Index trend
Previous quarterly editions
Expropriation Risk: 63 63 64 63 ►Political Violence Risk:49 49 49 50 ►Terrorism Risk:40 40 40 46 ►Exchange Transfer and Trade Sanction Risk: 63 63 55 63 ▲Sovereign Default Risk:65 65 65 65 ►
Overall Risk Temperature: 60 (Significant 2) TREND ▲
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
2
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
After decades of relative stability under an increasingly authoritarian regime helmed by Prime Minister Sheikh Hasina and her Awami League party, Bangladesh has seen a violent process of regime change with an interim administration put in place by the military, pending elections that can install a new government. The military has chosen to stay in the background rather than jettison parliamentary democracy and run the country, but the indications are that Bangladesh has entered a phase of uncertainty and instability.
Hasina has fled to India, but Delhi is holding back from granting her asylum because of perceptions in Bangladesh that Prime Minister Narendra Modi’s government was an active supporter of the Awami League and stayed with her when the tide inside Bangladesh was turning. Delhi also needs to build a relationship with whichever new administration runs Bangladesh in the immediate future. The interim administration in Dhaka has charged Hasina with murder on multiple counts and is demanding her extradition from India under a treaty between the two countries. That creates considerable uncertainty stemming from an environment that is still fluid and can be potentially volatile.
One fallout off this is the likelihood of multiple forms of gray zone aggression. The primary and nebulous sources of such aggression against India are Bangladeshi ”populist forces” (such as the Hefazat-e-Islam) that are, in the first instance, targeting India through an attack against minority Hindus in Bangladesh, with violent incidents of lynching of Hindu civilians and attacks on their property. The Hindu base that is the core source of political support for India’s ruling Bharatiya Janata Party sees these attacks on Hindus in Bangladesh as aggression against India.
Meanwhile, the prolonged period over which India is sheltering Sheikh Hasina has intensified anti-Indian sentiment. Bangladesh shares a long border with India, and India’s historical enemies, Pakistan and China, could exploit the situation, using Bangladesh as a proxy to exert geopolitical pressure on India.
Given the tendency of India under Modi’s leadership to adopt a “big brother” attitude toward its small-country neighbors, the Indian response to any attempt of new populist forces to suppress India-friendly forces and collaborate with those seen as “anti-India” could also take gray zone forms that worsen external relations in the subcontinent.
TREND ►Even though Bangladesh opted to negotiate a conditionality associated loan from the International Monetary Fund (IMF) program when it began experiencing early signs of debt stress after the COVID-19 pandemic and the Russia-Ukraine war, it has not been able to shore up its foreign exchange reserves adequately and is struggling to meet IMF targets.
In the circumstances, the new interim administration has approached the IMF for a new loan. If that loan is delayed and political uncertainty worsens the balance of payments, the government may be forced to place restrictions on repatriation of capital and profits of foreign investors and creditors. However, any such intervention amounting to a form of expropriation will not be ideologically grounded but a mere fallout of circumstances. As soon as Bangladesh can access foreign funds, it is likely to repeal any such measures. In fact, repeal may be a prerequisite for emergency foreign exchange access.
TREND ►
Reprisals against all politicians, activists, police and defense personnel, government officials and members of the judiciary seen as close to the Awami League seems to dominate the agenda of the support base that installed the interim administration after forcing Hasina to resign and flee.
The opposition had demanded the institution of a caretaker administration at the time of the last elections, arguing that fair elections were not possible under an Awami League government and raising questions about the integrity of the election commission. The government refused; the opposition boycotted the polls, and a government with a supermajority was elected. The Islamist Bangladesh Nationalist Party, now sensing an opportunity and fearful that the interim administration may not hold polls in the near future, is demanding early elections.
In fact, the interim administration seems geared to transforming the governance system and architecture as well as the election commission, besides rewriting the constitution, with little clarity as yet on the direction such changes will take. Meanwhile, overt and covert violence, including against non-Muslim minorities, is likely to continue.
Meanwhile, rising inflation and worsening economic conditions has intensified social strife, especially among workers in the crucial garment industry, flagged for extremely poor working conditions. The merging of strife triggered by worsening economic conditions and stemming from political confrontation heightens political risk.
The potential for terrorist activity has increased. The interim government’s lifting of the ban on the Islamist party Jamaat-e-Islami has emboldened Islamist forces that have allegedly engaged in widespread violence after forcing the police to withdraw from public action. Repressed for long, these forces are likely to want to wreak revenge on those responsible for violently suppressing them under the previous regime.
As of now, the reaction against such activities is weak, given the fear that has engulfed elements seen as having associated with the Awami League regime. As time goes on, however, strife that has characteristics of a civil war fought along terrorist lines is likely to surface.
Meanwhile, it is unclear what the attitude of the new administration to the Rohingya located in camps would be. Gang wars nurtured by inhuman living conditions because of declining aid support to manage the camps from the international community have increased. That too could take a terrorist turn.
TREND ▲
Starting from the beginning of financial year 2022, Bangladesh, affected by developments during the pandemic and by the post-pandemic rise in food and fuel prices, began recording higher current account deficits and declines in reserves that exerted downward pressure on the taka currency. The government faced a dilemma. On the one hand, a rapidly depreciating currency could be externally destabilizing and give rise to inflation. On the other, the country’s economy is hugely dependent on garment exports for foreign exchange, employment and output growth, and a depreciating currency strengthens export competitiveness.
In June 2023 the government agreed to work toward floating the currency as required by the terms of the IMF loan program. As part of that, it introduced a “crawling peg,” resulting in devaluation of the taka by 6.4% in May 2024, to touch 117 taka to the U.S. dollar. That compares with an 86 taka to the dollar value a year earlier. The difficulty is that despite this depreciation, foreign exchange is proving hard to come by. Having exhausted what it received from the IMF and following the collapse of exports because of the political turmoil, the government is desperate for another round of emergency financing, but the political uncertainty is likely to delay a new round of financing. This may force the government to impose measures to manage its foreign exchange resources, including import controls.
The desperate foreign exchange situation implies that the foreign currency needed to service external debt accumulated in the past is difficult to come by. That makes sovereign default a real possibility in the near future. Not surprisingly, all credit rating agencies have downgraded Bangladeshi foreign debt.
