Soft-Landing Bangladesh’s Economy

GBNEWS24DESK//

Economists are fond of drawing analogies from flying. Thus, when economies attain sufficient, sustained growth, they “take off.” When external conditions help them grow faster, they are pushed by “tailwinds.” Conversely, if unfavourable conditions force them to slow, they face the “headwinds.” When economies are unstable, it is “bumpy.” When they have to slow down quickly and significantly, we question whether they will have an orderly slowdown, a “soft landing,” or a disruptive one, a “hard landing.” Or, heavens forbid, a “crash.”

In our neighbourhood, the Sri Lankan economy crashed. As recently as in 2018, Sri Lanka’s outwardly booming economy attained the World Bank’s upper middle-income status. However, it accumulated debt over the past decade and became vulnerable. A reckless tax cut that tripled the fiscal deficit in 2020 was the straw that broke the camel’s back. Today, it has defaulted on debts and desperately seeks financing for food, fuel, power, medicine, and other necessities.

Also, in our neighbourhood, the Pakistan economy is, optimistically speaking, going for a hard landing, perhaps a crash if they cannot negotiate an IMF programme or get a bailout from one of its strategic allies. Having run up a large current account deficit of USD 19 billion in 2019 along with rising debt payments, the economy had an abrupt slowdown – i.e. a hard landing. Even so, the difficulties persist; Pakistan’s currency has depreciated by nearly 25 percent since this January, with inflation rates ranging somewhere between 14 and 24 percent, depending on the measure. Sri Lanka’s and Pakistan’s economies are now paying for several years of large fiscal and current account deficits and debt.

Further west, the Turkish economy provides another lesson for Bangladesh. It’s having a bumpy flight buffeted by a vicious inflation-depreciation cycle that has led to 70 percent inflation rates and a 47 percent currency depreciation in the past year. It’s worth noting that these developments are taking place even though Turkey’s public debt is relatively moderate at about 40 percent of GDP – the same as Bangladesh. Another unfortunate similarity with Bangladesh is that “Erdoganomics” has compelled the central bank to keep the interest rates low. Turkish President Recep Erdogan fired three central bank governors because they resisted him. Yes, the Turkish capital account is open, and ours is not. But with foreign currency transactions of more than USD 150 billion in the last year, we are not exactly closed either. Having flexible interest rates will be a key instrument to stabilise our economy.