than the per capita income of an average Indian citizen.
  • Typically, countries are compared on the basis of GDP growth rate, or on absolute GDP.
  • India’s economy has mostly been over 10 times the size of Bangladesh, and grown faster every year, as can be seen in Charts 1 and 2
  • However, per capita income also involves another variable — the overall population — and is arrived at by dividing the total GDP by the total population.
  • As a result, there are three reasons why India’s per capita income has fallen below Bangladesh this year.
  • First, since 2017 onwards, as Chart 1 shows, India’s growth rate has decelerated sharply while Bangladesh’s has become even faster.
  • Secondly, over the same 15-year period, India’s population grew faster (around 21%) than Bangladesh’s population (just under 18%).
  • The combined effect of these two factors can be seen in how the per capita GDP gap had closed considerably even before Covid-19 hit (Chart 3).
  • Bangladesh’s per capita GDP was merely half of India’s in 2007 — but this was just before the global financial crisis. It was roughly 70% of India’s in 2014 and this gap closed rapidly in the last few years.
  • Lastly, the most immediate factor was the relative impact of Covid-19 on the two economies in 2020. While India’s GDP is set to reduce by 10%, Bangladesh’s is expected to grow by almost 4%. 
  • In other words, while India is one of the worst affected economies, Bangladesh is one of the bright spots.
  • Also, such situation had happened earlier also. In 1991, when India was undergoing a severe crisis and grew by just above 1%, Bangladesh’s per capita GDP surged ahead of India’s. Since then, India again took the lead.

 

How has Bangladesh managed to grow so fast and so robustly?
  • In the initial years of its independence with Pakistan, Bangladesh struggled to grow fast. However, moving away from Pakistan also gave the country a chance to start afresh on its economic and political identity.
  • As such, its labour laws were not as stringent and its economy increasingly involved women in its labour force. This can be seen in higher female participation in the labour force
  • A key driver of growth was the garment industry where women workers gave Bangladesh the edge to corner the global export markets from which China retreated.
  • It also helps that the structure of Bangladesh’s economy is such that its GDP is led by the industrial sector, followed by the services sector. Both these sectors create a lot of jobs and are more remunerative than agriculture.
  • India, on the other hand, has struggled to boost its industrial sector and has far too many people still dependent on agriculture.
  • Beyond the economics, a big reason for Bangladesh’s progressively faster growth rate is that, especially over the past two decades, it improved on several social and political metrics such as health, sanitation, financial inclusion, and women’s political representation.
Besides the advances it has made, what challenges does Bangladesh face?

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  • Bangladesh’s level of poverty is still much higher than India’s and still trails India in basic education parameters and that is what explains its lower rank in the Human Development Index.
  • The bigger threat to Bangladesh’s prospects emerges from its everyday politics. The leading political parties are routinely engaged in violent oppression of each other.
  • In the 2019 edition of Transparency International’s rankings, Bangladesh ranks a low 146 out of 198 countries (India is at 80th rank; a lower rank is worse off).
  • Add to this a massive surge of radical Islam, which has resulted in several bloggers being killed for speaking out unpopular views.
  • These developments have the ability not just to arrest Bangladesh’s progressive social reforms that have empowered women but also to derail its economic miracle.
What is Bangladesh’s current Economic Scenario?
  • Unlike many countries including India that saw their GDP contract in 2020 following the Covid-19 pandemic, the economy of Bangladesh actually grew during this period.
  • Its GDP grew by 3.4% in 2020, by 6.9% in 2021, and it is expected to grow by 7.2% in 2022.
  • However, Bangladesh’s robust economic recovery from the pandemic has been interrupted by Russia’s war in Ukraine, leading to a sharp widening of the current account deficit, rapid decline of foreign exchange reserves, rising inflation and slowing growth.
  • The inflation rate in November was 8.85% as against 5.98% in November 2021 primarily due to crude oil becoming costlier.
  • Bangladesh has typically been hugely dependent on its export earnings, but as the western economies slow down and their consumers put off their demand for a later date, Bangladesh suffers. This has resulted in lower export earnings and widening of Current Account Deficit.
    • The current account balance looks at the gap between the money coming into a country on account of earnings via the export of goods and services and the money going out of the country via the import of goods and services.
  • Bangladesh’s currency, the Taka, weakened partly under the pressure of the increase in the US dollar and partly on account of the worsening current account deficit.
  • In December 2021, it took 86 Taka to buy a US dollar. As of today, the exchange rate has worsened to 105 Taka
  • A weaker Taka further aggravated the inflationary spiral because all imports become costlier still.
  • The weakness in the external front also resulted in Bangladesh’s foreign exchange reserves getting depleted
  • In December 2021, the forex reserves were valued at $46,154 million. As of now, they are just $33,790 million.
How will IMF’s monetary assistance help?
  • Bangladesh’s request is to cushion its economy from the economic disruptions caused by the ongoing war in Ukraine.
  • Apart from tackling these immediate challenges, addressing long-standing structural issues remains critical, including threats to macroeconomic stability from climate change.
  • IMF is of the opinion that in order to successfully graduate from Least Developed Country status and achieve middle-income status by 2031, it is important to build on past successes and address structural issues to accelerate growth, attract private investment, enhance productivity, and build climate resilience.
Overall, what does IMF’s programme hopes to achieve?
  • Creating additional fiscal space through higher revenue mobilisation and rationalisation of expenditures. This will allow the government to increase growth-enhancing spending as well as mitigate the impact of the current global instability.
  • Containing inflation with increased exchange rate flexibility so that the country can buffer external shocks better.
  • Strengthening the financial sector by enhancing governance and regulatory aspects.
  • Boosting growth potential by creating a conducive environment to expand trade and foreign direct investment among other things.
  • Strengthening institutions to create an enabling environment will help meet climate change objectives.

Main Practice Question: Do you think that the current economic crisis in Bangladesh will have ripple effects on Indian Economy? What can India do it ensure that its neighbourhood is economically stable given that Sri Lanka is also facing similar issue?

Note: Write answer his question in the comment section.


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