Bangladesh took prompt and decisive policy action to address the economic fallout of the COVID-19 pandemic, which helped in a rapid and strong recovery. But like countries around the world, Russia’s war in Ukraine has had a significant impact on Bangladesh.
Bangladesh’s current account deficit widened sharply due to rising global commodity prices, supply disruptions and a slump in external demand, depreciating the taka and depleting foreign exchange reserves.
Bangladesh is taking comprehensive measures to deal with these latest economic disruptions. Authorities have tightened the monetary stance, allowed a more flexible exchange rate, imposed temporary restrictions on non-essential and energy-related imports, and adopted measures to reduce electricity demand. Steps are also being taken to re-prioritise spending to protect the vulnerable.
Bangladesh’s request for an IMF-backed program is part of a broader set of measures to cushion its economy.
In the near term, policy priorities should focus on controlling inflation, mitigating the impact of these economic disruptions on the vulnerable, and building external resilience through sustained exchange rate flexibility.
But the current crisis has also highlighted the need to accelerate long-overdue structural reforms to accelerate growth, attract private investment, raise productivity and build climate resilience. Foremost in this endeavor is the challenge of raising more tax revenue, which is critical to increasing spending in critical sectors, including education, health and public investment, to create an environment conducive to growth. There is also a need for an augmented revenue base to assist the poor and vulnerable. This will require modernization of the tax system and improvement in revenue collection.
Bangladesh also needs a more efficient financial sector to improve credit allocation to the most productive economic sectors. This will require a reduction in the role of government in the allocation of credit, as well as an increase in the effectiveness of banking regulation and supervision, and reform of corporate governance and legal systems.