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Bangladesh economy hit hard by Ukraine war

GreenWatch Desk Economy 2023-09-23, 3:16pm

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Since the first shots were fired in February 2022, the war in Ukraine has affected the Bangladesh economy in a number of ways, and most of these can be described as supply chain disruptions.
 
 The most direct impact was felt in the energy sector, as prices skyrocketed on the international energy markets. Global oil prices soared to more than $120 a barrel amid concerns about a shortfall in global supplies from Russia, up from $70 a barrel before the war.  Although prices fell back again to pre-war levels by the end of 2022, they have been rising again over the summer, and are headed back towards the $100 mark.
 
 Brent crude, the oil price benchmark, rose to a 10-month high last week of almost $94 a barrel, up from $72 a barrel at its lowest point in June – heading for its biggest quarterly increase since Russia’s invasion of Ukraine.
 
 The price of LNG had arguably the most direct impact on the Bangladesh economy. The war drove gas prices to historic highs, with spot prices in August 2022 up more than 640 percent over the price a year earlier. Thereafter though, prices fell and returned to their 2019-2021 average.
 
 By June 2023, they sat 92 percent lower than the 2022 peak, even though the war persisted, and Bangladesh, having been forced to abandon purchases on the spot market, was able to resume LNG supplies on the spot market.
 
 During the time that it was forced to go off the spot market for LNG, Bangladesh’s dependence on coal increased. But this traditionally cheap fuel has also seen prices rise through the war. The Coal from Russia/Ukraine region in world market stopped due to the ongoing war resulting in world wide shortages and disruption in various Industries including Steel which uses large amount of Coal. Russia/Ukraine which were major exporters of Steel and alloying elements required for making higher grade steel used in various applications couldn’t supply due to war (Force Majeure) which resulted in disruptions in Steel availability.
 
 Australian coal, that the country has been purchasing for its power plant in Godhra, India, soared to its highest closing price since the war in August of 2022, exceeding $400. Imports of coal from Russia were completely halted under sanctions that came into effect on August 10 in 2022. Now however, they are back to pre-war levels.
 
 
Coal supplies for its power plants in Rampal and Godhra have both witnessed disruptions due to unpaid bills.
 
 
As a result of all this, the Bangladesh government had to raise both the gas and power prices as a major part of power generation depends on imported fuels.
 
 Besides, the war had a negative impact on all kinds of imports due to shipping restrictions and increased insecurity on navigation routes.
 
 The war also continues to disrupt the global trade of key foods such as wheat and vegetable oils, along with fertilisers, and the impact is falling heavily on countries such as Bangladesh.
 
 Dependent on imports of those items to feed its large population, many poor and vulnerable to shocks, the country faces the prospect of rising food insecurity.
 
 According to an International Food Price Research Institute study, the proportion of rural households facing moderate or severe food insecurity rose from 15% in early 2020 to 45% in Jan. 2021, then returned to pre-pandemic levels by the end of 2021.
 
 Now that 2021 recovery is in danger: Bangladesh saw a record rise in prices of staples in March 2022, along with volatility in the fertiliser market. In this post we discuss Bangladesh’s trade exposure to several commodities facing export restrictions, the fiscal impact of rising imports, and potential measures for easing food security pressures.
 
 Eminent economist and CPD executive director Dr Fahmida Khatun pointed out that the Russian invasion of Ukraine took place at a time when the world was just starting to recover from the fallout caused by more than two years of the Covid-19 pandemic. While the world came out of COVID pandemic, China took much longer and the Chinese supplies were absent for various critical items.
 
 But the recovery is facing inflationary pressure due to supply shortages in the face of higher demands as countries are beginning to expand economic activities.
 
 While the impact of the pandemic was a once-in-a-century shock for the world economy, the ongoing war has come as a new shock. Supply disruptions and financial sanctions pose serious economic challenges. With no signs of reconciliation between Russia and Ukraine, the global economic implications will remain severe for some time to come, according to Dr Fahmida.
 
 She said major countries including the US, the UK, Japan and the European Union (EU) have all suspended economic ties with Russia. Sanctions have been enforced on the Russian financial institutions with the objective to disrupt transactions with the country.
 
 As Russia is the third largest oil-producing country in the world, the global economy is suffering as a result of high oil prices. Though developed countries are sourcing their requirements from other oil-producing countries, small and poor countries are finding it difficult with their limited financial abilities to meet their energy requirement. In addition, high oil prices have a knock-on effect on other prices, leading to further inflationary pressure.
 
 The ramifications of these challenges are seen through higher commodity and oil prices. Food prices have skyrocketed.
 
 The CPD executive director said the global sanctions on Russia implies that Bangladesh's trade with Russia is going to be affected.
 
 Russia is a market for Bangladesh's ready-made garment (RMG) products. In FY2021, Bangladesh's export to Russia was to the tune of $550 million, and import from Russia was $480 million. Bangladesh imports wheat and maize from Russia. Sanctions mean Bangladesh will have to import these items from somewhere else.
 
 Rampal 1320 MW Power Plant has been impacted due to Coal shortages. Russia is also implementing several projects in Bangladesh. The Rooppur Nuclear Power Plant (RNPP) is a large project being implemented by Russia that involves USD 12.65 billion and is scheduled to be completed by 2025, reports UNB.
 
 
 The ongoing war and economic sanctions against Russia could delay this expensive project, which means cost escalation in Bangladesh. This implies higher loans and burden on the country, she observed.