Previous Quarterly Editions
Expropriation Risk: 62 64 63 64 ►Political Violence Risk:51 51 49 48 ▼Terrorism Risk:40 38 36 36 ▼Exchange Transfer and Trade Sanction Risk: 55 55 55 63 ▲Sovereign Default Risk:57 65 65 65 ►
TREND ▲
Protest intensity in 2022 and Q1 2023 2022 Q1 2023Cost of living : Low LowAll protest: Low Low
Cost-of-living protest risk in 2023Wage protest: Low Food/fuel policy protests: High
In January 2023, the government of Bangladesh entered into an agreement with the IMF for a USD4.7 billion loan. That loan was secured not because the country had reached a stage where a foreign exchange shortage had resulted in default on debt service commitments. Rather it was an attempt to buy insurance against such crises.
Having weathered the COVID-19 pandemic storm, Bangladesh was hit by the sharp rise in global oil and food prices following the Russian invasion of Ukraine. The trade and current account deficits on Bangladesh’s balance of payments had widened significantly, because of a spike in the import bill driven by these price increases. This resulted in a sharp fall in foreign exchange reserves that put pressure on the currency. Falling reserves had made it difficult for the central bank to intervene in currency markets to stabilise the taka. This encouraged speculation that further weakened the currency.
Over July 2022 to January 2023, the merchandise import bill declined by 5.7%, triggered by government restrictions and the depreciation of the currency. On the other hand, export earnings rose by 9.6% over July to February, almost solely because of a 14.1% improvement in ready-made garment exports. But despite that improvement and positive growth in remittances from abroad, the overall current account was in deficit to the tune of USD7.4 billion during the first seven months of financial year 2022-23 (July-June).
These balance of payments weaknesses were aggravated by Bangladesh having relied heavily on external borrowing following the onset of the pandemic. Servicing that debt at a time of balance of payments stress raised the possibility of destabilization that could lead to default. The Sri Lankan experience was seen as a warning signal. In the event, the argument Bangladesh would be ‘smart’ to approach the IMF early, so its borrowing requirement and negotiating position were better, gained ground. From the government’s point of view, access to IMF funding was seen as a means of sustaining crucial imports, in the absence of which discontent and social strife could increase and the government’s legitimacy could be threatened.
Prior to the receipt of the first instalment of USD476 million, shortages due to restricted imports of diesel and gas, plus curtailed supply from power utilities, led to extended blackouts. The government implemented rationing of power supply to manage the supply/demand imbalance. But energy prices had to rise, with the burden transferred to consumers. In August 2022, Bangladesh raised fuel prices by between 40% and 50%. This also negatively affected prices of essentials such as edible oils, rice, eggs, and vegetables. The potential for shortages is still there. Private power producers have reportedly asked for USD1 billion in foreign exchange from the country’s central bank, to import fuel oil to sustain energy supplies during the summer months.
Meanwhile, despite improved international conditions, domestic inflation remains a threat. According to World Bank commodity price data, international prices of major commodities imported by Bangladesh recorded declines in recent months. However, the depreciation of the taka and the cost-push effects of increased petroleum and energy prices have exerted upward pressure on prices. Moreover, domestic monopolies have exploited the situation to keep prices rising faster than they should.
In response, the central bank – partly also to appease the IMF – also raised the repo rate at which it lends to banks to 6% in January from 4.75% at the beginning of last year. The IMF’s loan is tied to reforms involving fiscal consolidation, withdrawal of energy subsidies, pursuit of an independent monetary policy by the central bank, and more cautious lending by the banking system. Together with the effects of devaluation, these measures are contractionary in nature. Thus, austerity and inflation are to remain features of the economic environment in Bangladesh.
Bangladesh’s finance minister had initially stated whether Bangladesh takes a loan from the IMF would depend on the conditions set. Most governments faced with imminent elections – which is the case in Bangladesh – are wary of implementing policies embedded in IMF conditionality. But Bangladesh’s Prime Minister Sheikh Hasina appears to be betting on the fact she has neutralised the opposition with strong-arm measures and can use IMF finance to relax restrictions on imports to appease voters.
*Note: Protest inensity is calculated based on ACLED. Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of calculations, see the introductory essay.
TREND ►Given balance of payments stress, Bangladesh’s government is resorting to measures to limit leakages on account of trade mis-invoicing and money laundering activities. If pressured into mobilizing whatever foreign exchange it can, the government may adopt measures that adversely affect those engaging in legal transactions as well. But with Bangladesh under an IMF programme, the government is unlikely to opt for measures that involve expropriation of any kind.
TREND ▼
Bangladesh has been historically prone to political violence involving the two parties that dominate the electoral space: the Awami League (AL) and the Bangladesh Nationalist Party (BNP). With elections slated to be held within a year, conflict leading to incidents of violence is likely to spike.
The AL is attempting to reduce this risk by coming down heavily on the opposition, many of the leaders of which are either in prison or restrained by legal cases. However, the BNP, though considerably weakened, is aiming to leverage the deteriorating economic situation to gain popular support.
The BNP is, however, likely to fail in its effort to ensure that elections are fought under an independent caretaker government to prevent alleged rigging by the AL. Therefore, violence is likely to heighten as the next election approaches.
While Bangladesh has had a history of left-wing and radical Islamic terrorism, the more recent concern has been terrorism deriving from gang wars in the Rohingya camps, where conditions are deteriorating to intolerable levels because of declining aid support to manage the camps from the international community.
According to a recent report, there are at least 20 armed gangs active in the camps, involved in serious crimes such as arms trading, drugs, human trafficking, kidnapping, extortion, and murder. The government is increasingly worried this would spill over to elsewhere in the country, as refugee anger at poor living conditions in the camps turns into anti-government activity.
The fragile balance of payments situation has put pressure on the domestic currency. This is likely to make it difficult for residents to sell assets and repatriate the proceeds by converting takas into dollars. For firms and institutions with foreign exchange liabilities to cover with payments in hard currency, the domestic currency burden of servicing those liabilities is likely to increase sharply. In the event, the government may be forced to adopt policies that commandeer available foreign exchange and save on imports.
TREND ►
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. Yet, without additional funding from sources other than the IMF, the task of stabilizing the balance of payments may be difficult. Furthermore, if inability to meet the conditions set by the IMF leads to missed targets, future tranches of IMF financing may be delayed. Therefore, while the risk of sovereign default has reduced, it is still a real possibility.
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