Index trend
Previous Quarterly Editions
Expropriation Risk: 63 64 64 64 ►Political Violence Risk:49 48 48 49 ►Terrorism Risk:36 36 36 40 ►Exchange Transfer and Trade Sanction Risk: 55 63 55 63 ►Sovereign Default Risk:65 65 65 65 ►
Overall Risk Temperature: 60 (Significant) TREND ►
Special topic: Relationship with the 'global rules-based order'
With democracy eroded, attacks on the opposition increasing and the election’s legitimacy in question, Bangladesh can be seen as departing from the political requirements of adhering to the current global rules-based order.
The U.S. government was emboldened in its view that sanctions it had imposed on “rogue” officers of Bangladesh’s Rapid Action Battalion and police in 2021 reduced attacks by these groups on Bangladesh’s opposition and thus in June 2023 announced visa restrictions on Bangladeshi officials. This led to some efforts by Bangladesh’s government (seeking to preserve trade) to appease Washington.
Yet U.S. and U.K. apprehensions led to an open spat, with Bangladesh’s government reportedly suspecting Washington of attempting regime change in Bangladesh via supporting forces inside that country that were attempting to undermine Bangladesh’s government and democracy. London and Washington nonetheless criticized the January elections openly as being in their view unfair and unfree. This is something that international agencies, including the United Nations, also said.
Even so, this context has not adversely affected Bangladesh’s participation in the global order’s economic aspects.
As a small country with balance-of-payments difficulties currently under International Monetary Fund (IMF) watch, and being dependent on exports and foreign inward investment, Bangladesh will avoid any measures that upset global trade and investment rules. Nor is there any U.S. plan to impose tariffs on Bangladesh’s garment exports, as feared by some.
Rather, Washington says it will continue working with Bangladesh on promoting a “free and open Indo-Pacific.” This forbearance is largely because of Bangladesh’s strategic location and importance; China has been quick to congratulate the ruling party, the Awami League, on its electoral victory, as has Russia, while India has chosen to back the new government rather than criticize it.
TREND ►Bangladesh is under a $4.7 billion IMF program, but potential balance-of-payments difficulties remain. This is partly because foreign investment flows are showing some signs of decline and because the country’s crucial garment exports are facing geopolitical hindrances.
Even so, the government wants foreign investment and to generate and retain investor confidence; thus, it is unlikely to adopt expropriation measures that could undermine these efforts.
TREND ►
The main opposition Bangladesh Nationalist Party (BNP) stayed out of January’s elections, meaning unopposed victory for Prime Minister Sheik Hasina and the Awami League; however, the government’s legitimacy is open to question.
The opposition wanted a caretaker administration, arguing that fair elections under the league were impossible, plus questioning the election commission’s integrity. The institutional breakdown implicit in that stance provides fuel for intensification of already prevalent political violence. This is aggravated given Bangladesh’s economic stress and declining faith in the government’s ability to spur economic recovery.
The pre-election period saw sporadic violence, with the BNP and Islamist Bangladesh Jamaat-e-Islami organizing protests — including a three-day, economically disruptive, rail, road and waterway blockade. Arson and property damage have been common. The situation is one of political polarization and violent conflict between political actors.
Meanwhile, rising inflation and the worsening economy have intensified trade union activity, with demands for higher pay by crucial garment sector workers; the sector has very poor working conditions. The merging of economic and political strife heightens political risks.
Despite the political violence, no fatalities from Islamist terrorist groups were reported in 2023, matching the 2021 and 2022 trend. This is due to the government’s zero tolerance for terrorism policy, backed with armed force; as many as 375 arrests were carried out in 2023.
A corollary of the policy’s success is that the focus of terrorism has shifted to the Rohingya camps, where gang wars nurtured by poor living conditions (international aid support is declining) have intensified. Meanwhile, sporadic violence associated with ethnic and other conflict forms in the Chittagong Hill Tracts is being reported.
Despite its access to multilateral development funding, Bangladesh still experiences balance-of-payments strains, with fears the central bank may intervene to prevent too sharp a slide in the Bangladeshi taka currency. However, in June 2023, the government agreed to work toward floating the taka, as the IMF’s loan program requires. The government has thus been considering introducing a crawling peg system as a transitional measure.
Simultaneously, there are pressures on the central bank to allow the currency to depreciate, to improve the balance of payments by encouraging exports over imports; however, there is no official plan to control the exchange of currencies and repatriation of foreign currency.
That said, so long as the foreign exchange reserves level is a concern, the possibility that the government may be forced to impose measures of exchange control in response to any sudden currency slide remains; however, ensuring access for garment exports to the U.S. and European markets is a government priority, so Bangladesh’s government lacks the realistic option of resorting to import controls or trade sanctions that might harm this stance.
Bangladesh has preempted a fate similar to Sri Lanka, with sovereign default on payments on external debt avoided via IMF support — following signs of rapid decline in reserves and currency depreciation, given the effects of the COVID-19 pandemic and Russia-Ukraine war; however, balance-of-payments stress remains significant.
Foreign reserves that had fallen below the $17.8 billion IMF program target in December 2023 were shored up to above $20 billion, due to inflows from the IMF and Asian Development Bank and to swap arrangements with local banks.
Yet with export earnings emanating mainly from garments and remittances registering an uptick, Bangladesh’s current account turned from a $4.65 million deficit during the first seven months of fiscal year 2022 – 2023 (January to July) to a $3.15 million surplus during the corresponding period of fiscal year 2023 – 2024. That increases the ability to avoid sovereign default.
