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 ►
TREND ▲
Protest intensity to date* 2022 2023 Low LowUnrest risk in 2024**Cost of living: HighAnti-austerity: Medium
In Bangladesh, the second half of 2023 is characterised by the unfolding of two parallel processes. One is increasing political conflict in the run-up to an election to be held under a government that is seen as engaged in manipulating the process. The other is a worsening economic crisis that is likely to spill over into the political arena, with the solution sought by a beleaguered government proving to be part of the problem.
The opposition Bangladesh Nationalist Party (BNP) is demanding that the current government step down and fair elections be held under a caretaker government. In the meantime, the Awami League government has been able to maintain ties with the West — on which it depends for markets — partly because of its ability to keep relations with India and China on an even keel.
These kinds of conflicts are likely to increase with growing economic problems. It does not help that Bangladesh — which was until quite recently seen as a star performer among its developing country peers — is under considerable economic stress. This began when, even while recovering from the economic setback induced by the COVID-19
pandemic, Bangladesh was hit hard by the rise in global food and fuel prices following the Russian invasion of Ukraine.
Meanwhile, quarterly dollar exports growth (compared with the corresponding quarter of the previous year), which averaged more than 40% in the quarters ending March and June 2022, fell to an average of 8.4% over the subsequent three quarters. Remittance receipts also fell by 3.2% in 2022, compared with positive increases of 1.9% in 2021 and 18.3% in 2020. With export revenues and remittance receipts sluggish, the sharp rise in the import bill resulting from the war resulted in a widening trade and current account deficit and a fall in reserves.
In an effort to find an early solution to the crisis, Bangladesh chose to turn to the International Monetary Fund (IMF) and was granted a combined loan package under the IMF’s Extended Credit Facility and Extended Finance Facility of around US$3.3 billion and a concurrent arrangement under the Resilience and Sustainability Facility of around US$D1.4 billion.
Seen as a clever move that preempted excessive debt stress and default, the first installment of the loan of US$476 million gave Bangladesh some respite; however, the loans and their aftermath are creating new problems. A central issue is that the conditions that accompany the IMF loan, which are set as a prerequisite for obtaining subsequent installments, are
difficult to meet and have collateral effects that can be economically and politically adverse.
Two core conditions are the shift to a unified, free-float determination of the exchange rate of the taka relative to the U.S. dollar and other hard currencies. Given the difficult balance of payments situation that triggered the decision to approach the IMF, any relaxation of measures aimed at fixing the exchange rate of the taka sets off a depreciation of the currency. The difficulty also is that this depreciation does not lead to a sharp rise in Bangladesh’s principal exports, which are largely restricted to garments. World markets are under strain given slowing global growth so that the fall in the dollar or euro unit value of exports is no guarantee of a rise in demand.
Further, given the widespread prevalence of balance of payments and debt stress, suppliers from other countries competing with exporters from Bangladesh are also beneficiaries of the devaluation of their local currencies. Consequently, exports do not revive enough to stabilize the balance of payments.
This is where the second of the IMF’s external conditions comes in. The IMF has set floors for net foreign currency reserves, with the Bangladesh central bank at between US$23 billion and US$26 billion at different points in time over 2023. Bangladesh’s central bank claims to have gross reserves of around US$30 billion, but when computed as per the IMF’s stricter formula, that figure falls below the floor levels set. Therefore, if there are to be no impediments to the receipt of the next installment of the IMF loan, Bangladesh must reduce foreign exchange outflows from the country to stabilize reserves.
The problem is not just that the international price situation is keeping Bangladesh’s import bill high, but loans that Bangladesh had contracted during its high-performance period to build infrastructure to match its economic success are now falling due, with a bunching of payments in the near term.
Meanwhile, the depreciation of the taka and other austerity measures are pushing up domestic inflation to near double-digit levels. The response of the government and the central bank has been to raise interest rates, which chokes off growth in pursuit of inflation control. In June 2023, the central bank scrapped the interest rate ceiling and adopted a new interest rate regime, which came into
effect on July 1. In addition, to save foreign exchange, the government has been curbing imports. According to reports, foreign exchange sanctioned for letters of credit for import of capital machinery and raw materials has fallen sharply. That affects production and leads to job losses.
Stagflation of this kind meant to address a problem imposed by international geopolitics has domestic political consequences, inducing popular anger and protest. An opposition striving to find ways of pushing back what it sees as an authoritarian government planning to fix the elections due next year would exploit that anger. The risk of political instability is high.
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
TREND ►With the government under IMF surveillance and the opposition keen on winning international support for the conduct of fair elections, expropriation of foreigner-held assets is unlikely. At most, balance of payments stress may force the government to limit leakages on account of trade mis-invoicing and money laundering activities.
Bangladesh has been historically prone to political violence involving the two parties that dominate the electoral space: the Awami League and the Bangladesh Nationalist Party. That tendency has intensified recently, with the Sheikh Hasina-led Awami League government seen as using its office to silence critics through means varying from arrest and incarceration to torture and “disappearances.”
The government is under some pressure to restrain its forces, especially the elite Rapid Action Battalion, the leaders of which were subject to U.S. sanctions in 2021. International human rights organizations and the office of the United Nations High Commissioner for Human Rights have periodically called for investigations of, and an end to, human rights violations. Ministers and senior officials deny any such violations have occurred.
TREND ►
Terrorist activity involving very diverse sections and conflicts are routinely reported from Bangladesh, despite the government’s declared zero-tolerance policy and intensified policing and suppression. Meanwhile, terrorism deriving from gang wars in the Rohingya camps, where conditions are poor, is increasing, and it could spill over into Bangladesh’s interior.
The fragile balance of payments situation has put pressure on the domestic currency. This is likely to force the government to intervene in foreign exchange markets to support the currency and impose trade controls to save foreign exchange. But intervention to support the currency may at most involve open market operations rather than exchange controls, and trade sanctions are unlikely given the IMF program.
When foreign reserves with the central bank fell rapidly in 2022, the potential for sovereign default was high. The IMF loan has provided a temporary reprieve. Now, however, not only have payments on loans for construction of the Rooppur Nuclear Power Plant begun, but repayments on loans taken to finance the Karnaphuli river tunnel and the Padma bridge rail link are due toward the end of the year. The burden is beginning to show. Loan payments over the fiscal year ending June 2023 were at US$2.74 billion, up by close to 40% relative to the previous year. Such repayments are estimated at US$3.3 billion in the current financial year and more than US$5 billion by 2029 to 2030. That creates conditions that could potentially precipitate sovereign default.
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