What are the regional economies doing right?

Bangladesh made a strong recovery from the Covid-19 pandemic. However, external pressure from the global geopolitical condition, rising global inflation and interest rates, and a weak financial sector disrupted the post-pandemic recovery in FY23. 

In the past year, our economy witnessed a sharp rise in the foreign exchange rate and a rapid decline in the Forex reserve, which is now below $18 billion. Inflation has also been rising and the banking sector of the country is facing an existential crisis.  

According to Bangladesh Development Update - New Frontiers in Poverty Reduction, published by the World Bank, reforms to address inflation, through monetary and fiscal policies, as well as financial sector vulnerabilities will be critical for the country to sustain growth and reduce poverty. 

A single market-based exchange rate would help attract foreign currency inflows through formal channels and support the balance of payment and reserve accumulation. These are statements we all agree to, and I believe our respected policymakers and regulators are well aware of this. 

I want to emphasise how the regional economies have been doing during this global crisis. The Indian economy grew by 9.1% in FY22 and by 7.2% in FY23. India's headline CPI inflation rate surged further to 7.4% year-over-year in July from a pace of 4.8% year-over-year in June. The Reserve Bank of India in its August Monetary Policy Statement raised its projected CPI inflation rate for FY24 to 5.4%, from the 5.1% year-over-year projection made in the preceding Monetary Policy Statement. 

Presently, India has a floating exchange rate system and the exchange rate rose from 75.1 in November 2021 to 83.1 in Oct 2023, which is negligible compared to Bangladesh. The Forex reserve of India remains strong with a value of nearly $600 billion as of October 2023. The outlook for the Indian economy remains strong, and according to IMF estimates, it will emerge as the world's third-largest economy by 2027, crossing over Japan and Germany. 

The private consumption within the country and the enormous consumer base with rising income is an advantage for India. FDI inflow to India remains strong, with $71 billion in FY23. This can be attributed to the size and scale of operation the country can handle, the availability of a skilled workforce and innovation capabilities. 

We have seen how rapid the growth startup ecosystem of India has been and continues to be due to the country's willingness to foster the Ministry of Micro, Small and Medium Enterprises (MSME). 

Moreover, at the national and sub-national levels, India practises complete macro-fiscal transparency and adequate implementation measures. We have seen measures being taken to take care of the rising debt servicing cost in Punjab and West Bengal. India also has a strict revenue collection mechanism and in FY23, revenue collection from some sectors exceeded the budget. 

In September 2022, at 69.8%, the headline inflation in Sri Lanka measured by Colombo CPI was at an all-time high. This number declined to only 4% in August 2023. Between January and July 2023, the country's trade deficit shrank by $1 billion, mainly due to reduced imports of intermediate and investment goods, despite decreased exports linked to weak global demand. 

Favourable factors included easing foreign exchange liquidity pressures, no major debt payments, strong remittances and better tourism earnings. Usable foreign reserves grew to $2.4 billion by July 2023, which is equivalent to 5-6 weeks of imports. The remittance surge boosted non-labour income but also reflected increased emigration since the crisis began. After an 81% depreciation in 2022, the local currency appreciated by 11% from January to August 2023.

At the onset of the crisis in 2022, the Sri Lankan government took rapid and effective measures to stabilise the economy. Firstly, bilateral loan agreements were restructured, allowing more time to repay obligations. Taxes were raised from 12.5% to above 36% in some cases. Public expenditure was tamed through reforms in social protection and a restructuring of State Owned Enterprises (SOE). 

At present, the Sri Lankan central bank has begun to loosen monetary policy due to decelerated inflation. Policy rates were cut by 250 basis points in June 2023 and by a further 200 basis points in July, bringing the Standing Deposit Facility rate down to 11% and the Standing Lending Facility rate to 12%. Supported by policy rate cuts and better clarity on domestic debt restructuring, the 91-day T-bill rates fell below 20% in July 2023 for the first time since April 2022. 

Indonesia's economic recovery has been exemplary in the region, and it continues to be so. GDP growth in this fiscal year has been above 5% for Indonesia. The inflation rate in Indonesia has been in a steady decline since December 2022 and was at 2.28% in September 2023. One of the driving factors of the growth is exports and it remains strong, showing a growth trajectory owing to China's domestic recovery. 

The Forex reserve of the country stood at nearly $138 billion at the end of July 2023. The currency exchange rate also remains stable.   

Looking into the implementation of financial sector regulations in Indonesia, we see a strict and transparent economy. There are multiple instances of enforcement through administrative sanctions, significant monetary fines, and permit revocations and suspensions of NBFIs, Banks and Insurance companies. 

The stability of the economy is allowing recent policy measures and interventions to make the business environment accommodating, innovative and investor-friendly. Examples of such measures include multiple tax deductions such as a deduction for internship programs and/or vocational training, a deduction for Research and Development (R&D) activities, and zero-rated final tax for MSMEs. 

Another example that can be highlighted is Thailand. In the post-Covid-19 period, the country posted real GDP growth of 2.6% in 2022. This growth was largely owed to the rise in private consumption, which grew by 6.3% in 2022 compared with just 0.6% year-over-year growth in 2021. Private investment also picked up, increasing from 3% growth in 2021 to 5.1% in 2022. 

Thailand's economy, throughout, has been highly dependent on the tourism industry, which was largely affected during the pandemic. However, the sector significantly improved during the latter half of 2022, when border restrictions were gradually lifted. The number of international tourist arrivals in 2022 reached 11.15 million, a notable improvement from the 4,30,000 recorded in 2021.

Mamun Rashid. Illustration: TBS

Writer Mamun Rashid is an economic Analyst.