For Bangladesh, Fuel and Foreign Reserve Crisis Means ‘No Light at the End of the Tunnel’
Recently falling below the $30 billion mark, Bangladesh’s fast declining foreign exchange reserves portend a growing energy crisis, as payments for fuel and gas pile up and fuel reserves plummet to alarming levels, according to industry analysts.
This is impacting the South Asian nation’s largest export earning industry, where apparel accounts for 80 percent of exports.
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The grim fuel situation is compounded by falling reserves while the taka continues to drop; it has already been devalued by 21 percent over the last year against the dollar. This has meant a change from 86.45 taka against one dollar to 108.50 taka as of a week ago, according to the Bangladesh Bank.
Earlier this month, the central bank tightened its rules for luxury imports while banks have also firmed up measures to issue the letters of credit needed for imports.
The shortage of fuel, including coal because of the foreign exchange shortage is causing power shortages, and electricity power cuts as demand surges along with with soaring summer temperatures.
Power plants, unable to secure letters of credit to import fuel, coupled with the foreign currency shortage, have few solutions.
The garment manufacturing sector, a major earner of foreign currency, is bracing for more erratic supply of electricity and fuel, while dealing with rising production costs and falling orders.
“A significant amount of industrial production has been hampered and there has been plenty of decline with a major impact on the manufacturing sector,” Dr Ahsan Mansur, executive director, Policy Research Institute (PRI) told Sourcing Journal. “It’s been a series of things that happened at the same time—the shortage of dollars led to the government having to delay imports of coal and gas; that reduced the capacity of power plants. Load shedding increased and also led to an adjustment in the tariff for power which has been increased three times in the last few months itself; petroleum products prices went up and subsidies for fuel oil, power and gas sectors have come down—everything happened at the same time.”
Though the world’s second-biggest garment-producing nation after China is “trying to get financial support from wherever it can,” he said, “at the end of the day its not the money that is going to solve the problem, but a change of policy is the way forward.”
“There is no light at the end of the tunnel yet,” Mansur said.
The industry wants to see the government issue a “much stronger policy statement,” he pointed out. “The interest rates are still too high and the exchange rate should be market based.“
Bangladesh exports grew more than 34 percent to $52.08 billion in the fiscal year 2021-22, which runs July 1 to June 30. Apparel exports accounted for $42.61 billion in that frame, according to the Export Promotion Bureau (EPB).
Knitwear garment exports grew 36.88 per cent year-on-year to $23.21 billion while wovens rose 33.82 per cent to $19.40 billion.
In January, Bangladesh secured a $4.7 billion loan from the International Monetary Fund (IMF) to help address its mounting economic troubles. The first tranche of $476 million came in earlier this year, with the next one expected in November.
Conditions apply, however.
For instance, foreign exchange reserves must meet the IMF condition of a minimum of $24.46 billion in June, to be calculated according to a new formula prescribed by the IMF. This will be part of the review of the central bank performance.
“The fall in exports and remittances, two key sources of foreign currency, have not helped improve Bangladesh’s current account deficit.
“Apparel exports, for instance, fell 16.5 percent in April year on year, to $3.95 billion from 2022, as orders from clothing retailers slowed. Inward remittances, on the other hand, declined 16 percent year-on-year to $1.68 billion in April,” said Mansur.
The structural reforms he champions are being advanced by both IMF and the World Bank.
Bangladesh must create jobs and employment opportunities by fostering a competitive business environment, diversifying exports, increasing human capital, building efficient infrastructure, deepening the financial sector, and establishing an enabling policy environment that attracts private investment,” according to the World Bank’s Bangladesh Development Update 2023.
While officials from the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) said that the nation’s apparel industry is still able to earn and pay in dollars, and gets priority status for government benefits, gas and fuel imports must be handled on a national level. With garment factories spread throughout Dhaka and Chittagong, there’s no single dedicated economic park where priority facilities are set up for special treatment.
The coal shortage forced the shutdown of a 660 megawatt unit of Payra power plant on May 25, a first in its three years supplying power to areas including Dhaka and Khulna, Bangladesh’s third-largest city.
Without any intervention, the plant’s other unit will stop production in about a week, according to energy experts, creating further shortages.
“The reports we are seeing are not encouraging,’ said Dr. Mohammad Tamim, a well-known fuel and energy expert and professor of petroleum and mineral resources engineering at the Bangladesh University of Engineering and Technology (BUET), Dhaka. “Almost every aspect of energy import is suffering from dollar shortage.”
Bangladesh buys more than 500,000 tons of finished petroleum and 100,000 of crude oil every month, he said.
“As the import cost and volume has to be reduced and letters of credit that businessmen need are being closely scrutinized, payments need to be made,” Tamim continued. “Exports are declining and remittance is not going up; we are resource starved, and a net importing country and the gap between export and import is growing.”
While sectors like apparel exports bringing in foreign exchange might be less impacted than the rest of the economy, Tamim believes that it can only be protected up to a point.
“They have dollars and are not suffering so much as those who don’t have foreign currency. But if this continues it will affect everyone: There will be panic and there will be problems,” he said.
A visit by an IMF staff team last month to discuss macroeconomic developments and programs supported by the fund found that “Bangladesh remains one of the fastest growing economies in the Asia-Pacific region,” despite the challenging climate. “However, persistent inflationary pressures, elevated volatility of global financial conditions, and slowdown in major advanced trading partners continue to weigh on growth, foreign currency reserves, and the taka,” IMF added.
That recognition of Bangladesh’s growth prospects is keeping hopes up for now.
Although they see shortages ahead, as well as shrinking orders amid global recessionary concerns, manufacturers and officials with BGMEA are focused on reaching $100 billion in garment exports by 2030.
Sri Lanka’s decline in foreign reserves last year which lead to a fuel crisis haunts economists across the region.
“I’m worried about what will happen,” Tamim said, “but Bangladesh has gone through lots of ups and downs so we are seasoned. So it has been our way of life and that is why we are more calm.”
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