The corporate sector's profitability was severely impacted by the sudden currency depreciation, said Ahsan H Mansur, executive director of the Policy Research Institute.

The sudden currency depreciation of more than 32 percent has increased the liabilities of the corporate sector by almost Tk 100,000 crore, he said at a session of the three-day Annual BIDS Conference on Development yesterday.

"In a stroke of a pen, the liability of the corporate sector in Bangladesh, particularly for the big ones, increased by Tk 100,000 crore."

As the private sector lost its interest in foreign borrowing, inflows stopped, and outward payments pressure increased, leading to a loss of reserves and accumulation of unsettled foreign payments, he said.

"The improvement in the current account balance, primarily through import compression, is important but it could not reverse the loss of reserves," he said, adding that the outstanding $12 billion of short-term debt is a sword hanging over Bangladesh.

The policy of fixed exchange rates in an environment of ultra-low interest rates globally created incentives for domestic firms to borrow in foreign currency without regard to the potential exchange rate risk.

"The surge in private sector foreign debt to almost $26 billion was a manifestation of this phenomenon," Mansur said.

Inflation is running high and people, particularly at the fixed- and lower-income levels, are suffering as a result.

Interest rates around the world were hiked from historically low levels to a record high.

"But we kept our interest rate fixed. And that is a major element of departure from standard macro-management. And the cost has been very high."

The problem Bangladesh is facing did not happen suddenly or because of the Ukraine-Russia war but because of poor choices.

"In particular, our macro management has been unnecessarily complicated by a number of domestic economic policies, such as the fixed exchange rate regime, fixed interest rate regime for quite a number of years. And that was kept fixed, despite the changing global economic and financial environment."

Maintaining a virtually fixed exchange rate regime for more than a decade, despite relatively high inflation compared to the trading partners and competitors, eroded Bangladesh's competitiveness and created other problems.

The fight against inflation remained virtually unattended after fixing the interest rate. After that, the central bank had no other monetary policy instrument to influence inflation outcomes.

At the same time, in addition to liquidity support provided at the time of the pandemic, Bangladesh Bank printed quite a large amount of bills to finance budget spending.

"In my view, there was a complete disregard for inflation from a central bank perspective, relying on the hope that an improved domestic supply situation will help contain inflation. God bless us."

The low tax collection coupled with other structural problems has diminished the government's capacity to cope with the macroeconomic challenges and meet the political aspirations of the government.

"Generally, it is expected that the tax-GDP ratio increases in line with the increase in per capita income. Bangladesh, despite being close to India in per capita income, has a much lower tax/GDP ratio. Despite having much higher per capita income, Bangladesh's tax-GDP ratio is lower than that of Pakistan."