S&P warns Bangladesh against inflation pressures

S&P Global Ratings has cautioned Bangladesh that further depreciation of its currency would mount domestic inflation pressures and make external debt servicing costs more expensive.

"Depreciation in the currency will add to domestic inflation pressures, and make external debt servicing costs more expensive," the global rating agency said in its latest update.

Bangladesh liberalised further its trading mechanism in June 2022 and since then nominal exchange rate of the Taka has depreciated by about 10% against the US dollar, marking a notable shift in the country's foreign exchange dynamics.

However, the rating agency kept its outlook stable for Bangladesh reaffirming 'BB-' long-term and 'B' short-term sovereign credit ratings and said the country's real GDP growth is expected to average 7% per year over the next three years.

In its latest report released Thursday, it also expected that Bangladesh's external conditions would gradually stabilise over the next 12 months with solid economic growth continuing to support gradual fiscal consolidation.

The S&P report came as the inflationary surge in Bangladesh tends to follow the trends in the movement of commodity prices in global and domestic markets.

It said high commodity prices, surging domestic demand, and tighter monetary conditions are exerting pressure on Bangladesh's external profile.

"These trends have driven net outflows of foreign exchange from the economy, resulting in declining reserves and depreciatory pressure against the taka," it said.

"Bangladesh's net external debt position has weakened. A longer period of high commodity prices and extremely strong import demand could give rise to additional weakness in the Bangladeshi taka and a sustained drain on foreign exchange reserves, which would further undermine Bangladesh's external buffers," said the agency.

"Despite its moderate net debt position, the Bangladesh government's interest burden is considerable. Its foreign currency-denominated debt, though predominantly borrowed from multilateral and bilateral sources, is subject to exchange rate risk."

The annual inflation rate in Bangladesh is underpinned by soaring prices of both food and non-food items while the Russia-Ukraine war and associated sanctions are also contributing to rising inflation in Bangladesh as global commodity prices surge.

Simultaneously, the inward worker remittances that have long acted as crucial support to Bangladesh's external financial flows fell in June to June 2021-2022 fiscal as fewer workers could repatriate their assets with gradual normalisation in global labour markets.

Bangladesh's highly concentrated political landscape may constrain the effectiveness of institutions and limit checks and balances on the government, said the credit rating agency.

However, the normalisation of economic activity domestically and abroad is supporting strong momentum in Bangladesh's labour market and export industries.