Energy Reality and Ambitious Export Target in Bangladesh

Bangladesh was conventionally known as import-dependent economy due to industrial and economic landscape. In the recent years, economy has been performing consistently with the export momentum, one of the key indicators of the economy. Due to the growing export trend, Government prioritized the export-led industrialization orientation. The world has been the victim of pandemic stress while Bangladesh has contained the vulnerability through resilient economic management.

While the world trade declined by 5.5%, our export trade has outperformed amidst the COVID and imports have heavily surged ending up our foreign trade at $145 billion in FY2022 with GDP growth. Uninterrupted utility supply support of the Government in recent years eased this momentum. When Bangladesh has been undergoing the pandemic recovery process, the war-led geo-economic shockwave started hurting our economic spree squeezing global trading and economic system have been shocked immensely. Energy has become apparently the root cause of the crisis of the ongoing global unrest and multilateral sanctions. The regional economies were hit and badly crippled.

Despite having all visible challenges, our economy gained trade momentum and become a centre of attraction regionally being branded as the top resilient economy in the Asia and 5th resilient economy in the world. The global trade network slightly recovered in 2021 but again faced a downfall due to the widespread global crisis. Russia and Ukraine have made the energy war widespread throughout the world causing various factions and triggering multiple crises including inflation, energy supply crunch and price shock. As a result, IMF estimated a downward global growth revision to 3.6% in 2022 and a likely recession.

The swinging world trade has shaken the spirit of revival of many economies. Against this dwindling global context, $67 billion in export earnings enshrining both goods and services in FY2023 has been targeted. Apparently, this target is exciting but there are some glooms that may overshadow the brightness of our trade perspective. Some of the core challenges which may hold back our desired export target are briefly elicited.

The gas and fuel stream has been disrupted causing Europe and the US markets to experience of double-digit inflation and economic instability. The staggering inflation in the US and UK due to higher fed rates turned them into part of new economic history in the world in the last 4 decades. The exchange rate of the Taka has declined by 10% in the last 3 months against the USD which tightens our foreign exchange reserve.

Recent Gas price hikes by 22.78% on average and 7.6% in industry gas will be detrimental because they will significantly inflate the production cost of export-oriented manufacturing declining export competitiveness. The liquid fuel supply crunch and decision of rationing diesel supply would affect the local industrial power supply and smooth local transport network resulting in delays in the supply chain related to the port. Thus, our lead time may reduce and the cost of doing business may hike. RMG export order tends to decline by double-digit and raw material import is getting dearer as importing countries are facing contraction. Exporters have been struggling with the global economy for increased shipping costs as well as undeserving concerns and cost elements. Our African and Asian market share is lower than desired but no endeavours are stated to harness potential markets.

Shipping eight cost has gone up from 400% to 500%. However, due to disruption in the supply chain and increased fuel price, the freight cost has increased to $18,000 to the USA and $15,000. Though the government has taken some commendable steps in this budget by exempting taxation from earning oceangoing vessels, more cost-effective shipping is required for easing export. The fuel price hike also provokes the shipping cost too.

Our recent import status shows Capital machinery import is 7% and industrial raw materials share 36%. However, the recent restriction on the import of luxury and non-essential products, LC margin hike and monitoring of imports may enhance our net foreign exchange reserve retention. Fuel and Gas import share was around 11% of total import. But, the extremely expensive LNG and liquid fuel price hike inflated the fuel import share to 15%. LNG import has been temporarily stopped. The unbearable import cost made our foreign reserve miserable. However, the gap between the exchange rate in the open market and LC needs to be rationalized for bringing order to the FOREX market and economy. This frequent fall is making the fuel import dearer.

We need to ensure the utmost benefit of the devaluation process. Therefore, we must concentrate on export diversification strategies adding new products to the export basket. But this cannot be translated overnight. On-going currency devaluation poses some threats to importers, making businesses less competitive which may reduce the net retention of export-oriented industries. The Dollar hike has already started dominating over other SDR currencies like the pound and Euro and alternative currency preference can be helpful to cool down the import market.

The order loss in Vietnam, Pakistan and Sri Lanka helped our sudden export hike in FY2022. As soon as the regional economic context fixes, this growth may not sustain.

12% flat rate corporate tax for all export items is apparently a good move for export diversification. For gaining the benefit, other allied economic factors and non-fiscal benefits like bond and industrial infrastructure are needed to gain the benefit of it. Off late, non-fiscal incentive like uninterrupted energy supply has become an inevitable enabler as this is linked with almost all economic activities.

Economic diplomacy effort needs to be heightened where export is small in Africa and Middle east, Asia Pacific regions for export market diversification. We need to diversify our product portfolio to manage any export market shock including implications of WTO MC12 outcomes and strategies.

The energy diplomacy should be a part of our foreign diplomacy considering the importance of oil price and volatile brent and clean crude oil market. OPEC and Bangladesh should have deep cooperation so that we can face minimum crisis and shocks due frequent change in global market. Frequent supply fall of liquid fuel and power generation have negative linear correlation. Our local power generation has been largely import-dependent and it can not be changed overnight and the unpredictable oil market may aggravate our energy future in Bangladesh. Inadequate power supply forced Government to ration the load shedding and weekly industrial production work throughout the country which may further cut and hamper the desired industrial productivity including the forefront and emerging export-oriented industries in Bangladesh. Our Quantum Index of Industrial Production (QIIP) highlighting the industrial production efficiency measure may plunge downward.

Taking into account the changing geo-economic ambiance, this ambitious target is not easy to reach. The ragged world economic state can affect planned export earning. Alongside, this target has not been made based on any forecast, trend and subjective assessment considering local, regional and global economic dynamics. The planned and research-backed target always remain achievable containing the pressing concerns in the economy. As an interim and low-cost solution, we can revisit the contract of power producers with IPP adding local currency led capacity payment ins stead of Dollar for overcoming the crisis. Multiple energy sourcing destinations like Qatar, Kuwait, Iran, Algeria, UAE and Russia subject to mutual understanding and currency Swap in some instance can be considered as cost-cutting strategy. The foreign trade performance is not linear rather subject to critical and diversified world economic atmosphere. Since Bangladesh is immensely integrated global trade with 190 economies, this global economic context often reshapes our economic trend. We need to target export taking into account the contemporary economic condition and other allied actors influencing economic competitiveness. LDC graduation led transition will erode many supports and require strategic preparedness for sustainable economic regime. In the current context, ambitious export should not be main objective now rather building a compliant, energy resource efficient industrial base need attention for long-standing and objective export business towards long-cherished economic transformation for the best interest of all.

- AKM Asaduzzaman Patwary, Sr. Economic Research Fellow & Doctoral fellow of Economics, Jagannath University