Lingering Effects Expected to Persist for Years

February 24 marks the two-year anniversary of the Russia-Ukraine war, which commenced on February 24, 2022. Observers suggest that neither side has been able to secure a decisive victory thus far, and the prospect of either side emerging triumphant in the future appears bleak. It is possible that at some juncture, this conflict may cease, or both nations may opt for a ceasefire. The global community, espousing peace, eagerly awaits such a momentous occasion. However, regardless of when this war concludes, its repercussions are bound to endure for an extended period. Initially, Ukraine may have anticipated direct involvement from the United States and its NATO allies, which could have swiftly shifted the course of the conflict in Ukraine's favor.

Indeed, contrary to initial expectations, neither the United States nor NATO directly engaged in the Ukraine war. Instead, the United States opted for imposing economic sanctions on Russia and commenced arms sales to Ukraine. Ukraine might not have foreseen the protracted nature of the conflict. Meanwhile, the United States has redirected its focus due to the resurgence of the Palestinian crisis, causing Ukraine to diminish in priority on the US agenda.

The United States initiated an economic embargo against Russia and freezing its reserves held in U.S. dollars with the expectation of weakening the country, but instead, the opposite occurred. In response to the U.S. economic sanctions, Russia retaliated by reducing its fuel supply to the international market. Concurrently, the European Union stipulated that purchases of fuel from Russia must be made using Russian rubles, prompting some countries to covertly procure Russian fuel in this currency. Moreover, Russia decreased its oil production, while OPEC nations, under Saudi Arabia's leadership, also significantly cut back on oil output. Consequently, the price of fuel oil surged dramatically in the global market. Prior to the conflict, crude oil prices ranged from $70 to $75 per barrel, but at one point, they soared to nearly unmanageable levels. This unprecedented escalation in fuel prices exacerbated transportation costs worldwide, contributing to soaring inflation rates in numerous countries.

The global hyperinflation triggered by the onset of the Ukraine war, which continues to affect many countries, did not directly contribute to a shortage in food or other goods. Rather, the surge in global inflation primarily stemmed from escalating supply-side costs. The significant rise in fuel oil prices in the international market following the commencement of the conflict can be best understood through statistical analysis.

It's crucial to note that approximately one-tenth of the world's annual oil production originates from Russia. Within less than a month after the war began, the price of crude oil surged to $123.70 per barrel in the international market. By May 31 of the same year, this price slightly decreased to $116.15 per barrel. However, on June 13, it again rose to $122.36 per barrel. Subsequently, the price of fuel oil in the international market gradually stabilised.

On March 20, 2023, the price of crude oil dropped to $73.80 per barrel in the international market, falling below the level observed at the war's onset. However, by September 18 of the same year, the price of fuel oil surged to $94.50 per barrel in the international market.

The fluctuation in the price of fuel oil in the international market has indeed had a significant adverse impact on the economies of various countries worldwide. Taking Bangladesh as an example, it's evident that the domestic market witnessed a substantial increase in fuel oil prices, purportedly due to the rise in international fuel prices. However, when concerns were raised regarding this escalation, assurances were given that if fuel oil prices dropped globally, adjustments would be made accordingly in the local market.

It's crucial to highlight the rhetoric used in this context. Rather than explicitly stating that a decrease in international fuel prices would lead to a reduction in domestic prices, it was conveyed that prices would be "adjusted." However, despite the return of fuel prices in the international market to pre-war levels, the prices in the domestic market have not been reduced or adjusted accordingly. This situation raises questions regarding the fulfillment of promises made to the public.

The impact of the Ukraine war on global commodity prices extends beyond fuel, affecting various other sectors, particularly food. The prices of all commodities have surged significantly, with food prices experiencing a particularly drastic increase. This surge in food prices has put immense pressure on several countries, exacerbating the challenges they face, including food shortages.

Russia and Ukraine, collectively responsible for supplying 30 percent of the world's food grains, play a crucial role in the global food market. Despite Ukraine's continued production of six crore tons of rice and wheat during the war, the inability to export these essential commodities has led to significant disruptions. Ukrainian ships carrying food cargo have been stranded in ports for prolonged periods, further exacerbating the situation.

Consequently, many countries reliant on Ukraine's food products find themselves particularly vulnerable to food shortages. The inability to access these vital food supplies from Ukraine has strained global food markets, contributing to the overall rise in food prices and exacerbating food insecurity in various parts of the world.

The signing of a food export agreement between Russia and Ukraine, brokered by Turkey and facilitated by a UN representative, came later in the conflict. However, by that time, global food prices had already surged significantly. The abnormal rise in food prices, attributed to the Ukraine war, has had severe repercussions, particularly for the impoverished populations of developing and underdeveloped countries.

According to the Food and Agriculture Organization (FAO), the global food price index experienced a notable increase due to the Ukraine war. In 2019, the index stood at 95.1 percent, followed by a slight uptick to 98.1 percent in 2020. However, in 2021, the index surged significantly to 125.8 percent, reaching a record level of 144.7 percent in 2022. Although there was a slight decrease in the index to 124.7 percent in 2023, the impact of the preceding years' price hikes persisted.

This substantial increase in food prices has posed significant challenges for vulnerable populations, particularly those in developing and underdeveloped countries, who are disproportionately affected by food insecurity.

The conflict in Ukraine has indeed had far-reaching consequences, exacerbating poverty levels in third-world countries significantly. Some sources suggest that the number of individuals falling into poverty has surged by over 10 crore in recent years, largely due to the ripple effects of the war.

Global hyperinflation emerged as an inevitable response to the conflict, impacting economies worldwide. While many countries have managed to mitigate high inflation rates and stabilise them to more manageable levels, others, like Bangladesh, have struggled to address inflation effectively. Authorities in such countries often cite the Ukraine war as a primary reason for persistently high inflation rates.

In 2022, global inflation surged to unprecedented levels. Notably, Turkey's domestic market witnessed a staggering inflation rate of 54.8 percent, while Argentina experienced similarly severe inflation at 55.1 percent. Estonia and Lithuania faced significant inflationary pressures as well, with rates reaching 23.2 percent and 20.1 percent, respectively. The United Kingdom grappled with inflation at 9.4 percent, whereas the United States encountered its highest inflation rate in 40 years, standing at 9.1 percent. Meanwhile, Sri Lanka saw inflation soar to 35 percent, reflecting widespread economic challenges across diverse regions.

Various countries, including the United States, have implemented initiatives to curb inflation by raising interest rates on bank loans, among other measures. However, there is a concern that increasing interest rates on bank loans may lead to fears of a recession in the country's economy.

The Federal Reserve Bank of America (Fed) has raised the policy rate at least 13 times in the last two years. The policy rate refers to the interest rate paid by scheduled banks when obtaining short-term loans from the central bank. When the central bank increases the policy rate, scheduled banks must pay higher interest than before when borrowing from the central bank. Consequently, scheduled banks are inclined to charge higher interest rates when disbursing loans to entrepreneurs or general borrowers, making bank loans relatively more expensive. This naturally reduces the money supply in the market, leading to decreased consumer spending and, eventually, a gradual decline in inflation to a more manageable level.

However, this approach has its drawbacks. If the flow of bank credit decreases due to high interest rates, there is a risk of disrupting productive activities, which can lead to a contraction in employment opportunities. Therefore, while raising interest rates can help control inflation, it also entails the risk of negatively impacting economic growth and employment.

Following the example of the Federal Reserve Bank of America, the Bangladesh Bank has increased its policy rate several times. Previously, the policy rate stood at 5 percent, but it has since been raised to 8 percent. However, despite this increase, the upper limit for lending by scheduled banks remained at 9 percent until recently. This discrepancy meant that while banks were borrowing from the central bank at higher interest rates, they were unable to proportionately raise the interest rates on loans provided to borrowers. Consequently, accessing loans from banks became easier than before.

Taking advantage of this situation, many individuals obtained loans and illicitly funneled them abroad. In a previous monetary policy, the growth in bank credit flows to the private sector was estimated at 14.1 percent, but the actual achievement exceeded this at 14.7 percent. However, despite the apparent increase in credit flow, there was a significant decline in the import of raw materials, capital machinery, and intermediate goods used in industry. This discrepancy suggests that the loan funds were redirected to sectors other than their intended purpose. There have even been allegations that some of these loan funds were illegally smuggled abroad.

While the global instability and hyperinflation triggered by the Ukraine war may have subsided, certain countries, like Bangladesh, continue to grapple with high inflation and other economic challenges. Despite the government attributing these issues to the aftermath of the Ukraine war, the root cause lies elsewhere. The failure to effectively control inflation stems from the government's inability to regulate the activities of politically affiliated business syndicates.

A segment of society is unlawfully amassing wealth through various illicit means, facilitated by political connections and support. This clandestine accumulation of wealth often involves illegal activities, including corruption and embezzlement. Furthermore, a significant portion of these ill-gotten gains is being smuggled abroad, exacerbating the economic challenges faced by the country.

The Bangladesh Financial Intelligence Unit (BFIU) has recently reported a significant increase in the rate of suspicious transactions during the financial year 2022-23, nearly doubling compared to the previous year. In the financial year 2021-22, there were 8,571 reported suspicious transactions, which escalated to 14,106 in the financial year 2022-23. This trend indicates a concerning rise in potentially illicit financial activities.

The BFIU's data reveals a steady increase in suspicious transactions over the years, with 5,280 reported in the financial year 2020-21 and 3,765 in the preceding year. Similarly, in the financial year 2018-19, there were 3,573 reported suspicious transactions. Notably, a substantial number of doubtful loan reports were filed, with 520 reported in FY 2022-23, compared to 341 in the previous year and significantly lower numbers in preceding years.

Moreover, the BFIU's investigation has uncovered the ownership of 260 houses by a former minister, raising questions about the source of funds for such extensive overseas property acquisitions. This revelation underscores the need for thorough scrutiny and accountability regarding the acquisition of assets by public officials and highlights potential issues of corruption and illicit wealth accumulation.

The historical narrative of foreign exploitation of resources in our country has shifted to a new form of exploitation perpetrated by a class of educated but unpatriotic individuals within our own borders. These individuals, driven by personal gain and lacking in national allegiance, are actively involved in looting the country's wealth and facilitating its transfer to foreign entities.

This trend poses a grave threat to our economic stability and development. Instead of working towards the betterment of our nation and its people, these individuals prioritise their own selfish interests, betraying the trust and welfare of the citizens they are meant to serve.

Addressing this issue is paramount to resolving the ongoing economic crisis. Efforts must be made to identify and hold accountable those responsible for such acts of economic sabotage. Moreover, there is a need to strengthen regulatory mechanisms, enhance transparency, and promote a culture of patriotism and integrity among all segments of society.

Author: Retired General Manager, Bangladesh Development Bank Limited and Writer on Economics.