Previous Quarterly Editions
Expropriation Risk: 55 54 54 56 Political Violence Risk: 74 75 75 73 Terrorism Risk: 46 45 44 46 Exchange Transfer and Trade Sanction Risk: 57 58 56 58 Sovereign Default Risk: 60 58 58 59
TREND ▲ OUTLOOK ▲
The global impact of COVID-19 will cast a strong shadow over the Bangladesh economy in the final months of fiscal 2019-20, which ends in June 2020. Pre-crisis predictions of a fall in growth from 8% to 7% this year already look highly optimistic. The government attempted to keep the economy buoyant for as long as possible before finally imposing a two-week lockdown on March 25 2020 that was subsequently extended. Once imposed, the government was determined that it would be effective, deploying the army across the country to ensure compliance with a dawn to dusk curfew and other measures intended to slow the spread of the virus. The initial impact on the economy came in the form of a fall in orders for the crucial garment sector, which accounts for 80% of exports. By mid-March 2020, overseas retailers had already cancelled garment orders worth 1.5 billion USD as they anticipated enforced closures, posing significant challenges to the sector. A scramble to win new orders for Personal Protective Equipment (PPE) related to the global crisis should help to offset some of the lost orders, however. Another area threatened by a virus-related slowdown is overseas remittances. These had grown by 16% during the last six months of 2019 but are imperilled by the wave of layoffs that have followed the plunge in global economic activity. The government’s hope is that the country can ride out the present crisis and then bounce back quickly thanks to its economic resilience. It is taking particular steps to help the farming sector, with 1.5 billion USD in credits and fertiliser subsidies announced in early April 2020. The recent years of strong growth have left the economy in relatively good shape to cope with a steep but brief drop in GDP. The banking system has finally got a grip on non-performing assets (NPA), which fell from 12% to 9.3% of total loans during the final three months of 2019, triggering an upswing in bank credit. In politics, the institutional dominance of prime minister Sheikh Hasina Wazed’s Awami League (AL) continues, which is unsurprising given that it holds 288 of the 300 parliamentary seats. However, opposition groups related to the Bangladesh National Party (BNP) and the country’s Islamist parties have been given new causes to rally in recent months. Hasina and the AL have long pursued a foreign policy based on close relations with India. Yet India’s controversial National Register of Citizens and the related Citizenship (Amendment) Act (CAA) are principally aimed at Bangladeshi immigrants, placing the AL in a difficult position. Also, the February 2020 riots in Delhi are widely seen as reflecting a threat to all South Asian Muslims from India’s resurgent Hindu nationalism. Hasina’s relations with Delhi have become strained and several cross-border ministerial meetings have been cancelled. To neutralise domestic criticism, she is now seeking to create greater distance between herself and Indian prime minister Narendra Modi even though this could cost Dhaka a number of current joint projects and investments. The tension is not expected to be long-lasting, as India will prefer to restore relations rather than see Dhaka move closer to Beijing and Hasina needs Modi’s help to prevent an influx of up to a million refugees from Assam as a result of the CAA. Efforts to repatriate an estimated 850,000 Rohingya refugees to Myanmar continue to stall and their immediate fate may now depend on the success of a new aid initiative worth 860 million USD that was launched by the UN in March 2020. Fears that the camps could prove a breeding ground for COVID-19 are increasing.
Bangladesh’s economy remains heavily dependent on its garment sector. While it remains strong, events during 2019 showed its vulnerability to industrial unrest in disputes about pay and conditions, exclusion from the US government’s Generalised System of Preferences and, less obviously but more worryingly, rising competition from other low-cost countries. Moreover, little has been done to reduce the unsafe working conditions that pose reputational risks for consumer brands sourcing from Bangladesh. The impact of the ongoing virus-related global slowdown underlines the extent to which over-reliance on the garment sector can quickly result in problems for the wider economy.
TREND ▼ OUTLOOK ▲
The near-complete dominance of the AL over opposition parties remains unchallenged as BNP activists continue to be arrested and tried on corruption and related charges. Opposition rallies were already effectively banned before the virus crisis provided a non-political rationale for doing so. However, the BNP and the Islamist parties have been revived by the strain in relations with India. Prime Minister Hasina and the AL pursue a foreign policy very close to India but the impact of the CAA and the evident ascendancy of Hindu nationalism looks increasingly alarming from Bangladesh. Before the impact of COVID-19, a popular backlash against the AL was just beginning to form, and if the government proves unequal to the task of protecting people and jobs from the impact of the virus then its opponents may well see taking to the streets as the only form of expression open to them.
The new concern about Hindu nationalism may also encourage radical Islamist groups in Bangladesh to act. While trying to attract moderate Muslims to move across to the AL from their traditional home in the BNP, the AL may have enabled these groups to covertly penetrate its own organisations. The Hefazat-e-Islam, now an ally of the AL, has persuaded the government to honour sensitive Islamic symbols, which is having the effect of highlighting the AL’s failure to prosecute attacks on secular writers and members of minority religions.
The government’s response to the high levels of non-performing assets (NPA) has been to liberalise banking laws and issue more licences for new private banks. After some delay, this was finally having an impact before the virus struck. The new crisis is also likely to see the current account deficit widen again after the government had managed to narrow it to just 1.4% last year. The taka was relatively well-placed at the start of 2020, but it will quickly come under pressure if the global slowdown is prolonged.
The government, which had sustained public spending throughout most of fiscal 2019-20, is now facing the need to provide support for a population of whom 90% work in the informal sector and most live close to the poverty level. It is clear that the fiscal deficit, which was above 5% of GDP last year, will move even higher in the coming months. However, after a decade of strong growth, the government is helped by having a debt-to-GDP ratio of 35% and an external debt level of 12%, both of which are low by international standards. In addition, foreign exchange reserves of 33 billion USD provided a sizeable cushion going into the crisis.
Return to contents Next Chapter