Days after hinting at an impending economic crisis, the Bangladeshi government on Friday (August 5) increased the price of petrol by 51.7% and diesel by 45.2%.
While speaking about the matter, Minister for Power, Energy, and Mineral Resources Nasrul Hamid said, “Some adjustments have to be made in view of the global situation. If the situation normalises, the fuel prices will be revised accordingly….The new prices will not seem tolerable to everyone. But we had no other choice. People have to be patient.”
The country is already reeling under high inflation. Reportedly, the inflation rate in Bangladesh has been over 6% for the past 9 months, with the annual inflation rate in July reaching a high of 7.48%.
This has put the middle class and the poor people under immense financial stress. The Russia-Ukraine war had also made things worse for Bangladesh, with the State-run Bangladesh Petroleum Corporation incurring a loss of over $85 million between February to July this year.
Despite being one of the fastest-growing economies in the world, Bangladesh has witnessed a sharp dip in its foreign exchange reserves. As of August 3, 2022, it has around $39.67 billion dollars in foreign reserves, which can sustain only 5 months of imports.
The drastic hike in fuel prices has sparked off protests, led to long queues at fuel stations, and even violent demonstrations. The earlier rise in fuel price in November last year by 23% had resulted in a 30% increase in transport costs. Bangladeshis are now anticipating similar aftermath after the government’s decision.
The high inflation has also landed a severe blow on the country’s garment industry as people are forced to prioritise essential commodities. This has also affected its exports. There has also been a dip in foreign remittances, which happens to be the 2nd largest contributor of foreign exchange reserves for Bangladesh.
Bangladesh seeks money from IMF, Asian Development Bank
Last month, Bangladesh sought $4.5 billion from the International Monetary Fund (IMF) to tide over its immediate economic woes, caused due to high imports.
While speaking about the matter, Finance Minister Mustafa Kamal said, “If the IMF conditions are in favour of the country and compatible with our development policy, we’ll go for it, otherwise not. Seeking a loan from the IMF does not mean Bangladesh’s economy is in bad shape.”
He further claimed that the macroeconomic condition of the country was firm. The IMF confirmed that Bangladesh has expressed interest in its ‘Resilience and Sustainability Facility.
In a statement, it said, “The IMF stands ready to support Bangladesh, and the staff will engage with the authorities on program design as per the established policies and procedures of the Fund. The amount of support will be part of the program design discussions.”
Reportedly, the IMF can extend a maximum of $1 billion in financial support. Bangladesh has also sought $1 billion from Asian Development Bank.
China is eyeing to exploit the economic woes of Bangladesh
With an eye to exploit the ongoing economic woes of another Indian neighbour, China is thinking of expanding duty-free access to 99% Bangladeshi goods and services. The move is likely to benefit the exporters of garments and woven products in Bangladesh.
While speaking about the development, Shahriar Alam, State Minister for Foreign Affairs, said, “It’s good news for Bangladesh as we have a thriving economy based on exports. We already had duty-free access for 98 percent of items exported to China.”
He added, ”The remaining 2 percent, like any other bilateral trade, has been important and sensitive. Now, they have offered duty-free access to 1 percent more from September 1.”
The matter was taken up for discussion during a bilateral meeting between Bangladeshi Foreign Minister AK Abdul Momen and his Chinese counterpart Wang Yi on Sunday (August 7). China is also eyeing setting up factories and providing technological support in Anowara upazila in the Chittagong district of Bangladesh.
The two countries are also likely to sign an MoU regarding Public-private cooperation, and chalk out plans for increasing aerial connectivity, and Foreign Direct Investment (FDI). China has reportedly promised to help resolve the Rohingya crisis and the internal challenges in Myanmar as well.
Earlier, four state-owned Chinese companies had expressed interest in building a ‘Smart City’ and a metro rail network in Chittagong. China is known to push developing countries under debt by lending money for building infrastructure projects with marginal or no economic returns.
While Bangladesh is relatively safe for now, things may spiral out of control if the Sheikh Hasina government fails to keep inflation and the associated unrest in check. It will then be an uphill task for India to support both Bangladesh and Sri Lanka at the same time.
The Sri Lankan crisis
Sri Lanka is experiencing its greatest economic crisis since gaining independence from Britain in 1948, with inflation hitting a record high of 54.6% in July 2022 as compared to the previous year.
The island nation’s citizens are facing severe food and cooking gas scarcity. Power outages are common, and huge lines for fuel may be seen throughout the National Capital.
The crisis was exacerbated following the coronavirus epidemic when the country began to struggle with tourism, the island nation’s main contributor to the economy, left severely damaged. Since the government lacked sufficient foreign reserves, many imports were prohibited.
This resulted in extended power outages and blackouts. In April, the Sri Lankan government declared a default on USD 51 billion in foreign debt. In the midst of Sri Lanka’s economic turmoil, India has offered assistance to the island nation.
India has provided a credit line of $1.5 billion for the purchase of 40,000 tonnes of diesel. Additionally, Sri Lanka requested an extra $1 billion credit line for necessary imports.