Previous Quarterly Editions
Expropriation Risk: 54 54 56 56 Political Violence Risk: 75 75 73 70 Terrorism Risk: 45 44 46 44 Exchange Transfer and Trade Sanction Risk: 58 56 58 56 Sovereign Default Risk: 58 58 59 57
TREND ▼ OUTLOOK ►
In mid-June 2020, Bangladesh was forced to re-impose a zone-targeted lockdown after lifting its previous 66-day general lockdown at the end of May 2020. The reason was a surge in COVID-19 infections that went on to push the number of recorded cases to 265,000 by mid-July 2020. Until the re-imposition, the government had been optimistic about its handling of the pandemic, which seemed to have caused less damage to life and livelihood than elsewhere in south Asia. An early lockdown and a generous financial package worth 3.7% of GDP helped to secure the country from the worst of the impact. In response, the government’s budget for 2020-21 (presented in June 2020 for the fiscal year that began in July 2020) assumed that GDP growth in 2019-20 would only fall to 5.2% from 8.2% in 2018-19 and would then recover its previous level during the fiscal year just starting in July. The budget also expected that the fiscal deficit would see only a small rise from 5.5% to 6%. However, these numbers quickly looked suspect as two key sectors of the economy face severe disruption. Overseas remittances, which provide almost 10% of national income, could fall by 25% in 2020-21 according to the IMF, while the garment industry, responsible for 13% of national income and 85% of export earnings, saw orders worth more than three billion USD cancelled and exports in April and May 2020 plunge by 72%. The government has pledged some 600 million USD in support for the sector but one in four of all garment workers are now laid off. In broad terms, the IMF estimates the the GDP growth this year of 1.6%, along with the current spending, puts the Bangladesh fiscal deficit on course for a substantial increase. A major challenge for the new fiscal year is that Vietnam, the main competitor to Bangladesh in the garment sector, has largely escaped the virus. Nonetheless, after a decade of GDP growth at 6-8%, the economy still has considerable resilience and remains fundamentally stable. In politics, the lockdown has largely precluded public demonstrations although the attempt to impose restrictions on the garments industry led to local riots and was widely evaded. Opposition parties remain very weak having boycotted the last election and the Awami League (AL) is essentially governing unchallenged with 288 of 300 seats in parliament. However, as Prime Minister Sheikh Hasina struggles with an inexperienced cabinet, and as the inadequacies of the government’s handling of the COVID-19 crisis become apparent, support for the opposition may start to strengthen. One political move that could prove significant is the formation of a new Amar Bangladesh Party by younger members of the largely discredited Jamaat-e-Islami. The new party aims to be more secular and inclusive, appealing to constituencies currently supporting the AL. Regionally, the COVID-19 crisis has overshadowed the tensions with Delhi over the changes to India’s citizenship laws that Bangladesh sees as targeted at Muslims, but the issue has not disappeared and will continue to complicate bilateral relations. Meanwhile, Beijing is attempting to woo India’s smaller neighbours and has offered to drop tariffs on 97% of Bangladeshi exports, which will be difficult to resist. The problems posed by the 1.1 million Rohingya refugees in Bangladesh continue to deepen now that COVID-19 has reached the main encampments, which threatens to be a major medical crisis. The government’s policy of isolating the camps, including cutting their internet connections, is now under scrutiny, but the latest efforts by the UN Human Rights Council to get Myanmar to begin repatriating refugees has made little progress.
TREND ► OUTLOOK ▲
The new threats to the garment sector have serious implications for the whole of the economy. In addition to the cancellation of orders due to the COVID-19 crisis, it is experiencing increased competition from Vietnam which has largely evaded the virus and is fast expanding. Also, Bangladesh’s recent record of successful GDP growth means that it is about to lose its UN Lesser Developed Country (LDC) status, which gives it tariff exemption to the EU and other international markets. In spite of repeated appeals, it still has not regained entry to the US’s Generalised System of Preferences. Major retail chains remain concerned about the reputational risks associated with working conditions in the country’s garment factories.
TREND ▼ OUTLOOK ▲
After a protracted period in which the AL effectively sidelined the main opposition party, the BNP, whose members continue to be arrested and tried on corruption charges, the hopes of the BNP and the Islamist parties have been revived by the strain in relations with India and, more recently, by inadequacies in some aspects of the AL’s handling of the COVID-19 crisis. The new Amar Bangladesh Party, formally established at the start of May 2020 by former members of the youth-wing of the Jamaat-e-Islami, may develop into a significant threat to the AL’s monopoly on power. Where the Jamaat favoured a narrow sectarian brand of politics and flirted with Islamist violence, the new party aims to be more socially inclusive and to accept regulation by the secular state. It could recover a range of constituencies now lost to any religious party, especially if the AL government is blamed for the poor state of the country’s health infrastructure after spending less than 2% of GDP on the sector while in power.
The new Amar Bangladesh Party may be an alternative means for moderate Muslims to re-engage with politics, but rising concern about Hindu nationalism in India is also strengthening radical Islamist groups within Bangladesh. The Rapid Action Battalion, an anti-crime and anti-terrorism unit of the Bangladesh Police, continues to arrest critics of the government on charges of spreading rumours and misinformation on social media.
The recent success in reducing the ratio of non-performing assets in the banking sector, from 12% to 9%, is at risk because of the COVID-19 crisis and is pushing up defaults again. Another concern for the sector is the cap of 9% on bank interest charges imposed by the government from April 2020 which will squeeze bank earnings. While the current account deficit will come under pressure from the decline in exports, imports have also fallen sharply. As a result, any widening should be kept below 2% of GDP.
The government’s expectation of only a minimal rise in the fiscal deficit for 2019-20 is extremely optimistic. In light of increased spending on economic stimuli and reduced government revenues, it could come in closer to 8% rather than 6%. However, after a decade of strong growth, the government is helped by having a debt-to-GDP ratio of 36% and an external debt level of 12%, both of which are low by international standards. In addition, foreign exchange reserves of 34 billion USD, equivalent to seven months of imports, provide a relatively comfortable cushion at this stage of the pandemic.
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