Addressing the dollar crisis by investigating underlying causes, effects, and strategic solutions in emerging economies

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Research in Globalization 8 (2024) 100187

Available online 28 December 2023

Addressing the dollar crisis by investigating underlying causes, effects, and strategic solutions in emerging economies

Sajid Amit

^a

, Abdulla - Al Kafy

^a^,^b^,^*

aCenter for Enterprise and Society, University of Liberal Arts Bangladesh (ULAB), Dhanmondi, Dhaka 1209, Bangladesh

bDepartment of Urban & Regional Planning, Rajshahi University of Engineering & Technology (RUET), Rajshahi, 6204, Bangladesh

A R T I C L E I N F O Keywords:

Sustainable resource management Foreign exchange reserve crisis Dollar crisis

Economic stability Developing economy

A B S T R A C T

Foreign exchange reserves (FER), especially dollar assets, are vital for a developing country to maintain economic stability, foster growth, and protect against unexpected amendments. In recent years, particularly since the onset of COVID-19, several emerging countries have experienced significant economic hardship due to a crisis in foreign reserves. This has led to inflation and disruptions in supply chains, healthcare, and various service facilities. Despite the gravity of this issue, previous studies have not investigated the causes and consequences of such sudden crises. This study aims to fill this gap by investigating the causes and consequences of sudden FER crises in a developing country, specifically Bangladesh, through a systematic review. The study also explores innovative process-oriented policies to mitigate the immediate FER crisis. The systematic literature review followed the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) guidelines.

It included 90 articles published between 2020 and 2023. The results discovered that the FER crisis in Bangladesh has been triggered by both external factors (such as the COVID-19 pandemic, the Russia-Ukraine conflict, trade imbalances, and remittances) and internal factors (including large infrastructure projects, com- plexities in the banking sector, local project subsidies, a managed floating exchange rate, and an over-reliance on the ready-made garments sector). These factors escorted deflation of the national currency, causing further inflation, declining domestic purchasing capacity, and raising concerns about food security. Additionally, price hikes and unauthorized storage of daily necessities made accessing daily essentials challenging for locals. The government has implemented three policy interventions, including managing consumer demand, safeguarding the supply of goods, and regulating continuous market monitoring to overcome the challenges. This study proposes eight innovative process-oriented policy recommendations for mitigating the immediate foreign exchange crisis and promoting sustainable economic development. Overall, this study offers valuable contributions in developing sustainable global economic policies. It fosters improved recovery and reuse of materials and energy while advancing long-term growth in developing nations.

Introduction

Foreign exchange reserves (FER) represent a vital component of a country’s financial assets held by its central bank or monetary authority.

These assets typically include foreign currencies, government securities denominated in foreign currencies, gold, and occasionally Special Drawing Rights (SDRs). FER safeguards against external economic shocks and uncertainties (Bussi`ere et al., 2015). FER plays a crucial role in supporting international trade and investments by facilitating international trade and payments. FER holds particular significance for developing countries due to their vulnerable economies, external

economic shocks, higher dependency on the exports of important goods, and limited access to global financial markets (Bordo, Meissner, &

Stuckler, 2010; Kruˇskovi´c & Mariˇci´c, 2015; Augustine, Malindretos, &

Emmanuel, 2017). Moreover, developing countries emphasize FER, especially dollar reserves, to attract foreign direct investment and reduce the risk of sudden capital flight. However, recent COVID-19 outbreaks have created a significant FER crisis in many countries worldwide. Especially developing countries faced a sharp economic downturn, leading to recessions and contractions in economic activities, business closures, unemployment, and pushing vulnerable populations into poverty (Reuters, 2023; Times of India, 2023). These underscore the

* Corresponding author at: Center for Enterprise and Society, University of Liberal Arts Bangladesh (ULAB), Dhanmondi, Dhaka-1209, Bangladesh.

E-mail addresses: [email protected] (S. Amit), [email protected] (A.A. Kafy).

Contents lists available at ScienceDirect

Research in Globalization

journal homepage: www.sciencedirect.com/journal/research-in-globalization

https://doi.org/10.1016/j.resglo.2023.100187

Received 15 June 2023; Received in revised form 17 September 2023; Accepted 10 December 2023

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need for a comprehensive study of the causes and consequences of the FER crisis in recent years.

FERs are lifelines for developing countries. Emerging nations often face increased volatility in their economies, including fluctuations in currency exchange rates, balance of payments deficits, and vulnerability to external crises (Kruˇsković & Mariˇcić, 2015). In such contexts, FER serves as a vital buffer, allowing these countries to stabilize their currencies, ensure the smooth flow of imports and essential goods, and meet external debt obligations. To finance imports and repay foreign debts, developing countries often rely heavily on foreign currency reserves, particularly US dollars (Catão & Milesi-Ferretti, 2014). Additionally, reserves enhance investor confidence, attract foreign direct investment, and reduce capital flight risk. Thus, high FER in developing countries fosters economic growth. Moreover, FER helps developing countries get loans for infrastructural development, such as transportation, energy, and urban development (Matsumoto, 2022). Investment in infrastructure development leads to increased economic activity, job creation, and improved living standards for the population. Additionally, revenues generated from these infrastructure projects, such as highway tolls and port fees, can replenish the EFR, creating a virtuous economic growth and infrastructure development cycle. However, the FER crisis leads to the postponement or cancellation of vital projects, including transportation networks, energy facilities, and urban development initiatives, which therefore limits economic growth. FER crisis can lead to inflationary pressures, import restrictions, unemployment, and a reduction in people’s purchasing power (Moore & Glean, 2016). Moreover, it may impede a country’s progress toward achieving its development goals, including those relating to poverty reduction, healthcare, education, and environmental sustainability (Matsumoto, 2022).

The majority of developing nations heavily depend on the dollar for various transactions, such as procuring food essential goods and facilitating foreign investments. In addition, dollar-denominated debt is an overall financing strategy for these countries, significantly impacting their economies’ sudden depreciation or devaluation (Tanjim, 2022;

FAIR, 2023). As of April 2023, a large number of developing countries are facing a FER crisis or debt crisis, including Egypt, Pakistan, Ghana, Lebanon, Pakistan, Malawi, Ukraine, Tunisia, Sri Lanka, and Zambia (Reuters, 2023). Times of India (2023) reported that the number of countries at risk of a FER crisis has increased substantially. Due to ballooning inflation rates, increasing borrowing costs, and a strong dollar, these developing nations have had difficulty repaying loans and raising funds, forcing many to default last year and seeing mounting debt (Matsumoto, 2022; Moore & Glean, 2016). Poor economic structure, political problems, war, and economic mismanagement in these countries, exacerbated by the COVID-19 pandemic and the Russia- Ukraine war, increased the crisis in these countries (The World Bank, 2022). Factories in Pakistan have halted operations in the past few months due to a lack of hard currency to import raw materials. Gov- ernment hospitals in Sri Lanka are postponing non-urgent surgeries due to a shortage of drugs and other medical supplies due to a 20-liter fuel limit per person per week (Times of India, 2023). Bangladesh is one of the victims of the recent FER crisis, facing serious economic hardship since COVID-19, triggered by the Russia-Ukraine War (The World Bank, 2022). During the six months from August 2022 to January 2023, Bangladesh’s foreign reserves have fallen from $39 billion to $32 billion while the value of the Bangladeshi Taka has fallen by 27 percent from BDT 84 to BDT 107 to the dollar (Alo, 2022; Apparel Resources, 2023).

Such short-term economic crises were also observed in several developed countries, including the USA and Europe. In this situation, it is particularly important to comprehensively explore the causes of the recent debt or dollar crisis. Despite the growing prominence of debt crises as a hot topic, no prior studies have addressed the causes and consequences of these sudden short-term FER crises in emerging countries.

To fill the prior literature gap, this study aimed to provide a comprehensive perspective of the causes and consequences of FER crises

in Bangladesh by addressing the following questions: First, what are the major causes of sudden FER crises in Bangladesh? Second, what are the major structural and institutional weaknesses associated with FER crises? Third, what are the socioeconomic impacts of FER crises? Fourth, what are the sustainable solutions to overcome the challenges of sudden FER crises? This study used a comprehensive literature review approach to shed light on these questions. Findings of will guide economists and policymakers toward developing more equitable and sustainable global economic frameworks. This would ultimately benefit not just developing countries but also the global economy. This research contributes significantly to the discourse on financial sustainability, which is vital in our increasingly interconnected global economy.

Methods and materials

This study adheres to the guidelines provided by Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) and con- ducts a systematic literature review of 90 articles in February 2023. The screening approach begins with the title, followed by the abstract, and finally, the full articles. PRISMA provides a clear and structured method for conducting systematic reviews, ensuring that all relevant studies are considered and reducing the risk of bias. It also enhances the trans- parency and reproducibility of the review process, making it easier for others to understand, critique, and build upon the work (Sarkis-Onofre et al., 2021; Page et al., 2021).

This study constitutes a bibliometric and systematic review to comprehensively investigate the underlying causes and consequences of Bangladesh’s recent sudden FER crises. The systematic review process was conducted in four steps: data collection, assessment, extraction, and explanation. In the data collection step, we have paid attention to recent research papers, newspapers, blogs, websites, and reports published during 2020–2023. We selected news pieces from reputable news outlets and prominent news portals. Additionally, we incorporated reports from esteemed institutions such as the Bangladesh Bank, Asian Development Bank, and World Bank, which focus on debt and FER crises. To facilitate our search process, we strategically employed the keywords in Table 1 as part of our resource identification strategy. We assessed all the reports, blogs, websites, news articles, and reports in the second step. We elim- inated ambiguous and irrelevant titles. Only resources directly pertinent to recent FER crises in developing countries and, specifically, in Bangladesh, were retained for further analysis. The third phase involved systematically extracting pertinent data and information from each of the selected reports, blogs, articles, newspapers, and websites, as identified in the preceding assessment step. The extracted data encompassed both numerical elements, such as statistics, numbers, percentages, and dates, as well as textual components elucidating the causes, phases, reasons, and consequences of FER crises. Finally, we have interpreted, explained, and discussed the extracted data in the context of the objective of this study.

Table 1

Data sources utilized for this research.

Source type Documents

number Collection

sites Searching keywords Journal

articles 12 Google

scholar Dollar crisis, foreign exchange crisis, food security in Bangladesh, causes of dollar crisis, inflation, purchasing power, Reserve of Bangladesh, Foreign loans, Remittance, Export and import, Bank, economic stability, global economy, economic growth, price hikes, devaluation of currency, foreign investment.

Reports 15 Google search

Newspaper

articles 45 Google search

Blogs 18 Google search

Video clips 22 YouTube and

Facebook

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Results and discussion Current state of dollar and reserve

Prior to the emergence of COVID-19, the exchange rate of the US dollar was relatively stable, hovering around 84 Tk, with a modest increase to 86.635 Tk by April 2022 (Mavis, 2022a). However, a notable shift observed over the subsequent three months, marked by a significant uptrend in the dollar’s value. A historical peak of BDT 119.9 was registered on August 10, 2022, in the kerb market (Mavis, 2022b). As represented in Fig. 1, the dollar’s value consistently remained above 100 Tk from April 2022 onwards. By the end of March 2023, the dollar rate reached to 106.71 Tk.

The nation’s economy also grapples with a persistent energy crisis, primarily attributed to escalating fuel prices and persistent power shortages. Interestingly, Bangladesh heavily relies on energy imports, with 34.5 % of its energy requirements being sourced from abroad (BEI, 2020) In 2021, the total import expenditure on fuel and petroleum products amounted to $8985.10 million, constituting a substantial 25.5

% share of the country’s overall imports (BEI, 2020).

Fig. 2a shows the gradual increase of inflation in Bangladesh, coin- ciding with the decline in the country’s foreign exchange reserves (Fig. 2b). As of June 2022, the annual inflation rate was 7.56 %, while the food inflation rate was 8.37 %. This higher rate of food inflation has grown a serious concern for the food security crisis in the country (Bangladesh Bank, 2022; The Financial Express, 2022a). This inflation rate has been increasing quickly and will reach 9.335 %by March 2023 (food inflation will reach 9.90 %). Low- and fixed-income groups are becoming increasingly food insecure as a result of ongoing inflationary pressure. Fuel prices have been one of the prominent drivers of inflation in Bangladesh. For the first time in two years, Bangladesh Bank’s foreign exchange reserves fell below $40 billion in July, reaching $39.04 billion on August 30 (Fig. 2b). In November 2022, the central bank was reported to have foreign currency reserves of $35.7 billion, which could cover imports for about four months. The export sector also faced challenges due to increased production costs and economic uncertainties in the European and North American markets. In a bid to avert a situation analogous to those of Sri Lanka and Pakistan, Bangladesh sought a substantial loan of $4.5 billion from the International Monetary Fund (IMF), supplemented by smaller sums from various international financial institutions (IFIs) (CEIC, 2023). In February 2023, the IMF greenlit a loan of $4.7 billion for Bangladesh, which coincided with a decrease in foreign exchange reserves to $28.6 billion (CEIC, 2023).

Meanwhile, the country is grappling with its most severe economic downturn since the Global Financial Crisis of 2008. The government is contending with high inflation rates, persistent power shortages, a fluctuating exchange rate, and rapidly depleting foreign exchange reserves. The price surge for all commodities, particularly essential goods and food, has directly impacted all socio-economic segments, with low- and middle-income groups bearing the brunt of these economic

hardships.

Factors led to present situation

The prevalent economic volatility has been labeled as a balance of payments (BoP) crisis by mainstream media, while economists often refer to it as a dollar crisis. This volatility predominantly results from supply shortages leading to surging dollar prices, a manifestation of a BoP deficit where imports outpace exports. This study classified the factors that triggered the sudden FER crises in Bangladesh into two types: external factors and internal factors.

External factors contributed to sudden FER cirses

Influence of COVID-19 and war. The global onset of the COVID-19 pandemic served as the catalyst for the ongoing crisis, substantially interrupting global production and trade operations thereby inducing inflationary pressures. In response to the looming threat of a global economic slump, nations around the globe enacted stimulus packages and financial aid initiatives to increase their money supply and boost production. However, the conflict between Russia and Ukraine towards the end of 2021 only exacerbated the situation, severely disrupting supply chains for essential commodities like oil, gas, fertilizers, chem- icals, and agricultural goods (Business Inspection, 2022). By March 2022, inflation had climbed to an alarming 8.5 %, marking the highest level since 1981, particularly pronounced in the USA. The US Federal Reserve implemented interest rate hikes to counter this inflation, attracting global investors. This monetary policy shift by the Federal Reserve substantially contributed to the surge in the value of the US dollar. Moreover, escalating energy prices have negatively impacted fuel-importing nations, especially Europe and developing countries (including Bangladesh), as they rely less on oil and gas imports than the USA (Russel et al., 2022). Consequently, the majority of global currencies began to depreciate against the dollar. Fig. 3 reveals that the value of several nations’ currencies has plummeted, some by more than 5 %.

Export and import. The appreciation of FER has profoundly influenced Bangladesh’s import and export landscape. While it resulted in costlier imports, the competitive pricing should have boosted exports theoreti- cally. However, surging fuel prices increased production costs, and the economic downturn in North America and Europe, combined with contractionary monetary policies, stifled demand for Bangladesh’s exported goods, leading to a drop in exports. Moreover, the Government of Bangladesh (GoB) liberalized import regulations and broadened duty- free imports as part of its post-COVID-19 stimulus strategy, resulting in a surge in import volume. In the fiscal year 2022, remittances into the country declined by 15 % compared to FY21 (The Business Standard, 2022a). This combination of reduced exports and increased imports led

Fig. 1. Interbank and Kerb Market Exchange Rates (Bangladesh Bank & The Business Standard).

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to an escalating demand for the US dollar, thereby exacerbating a growing balance of payment deficit of $33.25 billion in FY2021-22, which had to be offset with foreign exchange reserves (Rahman, 2022a). Fig. 4 shows that net imports outstripped net exports in the last

fiscal year, with total imports growing faster than exports.

Remittance. Remittances play a pivotal role in the economy of Fig. 2. (a) Inflation Rate and (b) Foreign Exchange Reserve of Bangladesh.

Fig. 3. Global Currencies’ Depreciation against the US Dollar.

Fig. 4. Bangladesh’s Exports and Imports in FY22.

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Bangladesh, contributing significantly to FER and overall economic expansion. Numerous Bangladeshi expatriates, working across countries such as the Middle East, Europe, and the United States, send money back home, bolstering the country’s FER. However, during the COVID-19 pandemic, remittances experienced a substantial drop up until October 2021, even as imports continued to rise. This decline in remittances directly affected the country’s dollar reserves, leading the central bank (BB) to fund the market from the FER to maintain exchange rate stability (Fig. 5). The stronger dollar and its limited availability domestically necessitated this action.

Managed floating exchange rate (MFER). The Managed Floating Ex- change Rate (MFER) is a system where the exchange rate is allowed to vary within a specific boundary, and the central bank steps in to influence the foreign exchange market as needed. This system has played a role in the ongoing economic crisis in Bangladesh. By artificially maintaining the value of the national currency, the Taka, the competitiveness of exports has suffered, and there has been a decrease in the volume of remittances processed through the banking system (The Daily Star, 2022b). The kerb rate, which brokers informally set, often reflects the market value more accurately. For instance, the real effective exchange rate index increased from 100 in 2016 to 115 by October 2020 (The Daily Star, 2022b). As of May 9, 2022, the Bangladesh Bank mandated that importers purchase dollars at a rate of BDT 95 for settling import bills (The Daily Star, 2022c). Due to a surplus of dollars, banks were forced to set a higher price for the dollar. On August 10, there was a notable discrepancy, with the kerb rate being BDT 119.9 and the interbank rate set by the Bangladesh Bank being BDT 95, which resulted in a significant difference of BDT 25.

Internal factors contributed to Sudden FER crises

Mega projects. Bangladesh’s dollar crisis surge is also connected to major projects that enhance the demand for foreign currency. These projects necessitate imports of machinery, equipment, and other materials, leading to a depletion of foreign currency reserves and a dollar shortage in the market. This shortfall can potentially lead to local currency depreciation, inducing inflation and other economic challenges. In addition, these major projects add to the country’s increasing debt burden, exacerbating the dollar crisis (Mahmud, 2023). Factors

contributing to this crisis include high-cost infrastructure projects, pervasive bank loan defaults, excessive spending in the energy sector, exchange rate misalignment (Ali, 2019), capital flight, and low levels of Foreign Direct Investment (FDI).

Since 2009, the Government of Bangladesh (GoB) has kickstarted several large-scale projects using funds from bilateral channels and international financial institutions. Prominent projects include the Padma Bridge, the Rooppur Nuclear Power Plant, the Dhaka Metro Rail, Dhaka Elevated Expressway, and the Karnaphuli Tunnel. Unfortunately, many of these initiatives have surpassed their initial budgetary allocations (Fig. 6) (Rahman, 2022b). In a 2017 report, the World Bank pointed out that the cost of road construction in Bangladesh was the highest glob- ally, largely attributed to inflated prices for materials and considerable delays (Riaz, 2022). This recurrent pattern of overspending, coupled with the obligation to repay high-cost loans, has further exacerbated the country’s financial stress and contributed to the burgeoning dollar crisis.

Additionally, Bangladesh continues to struggle with stimulating private-sector investment and driving economic growth through infrastructure development. Over the past three years, the country has seen a decrease in the investment-to-GDP ratio, indicating a concerning trend.

According to the Bangladesh Bureau of Statistics (BBS), the investment- GDP ratio was 31.02 % in FY2021, a drop of 0.29 % and 1.19 % compared to FY2020 and FY2019, respectively. This downward trend is attributable to the diverging paths of public and private sector investments. Public infrastructure and social services investment accounted for 6.96 % of GDP in FY19 (NAW, 2022), and slightly increased to 7.29 % in FY20 and 7.32 % in FY21. In contrast, private investment as a percentage of GDP was 25.25 % in FY19 but declined to 24.02 % in FY20 and further to 23.70 % in FY21 (The Financial Express, 2022b). Despite the government’s concerted efforts to catalyze investment, the protracted completion timelines of major infrastructure projects have been acting as a hindrance, preventing private capital from realizing its full potential for economic growth.

Complexity in banking sector. Findings suggest that the banking sector’s issues also drive the recent FER crises in Bangladesh. During economic crises, the BB borrows dollars from local banks (Uddin, 2021). However, there is a high prevalence of non-performing loans in the banking sector, and there are challenges to corporate governance in the sector (The Daily Star, 2022a; Uddin & Parvez, 2022). Despite a lenient policy on

Fig. 5. Number of Expatriate Employees and Remittance Inflows.

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loan classification, non-performing loans increased by 16.38 % from 2020 to 2021. As of 31 December 2021, there were 1032.74 billion BDT worth of non-performing loans. Mis-invoicing of trade goods resulted in an average theft of $8.27 billion per year from 2009 to 2018. Bangla- deshis have deposited large amounts of money in Swiss banks over the past decade, and such deposits increased by 55 % in 2021, reaching

$912 million (CHF 871.1 million) (Bhuiyan & Islam, 2022; The Business Standard, 2022b).

Subsidies for projects. The poor economic condition of Bangladesh is further amplified by issues such as capital leakage, inefficiency, and notably, substantial subsidies embedded within the annual budget. A glaring example of resource mismanagement lies in the energy sector.

Despite producing no electricity, the government finds itself committed to payments for entities such as Quick Rental Power Plants (QRPPs), Rental Power Plants, and Independent Power Producers in the private sector, in accordance with specific contractual obligations, including capacity charge provisions. Over the past decade, twelve such companies have amassed capacity charges summing up to $5.5 billion.

Furthermore, the power sector was granted extensive subsidies from 2010 through 2021 (Mehedi, 2022). Between 2010 and 2015, the Bangladesh Petroleum Corporation was given BDT 300.86 billion (about

$3.5 billion) (Moazzem, 2022). While aimed at support, these subsidies resulted in rising consumer costs for electricity and fuel. Furthermore, a recently inked agreement between the GoB and Adani Energy underscores the magnitude of the financial commitments and resource allocation required for the nationwide goal of comprehensive electricity coverage. This agreement mandates annual capacity charge payments of

$423.29 million for the next twenty-five years, accentuating the financial burden associated with such endeavors (The Daily Star, 2021a). The subsidies in these sectors may seem like a means of supporting the population, but later found to be straining the national budget, the government is now covering the gap.

Overdependency on RMG sector. The overreliance on the ready-made garment (RMG) sector has significantly aggravated the dollar crisis in Bangladesh. The RMG sector, contributing over 80 % of the country’s total exports (Islam, 2021), is heavily reliant on imported raw materials and its main export markets are in Europe and North America. With the rising cost of imports and a decrease in demand due to economic concerns, production costs in the RMG sector have escalated while demand has waned. Moreover, RMG exports encounter various tariff and non- tariff barriers, such as the absence of a Generalized System of Prefer- ences (GSP) in the U.S. and the lack of free trade agreements with Bangladesh’s competitors (The Financial Express, 2022c). Despite consistent economic growth, attracting foreign direct investment (FDI) to Bangladesh has proven challenging. FDI inflows represent just 1 % of the country’s GDP, the lowest among Asian countries. The government

has initiated steps to attract FDI (Asaf, 2022). However, improvement is still necessary in critical global indicators like the Ease of Doing Business Index (EDB) and the Global Competitiveness Index (GCI). In the 2020 EDB Index, Bangladesh ranked 168th out of 190 countries, scoring 52.12 out of 100 on the 2019 GCI (The Daily Star, 2021b).

Response of Bangladesh government

In an attempt to tackle the sudden dollar crisis, the GoB has taken action to promote exports, invite foreign investments, and stimulate the flow of remittances. The government and the BB have employed a triple- pronged strategy encompassing market control, demand-side, and supply-side policies (Table 2). These measures primarily aim to increase the availability of dollars in the domestic market, while simultaneously attempting to decrease demand and establish market controls to carry out supply-side measures effectively.

While these strategies have temporarily stabilized the value of the dollar in the curb market, it is essential to recognize that transient stability does not necessarily translate to sustained market health. As a consequence of the Russia-Ukraine conflict, the prices of essential agricultural inputs such as fuel and fertilizers have seen a significant upsurge. In response, the government increased fuel prices by 50 % in July and implemented various austerity measures, such as power ra- tioning, restrictions on foreign travel for government officials, limita- tions on acquiring government vehicles, and prohibitions on nonessential and luxury items. Although these actions have curtailed short-term expenditures, they have negatively impacted production and living costs (Chakravarty, 2022). Furthermore, beyond these immediate measures, the government has solicited aid from international financial institutions to bolster foreign exchange reserves. GoB asked a loan of

$4.5 billion from the International Monetary Fund (IMF) and IMF approved a loan of $4.7 billion, with an interest rate of 2.2 %. Of the

$4.7 billion, $1.3 billion can be repaid over a period of 20 years with a grace period of ten years. The remaining amount must be repaid within ten years, with a grace period of 3.5 years for part of the sum and 5.5 years for the remainder (The Daily Star, 2023). Similar aid has been sought from the World Bank ($1 billion), the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank (AIIB), and the Japan International Cooperation Agency (JICA) (Byron, 2022). The IMF has already approved a loan of $3.3 billion for Bangladesh (IMF, 2023).

Bangladesh finds itself at a crucial juncture, necessitating prudent management strategies to avert the looming specter of a debt trap. In recent years, the country has seen its foreign debt reach a staggering $90 billion, a significant portion of which can be attributed to loans for large- scale infrastructure projects. This hefty debt has put substantial pressure on the national treasury for repayment (Chakravarty, 2022). The country owes approximately $43 billion to countries like China, Japan, and Russia. From FY20 to FY22, it received $5.88 billion in budgetary Fig. 6. Cost Overruns of Mega Projects in Bangladesh.

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support from a range of international financial institutions. By the conclusion of FY21, Bangladesh’s outstanding foreign debt had climbed to $49.46 billion, which accounted for 13.9 % of the country’s GDP (Bangladesh Bank, 2021). The Ministry of Finance’s Economic Relations Division (ERD) has highlighted that several major foreign loans are due for maturity in FY25 (Hossain, 2022). Additionally, the country’s overall debt repayment commitments are anticipated to rise after FY26 as grace periods for non-concessional loans from countries like China, Russia, and India come to an end (Samakal, 2022). Therefore, the potential risks of accumulating further burden by adding new loans from various international financial institutions must be evaluated with a discerning eye.

Policy recommendations to overcome the crisis

As Bangladesh grapples with the ongoing economic crisis, the government faces the formidable challenge of crafting and implementing policies that can restore stability. Achieving equilibrium in the foreign exchange market ranks high on the priority list, but it is equally imperative to exercise vigilance in curbing domestic inflation. The re- percussions of rising inflation in a nation where a significant portion of

the population belongs to the middle and lower income strata are multifaceted, with far-reaching socio-economic and political implica- tions. The management of budgetary constraints, exacerbated by inflationary pressures on essential commodities, presents a formidable task.

Furthermore, the austerity measures currently in place exert additional strain on these segments of the population, contributing to labor unrest and heightened market volatility.

Contractionary monetary policy

Deploying contractionary monetary policies can serve as an efficient mechanism to tame inflation. Notably, global interest rates have risen over the past year, influencing key economic parameters such as inflation, balance of payments, and exchange rates. Despite the government’s intention to augment the money supply in FY23, it may inadvertently escalate inflation. Presently, Bangladesh is grappling with a negative real effective interest rate. Therefore, the need to curb demand-pull inflation calls for an increase in the interest rate and a reduction in the money supply, urging the Bangladesh Bank to ponder over hiking the interest rate (Kashem & Islam, 2022). The government can address immediate expenditures by stimulating savings and forti- fying treasury funds (Tanjim, 2022). Implementing alternative Table 2

Bangladesh’s Strategy to Mitigate the Dollar Crisis.

Intervention Areas Measures Modifications Consequences

Consumer Demand

Management Impediments on Imports •Enactment of a 20% regulatory duty on roughly 135 goods.

•Establishment of a 25% cash margin on import letters of credit (LCs) of non-critical consumer items.

•Discouraging nonessential imports

•Reduction in imports and dollar drain.

•Inflation of imported good prices.

•Reluctance of banks to open LCs for nonessential imports

Measures to

Increase Supply Lowering ERQ •Allowing encashment of half of the Exporters’ Retention Quota (ERQ).

•Lowering the limit of export proceeds from 15%, 60%, and 70% to 7.5%, 30%, and 35%, correspondingly.

•Imposing limits on the transfer of export earnings from one bank to another.

•Valid until the end of 2022

•An immediate infusion of USD 360 million into the foreign currency market.

•Increased borrowing costs for exporters due to reliance on borrowed dollars for payment settlements.

•Additional requirements for obtaining Bangladesh Bank’s permission for dollar borrowing, reducing the ease of business Facilitating Fund Transfers •Permission granted to offshore banking units to allocate up to a

quarter of the banks’ total regulatory capital in domestic units for up to half a year to settle import payments for capital machinery, industrial raw materials, and government imports.

•Enhanced dollar influx into the domestic market

Limiting NOP •Decreasing the dollar holding limit of banks, i.e., the Net Open Position (NOP), from one-fifth to 15% of regulatory capital.

•An injection of USD 569 million into the market

Utilizing Forex Reserves •Selling USD from BB forex reserves to commercial banks to manage the exchange rate, which amounted to $7.62 billion in FY22.

•A decline in the forex reserve of BB to USD 39.04 billion as of August 30, 2022, from USD 48.06 billion in August 2021

•Rise in dollar supply in the domestic market.

•Quick exhaustion of foreign exchange reserves

Easing Interest Rate Cap on

Raw Material Import LCs Lowering the maximum interest rate for short-term foreign currency

investment from LIBOR plus 3.5% to LIBOR plus 3% Enables RMG exporters to borrow from banks for raw material imports at a more affordable interest rate

Regulation of

Market Setting a Cap on Exchange

Rate Spread Limiting the exchange rate spread (the gap between dollar buying and selling rates) to BDT 1 for banks and BDT 1.5 over the banks’ selling rate for foreign exchange firms

Restrains the surge in the dollar value in the kerb market

Implementing a Uniform

Exchange Rate Enforcing a uniform foreign exchange rate for importers and exporters from May 2022 onwards

•Promotes adherence to a fixed exchange rate, discouraging the kerb market rate from rising.

•Efficiency of this measure has been debated Introducing Import

Monitoring Framework •Imposing an obligation on banks to report all foreign exchange transactions, including offshore banking operations.

•Requirement of a report submission to BB 24 hours before initiating import LCs.

•Reporting mandatory for transactions exceeding USD 5 million, excluding government imports

•Eased pressure on import LC payments over the past quarter.

•Increased focus of state-owned banks on government import LC settlements

Increasing Market Surveillance

•Enhancing market inspections by BB.

•Discharge of treasury heads of 6 banks and issuance of show-cause notices to managing directors (MDs) accused of earning excessive profits from dollar trading.

•Suspension of 5 money changers’ operations and issuance of show- cause notices to 42 others on various charges.

•Investigations by the Bangladesh Financial Intelligence Unit (BFIU) to find potential involvement of money changers in money laundering or hundi

•Increased wariness among unlicensed traders.

•Dollar scarcity establishes an informal limit on the transaction size by authorized companies and banks.

•Banks adopting a more cautious approach towards dollar trading.

•Decrease in the dollar price due to intensified BB inspections.

•A relatively more stable dollar market

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strategies, such as temporary tax breaks or sector-specific incentives, can offset the higher financing expenses for export-oriented industries and minimize layoff threats in labor-intensive sectors. Moreover, the pros- pect of revisiting costly projects and prioritizing financially viable ventures becomes more pronounced with a potential interest rate hike.

This aligns with potential anti-inflationary advice that could accompany a prospective loan from the IMF (Raihan, 2022).

Management of the floating exchange rate

Although the Taka is technically a freely floating currency, it prac- tically functions as a pegged or managed float, often dubbed a dirty float. The real effective exchange rate of the Bangladeshi Taka against the US dollar in 2021 was recorded at 110, notably exceeding the interbank rate fixed by the Bangladesh Bank, which ranged between 84 and 86 (Danial, 2022). This persistent overvaluation of the Taka has imparted adverse effects on various facets of the economy, including exports, remittances, and the performance of banks (Ali, 2019). The existing economic crisis has only exacerbated this pressure, necessitating a tangible solution. It would be prudent for the Bangladesh Bank to progressively depreciate the Taka in the forthcoming months, moving towards a floating exchange rate. Moreover, a swift depreciation of the Taka would motivate remittances to flow through formal banking channels, reducing allure for illicit transfers such as hundi. Data from July 2022 presents an optimistic picture as remittances have seen a significant surge. The increased costs of imported raw materials have already been offset by the interest rate cap on letter of credit (LC) imports. In light of the challenges associated with sustained market surveillance, both the government and the Bangladesh Bank stand to benefit from pursuing a floating exchange rate mechanism.

Contractionary fiscal policy

The depreciation of the Taka may compel the government to consider increasing corporate taxes to boost its fiscal capacity. While this move may encounter resistance from businesses, the progressive nature of Bangladesh’s tax system allows the government to raise rates for the higher income brackets. Instituting higher tax rates for a temporary period of 2–3 years would assist the government in absorbing the current economic stress and would exert an anti-inflationary effect. It’s also vital to enhance tax collection methods and to intensify efforts to combat tax evasion, as these are ongoing processes. Stringent tax policies should be implemented, targeting both middle-income groups and entities engaged in large-scale tax evasion (Raihan, 2022). The success of solid anti-corruption measures hinges on the effective execution of these tax strategies.

Invoicing in multiple currencies

To enhance financial stability in the face of US dollar-driven economic shocks, diversification of the currencies employed in international trade emerges as a prudent strategy. Given that Bangladesh’s primary trading partners are China and India, switching from predominantly using USD to employing RMB and INR could lessen the impact of dollar volatility on the economy (Parvez and Uddin, 2022). While total conversion to these currencies might prove challenging due to trade deficits with these nations, export earnings in RMB and INR could offset a portion of import payments. Bangladeshi exporters should be educated on exchange rate risk mitigation and conducting transactions in multiple currencies to achieve this. Moreover, the introduction of pilot programs and regulatory enhancements could pave the way for currency swap- based payment systems. Considering the substantial volume of trade between Bangladesh and the EU, the Euro could serve as a suitable currency for initial experimentation with multi-currency transactions.

Reduction of import dependency for essential goods

The prevailing FER crises underscores the necessity to diminish import reliance for enhancing both food and energy security in Bangladesh. As per statistics, nearly 9 % of all imports comprise food

items, while 11 % is made up of oil and petroleum products (Bangladesh Bank, 2022). In the Fiscal Year 2021, edible oil imports stood at $186.8 million, and rice and wheat imports totaled $176.1 million (Bangladesh Bank, 2022; Hasan, 2021). To mitigate the risks associated with food insecurity, strategies aimed at boosting the production of staple foods must be employed. One viable approach could involve the relaxation of collateral requirements for loans issued by the Palli Sanchay Bank.

Furthermore, differentiating interest rates for essential and nonessential food items can provide a nuanced tool for policy intervention.

Over the last 11 years, Bangladesh has shifted its focus towards importing expensive liquefied natural gas (LNG), neglecting its own domestic natural gas resources. As per Petrobangla’s estimation, with an annual consumption rate of about 1 trillion cubic feet (TCF), Bangla- desh’s gas reserves should suffice for the next 9 to 10 years. From the total 29.9 TCF reserves spread across 28 discovered gas fields, 19.11 TCF has already been exploited (Rahman, 2022). To avert futher depletion, concerted efforts must be directed toward optimizing current wells, augmenting production, and exploring new reserves.

Green energy expansion, with a particular focus on solar power, is crucial based on the success of 6 million solar home systems (Zami, 2022). Renewable sources contribute only 3.5 % of Bangladesh’s electricity generation, falling short of the targeted 10 %. However, the power ministry envisions a future where 40 % of the nation’s electricity comes from renewables, particularly solar, by 2041. According to pro- jections from UNDP and the National Solar Energy Roadmap, Bangladesh could generate 6,000 MW to 30,000 MW of solar power through different policy scenarios by 2041 (Zami, 2022). Although land scarcity poses a significant challenge, exploring the potential of farm- land for both agriculture and power generation, along with reclaiming unused riverside areas, can provide viable solutions. Striving for a diversified energy mix that emphasizes sustainability and self- sufficiency is necessary.

Export diversification

The enhancement of export diversification has always been a top priority for policy makers in Bangladesh. The RMG sector, which forms around 85 % of the nation’s export revenue, is heavily reliant on imported raw materials (accounting for 80 %) and is subject to trade constraints such as tariffs and non-tariff barriers. As reported, Bangladesh has many challenges in diversifying its export portfolio (The Daily Star, 2022d). Even though the GoB has rolled out numerous measures to address these issues, the execution of projects has seen considerable delays. The completion of these projects must be priori- tized to enable export diversification.

Bangladesh currently has a comparative advantage in the leather and seafood sectors. Several other sectors, such as home textiles and jute- related products, have achieved annual exports surpassing $1 billion, alongside the RMG industry (Islam, 2019; Export Promotion Bureau, 2022). In line with the Bangladesh Export Policy 2021–24, 12 sectors have been classified as High Priority Sectors (Ministry of Commerce, 2022). These industries should be given precedence, particularly those with high compound annual growth rates (CAGR) and social benefits.

The agricultural and fisheries sectors are critical and exhibit less demand fluctuation during crises. Bicycles, jute, and jute-related products have positive socioeconomic perceptions that can be capitalized upon to stimulate demand in the international market. Due to its relatively stable demand, the pharmaceutical sector can potentially capture a significant market share in developing countries. Leather products have demonstrated consistent demand over the years, even during socioeconomic crises, particularly in the European market. By positioning Bangladeshi leather products as high-end premium goods with a significant brand value, a diverse assortment of goods can be incorporated into the export basket for different markets. Moreover, vertical farming and hydroponic-aquaponic farming will increase food production (Chowdhury, 2023), reducing the expenditure on food imports.

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Strengthening foreign direct investment (FDI) inflows

According to Rao and Dhar (2011), FDI inflows can lead to currency appreciation and diminish the competitiveness of domestic firms.

Amplifying the inflow of FDI is essential for the economic growth of Bangladesh. The country witnessed substantial FDI inflows despite possessing competitive strengths, such as a low-cost labor force. From 2010 to 2019, Bangladesh managed to attract a net FDI of around $20.5 billion, which, compared to its neighboring countries like Myanmar and the Philippines, which accumulated $24.8 billion and $58.6 billion respectively, seems paltry (Asaf, 2022). This disparity becomes even more stark when contrasted with countries such as Malaysia, Indonesia, and India, which each garnered FDI worth over a hundred billion US dollars. Furthermore, despite a 4 % increase in global FDI flows to Asia amid the pandemic in 2020, reaching $535 billion, Bangladesh struggled to devise an effective FDI attraction strategy (UNCTAD, 2021). That same year, Vietnam, India, and Indonesia secured about $17 billion, $64 billion, and $18.58 billion in foreign investments, respectively, while Bangladesh drew a mere $2.56 billion, of which $1.6 billion was rein- vested by already established foreign companies (Haider, 2021b).

FDI injects stable, long-term capital into the host country’s economy, reducing dependence on short-term and volatile sources of foreign exchange, which is essential for the country to reduce its dependency on FER. Moreover, FDI not only enhances a country’s FER directly by bringing in substantial capital but also promotes economic growth, boosts exports, and creates economic opportunities (Hameedu, 2014). In this way, export earnings are increased, the trade deficit is reduced, and foreign exchange reserves are strengthened. Furthermore, foreign direct investment often entails technology transfer and knowledge spillovers, which can enhance a country’s economic capabilities, enabling it to compete on global markets and keeping its foreign currency reserves healthy (Zeng and Zhou, 2021). Zeng and Zhou (2021) and Yue (2022) reported the improvement of local enterprises in China due to FDI, and local enterprises are the most promising sector in Bangladesh.

Improvement in these sectors will reduce imports and therefore, reduce the pressure on FER. In this regard, targeting potential global investors is also critical to attracting FDI. Japan, China, and South Korea, among the top ten global sources of FDI with over $336 billion (Liaquat, 2022;

OECD, 2022), could be potential targets. While these countries majorly invest in Western industrial sectors, they also have significant investments in Asia. Effective bilateral agreements can be used as a tool to lure FDI, especially in the energy and financial sectors.

Strengthening of remittance inflows

Strengthening remittance inflows has substantial potential to enrich FER in Bangladesh. The country has consistently ranked among the top remittance-receiving countries around the world, with billions of dollars added to the economy annually. A significant portion of remittances to Bangladesh originate from Gulf countries. In the fiscal year 2021 (FY21), Saudi Arabia made up the largest share of remittances at 23.09 %, followed by the United States at 13.97 %, the United Arab Emirates at 9.85

%, the United Kingdom at 8.17 %, Malaysia at 8.08 %, Kuwait at 7.61 %, and Oman at 6.20 %. Despite initiatives to stimulate remittances, the inflow dipped by around 15 % in FY22, amounting to $21.03 billion in comparison to $24.77 billion in FY21 (The Financial Express, 2022d).

Though during the pandemic, a slowdown in remittance inflows has been seen, after the pandemic, the inflows increased. Bangladesh Bank data shows that the country received $21,610.66 million in remittances in FY-23, which is about 2.75 % more than the previous year (Dhaka Tribune, 2023).

However, the government remittance channels in Bangladesh often involve complex work and consume time, which deters individuals from choosing government channels. Moreover, higher costs, limited accessibility, inefficiency, and a lack of awareness lead individuals to choose familiar private providers. As a result, huge amounts of remittances are not added to FER in Bangladesh (Raihan, 2023; Paul, 2022). The government must address these concerns in order to encourage greater use

of government remittance channels. The process must be simplified, costs must be reduced, accessibility must be enhanced, efficiencies must be improved, and the public must be informed about the benefits of using government services. Notably, the recent introduction of a 2.5 % cash incentive for remittances conducted through any banking channel by the Bangladesh Bank aims to catalyze remittance inflows and curtail the use of informal and often illicit channels such as “hundi”. Moreover, to boost remittance inflows over the long term, the government should focus on creating skilled workforces and arrange training for a large number of people. The migration of skilled workers, especially if equipped with updated skills tailored to the demands of overseas markets, promises enduring support for remittance flows. In this regard, identifying new migration markets is critical but requires developing novel skill sets. Long- and medium-term vocational training, tailored to the demands of overseas markets, can boost remittance inflows. Training programs for sectors requiring women workers can be offered to girls who have completed their Higher Secondary Certificate education. The expansion of training centers to enhance the skills of expatriates is crucial. Additionally, a clampdown on fraudulent migration networks is necessary, with measures to hold migrants accountable for false promises made by intermediaries and bring them to justice.

These measures are likely to spur remittance inflows and stimulate foreign direct investment. Moreover, the influx of remittances is not only beneficial to FER, but also indirectly promotes economic stability and growth. Through the conversion of remittances into local currency, the value of the Taka is strengthened, which helps control inflation and stabilize the exchange rate. The stability of the exchange rate reduces the cost of imports, reducing the price of essential goods and encour- aging foreign investment.

Conclusion

Bangladesh has been grappling with a persistent dollar crisis for some time now, intensified considerably by the inflationary pressures triggered by the COVID-19 pandemic and the Russia-Ukraine conflict.

Underpinning economic frailties, however, have added layers of complexity to attempts at mitigating these challenges. This study followed a systematic review technique to investigate the causes and consequences of this sudden FER crisis in the country. We’ve also explored the government’s strategies to mitigate the challenges and proposed policies to overcome such a situation in the long-term. The study identified that issues such as non-performing loans plaguing the banking sector have played a role in aggravating the crisis. The managed floating exchange rate system in place has also been a contributing factor. Notably, the country’s significant spending on large-scale infrastructural and energy-related projects, many of which have not provided an immediate return on investment, has exacerbated the FER crisis.

Moreover, Bangladesh’s reliance on import-based, short-term solutions for its energy needs has also triggered the foreign currency crisis.

The GoB has struggled to address the dollar crisis effectively. The country faces the risk of insolvency as its dollar reserves have been depleted to alleviate supply shortages. The increasing external debt and servicing costs also raise concerns about possibly falling into a debt trap.

Implementing contractionary monetary and fiscal policies with an effective real interest rate below 1 % in these circumstances is imperative. Moreover, gradually transitioning toward a free-floating exchange rate system over the medium term should be considered. Introducing multi-currency invoicing practices could help alleviate the pressure on dollar demand. In the long run, focusing on export diversification, attracting FDI, boosting remittance inflows, and enhancing food security and energy capacity can help reverse Bangladesh’s macroeconomic challenges.

This study opens up several avenues for future research. Further investigations into specific policies and their effectiveness in addressing similar crises in other developing countries would provide additional insights and refine policy recommendations. Additionally, conducting

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comparative analyses of Bangladesh’s crisis response with other countries facing similar challenges would offer valuable lessons. Lastly, delving deeper into the socioeconomic effects of the dollar crisis on different demographic groups within Bangladesh would contribute to a more comprehensive understanding of the crisis’ impact, informing the development of targeted interventions.

Bangladesh has experienced significant growth over the past decade, showcasing the resilience and capacity of its government to bring about change, exemplified by the successful construction of the Padma Bridge.

However, after graduating from Least Developed Country status, the country now stands at a critical juncture in its economic development.

Moving forward, Bangladesh must prioritize long-term strategic de- cisions over short-term remedies. In this context, the dollar crisis can potentially catalyze positive change, guiding the country toward a more sustainable economic trajectory.

CRediT authorship contribution statement

Sajid Amit: Writing – review & editing, Writing – original draft, Validation, Supervision, Resources, Methodology, Investigation, Formal analysis, Data curation, Conceptualization, Project administration.

Abdulla Al Kafy: Writing – review & editing, Writing – original draft, Validation, Supervision, Resources, Methodology, Investigation, Formal analysis, Data curation, Conceptualization, Project administration.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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