Addressing the dollar crisis by investigating underlying causes, effects, and strategic solutions in emerging economies

Abstract

Foreign exchange reserves (FER), especially dollar assets, are vital for a developing country to maintain economic stability, foster growth, and protect against unexpected amendments. In recent years, particularly since the onset of COVID-19, several emerging countries have experienced significant economic hardship due to a crisis in foreign reserves. This has led to inflation and disruptions in supply chains, healthcare, and various service facilities. Despite the gravity of this issue, previous studies have not investigated the causes and consequences of such sudden crises. This study aims to fill this gap by investigating the causes and consequences of sudden FER crises in a developing country, specifically Bangladesh, through a systematic review. The study also explores innovative process-oriented policies to mitigate the immediate FER crisis. The systematic literature review followed the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) guidelines. It included 90 articles published between 2020 and 2023. The results discovered that the FER crisis in Bangladesh has been triggered by both external factors (such as the COVID-19 pandemic, the Russia-Ukraine conflict, trade imbalances, and remittances) and internal factors (including large infrastructure projects, complexities in the banking sector, local project subsidies, a managed floating exchange rate, and an over-reliance on the ready-made garments sector). These factors escorted deflation of the national currency, causing further inflation, declining domestic purchasing capacity, and raising concerns about food security. Additionally, price hikes and unauthorized storage of daily necessities made accessing daily essentials challenging for locals. The government has implemented three policy interventions, including managing consumer demand, safeguarding the supply of goods, and regulating continuous market monitoring to overcome the challenges. This study proposes eight innovative process-oriented policy recommendations for mitigating the immediate foreign exchange crisis and promoting sustainable economic development. Overall, this study offers valuable contributions in developing sustainable global economic policies. It fosters improved recovery and reuse of materials and energy while advancing long-term growth in developing nations.