Dhaka: Global rating agency Standard & Poor's (S&P) has cautioned Bangladesh that further depreciation of its currency would mount domestic inflation pressures and make external debt servicing costs more expensive. Bangladesh liberalised further its trading mechanism in June 2022 and since then nominal exchange rate of Taka, the local currency, has depreciated by about 10 per cent against the US dollar, marking a notable shift in the country’s foreign exchange dynamics.
"Depreciation in the currency will add to domestic inflation pressures, and make external debt servicing 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 marked rise in its current account deficit, driven by surging domestic demand and higher commodity prices.
"These trends have driven net outflows of foreign exchange from the economy, resulting in declining reserves and depreciatory pressure against the taka," it said.
The S&P report came as the inflationary surge in Bangladesh tends to follow the trends in the movement of commodity prices in global and domestic markets.
The annual inflation rate in Bangladesh is underpinned by soaring prices of both food and non-food items while the Russia-Ukraine war and associated sanctions are also contributing to rising inflation in Bangladesh as global commodity prices surge.
Simultaneously, the inward worker remittances that have long acted as a crucial support to Bangladesh's external financial flows fell in June to June 2021-2022 fiscal as fewer workers could repatriate their assets with gradual normalisation in global labour markets.
Bangladesh this year also saw less production of rice which experts fear would increase price of the staple.
Financial analysts said they saw no sign of an immediate respite from spiraling prices.
“Bad times are looming large as the general point-to-point inflation may hit 10 per cent in the coming months,” financial think-tank Policy Research Institute (PRI) Executive Director Ahsan H Mansur said, adding that the monetary policy was not working well to contain the inflationary pressure.
He said the government was trying to face the challenges of inflation through supply-side boost but the deficit in balance of payments was unlikely to go away very soon even if export earnings and inward remittances were increased, imports declined, and a desirable balance in foreign trade could be ensured.
The S&P, however, said Bangladesh's economy accelerated in 2022 and underlying momentum remains sound and added that the normalisation of the global economy continued to drive a strong pick-up in the country’s garment sector, contributing to a 12.3 per cent expansion in manufacturing activity in the outgoing fiscal year.
"The sector's recovery has also underpinned a durable recovery in the condition of Bangladesh's labour market, supporting robust domestic demand conditions," the rating agency said.
“The outlook remains stable (and) the stable outlook reflects our expectation that Bangladesh's solid growth prospects 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 Bangladesh's economic recovery remains on a sound footing, and "we project real GDP growth to average 7.0 per year over the next three years." But the S&P said it might lower the ratings on Bangladesh if net external debt or financing metrics worsened further.
It said the revised negative rating could come if the external debt surpassed 100 per cent of current account receipts, or gross external financing needs exceeded 100 per cent of current account receipts plus usable reserves, on a sustained basis.
The S&P cautioned that although Bangladesh’s private sector banks were in a better shape, there were “notable risks” in the state-owned commercial banks.
"We may upgrade Bangladesh if the government materially improves its fiscal outcomes, including its very low revenue generation and elevated fiscal deficits, and experiences a substantial improvement in its external settings. We may also raise the ratings if we observe that Bangladesh's institutional settings have markedly improved," it noted.
Bangladesh Bank’s Chief Economist Habibur Rahman bluntly admitted that the inflationary pressure would continue as “it has been caused totally from imports”.
But, he said, the central bank took various steps to contain inflation stabilising the exchange rate while “efforts are on to control inflation through improving the supply side without raising the interest rate".
Hopefully, Rahman said, the exchange rate of the US dollar against Taka would come down soon and there would be improvement in other sectors as well.
State Minister for Planning Shamsul Alam, himself an economist, on Sunday criticised fellow economists of the country, saying they mostly tend to express concerns but could not see the attainments and possibilities of the country.
"But, the foreign research institutions have highlighted the strengths and potential of the economy of Bangladesh," he said.
Alam, however, said there is no denying the fact that people were now suffering due to the inflation, largely caused by fuel price hike “but, the government has taken various steps and hopefully the inflationary pressure will come down by October",