Previous Quarterly Editions
Expropriation Risk: 60 61 62 62 ► Political Violence Risk: 51 51 51 51 ► Terrorism Risk: 46 44 40 40 ► Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 57 57 57 57 ►
TREND ►
June and July 2021 proved to be difficult months for Bangladesh as it experienced a surge in coronavirus cases driven by the heavily infectious Delta variant. After having experimented with limited restrictions, the Bangladesh government imposed a nationwide lockdown on July 1, 2021, in response to this third wave. The lockdown did not manage to hold back the virus, with the number of confirmed cases rising to a peak of more than 16,200 on July 28, as compared with around 6,000 in late June and around 1,000 in mid-May.
The lockdown had to be extended repeatedly, with extremely adverse effects on economic activity and employment. Since the surge in infections came just a few weeks after a second wave, the economy has been set back for some time. Meanwhile, hospital beds and medical facilities are in short supply and the shortage of doctors and health workers has intensified, with many also succumbing to the virus. Vaccine shortage is a problem, with Bangladesh having to turn to China for supplies, after promised deliveries from India were suspended because of India’s own COVID-19 wave.
A week after the July lockdown was first imposed, news came of a fire in a food processing factory in a district near Dhaka that killed more than 50 workers and injured more than 20. This revived concerns of international investors and global retailers sourcing from Bangladesh over fire safety standards and labour conditions in its factories -- concerns which were highlighted by the fire in the Rana Plaza garment manufacturing complex in 2013 that killed more than 100 workers.
The recent fire hastened signing of a delayed tripartite safety agreement -- the International Accord for Health and Safety in the Textile and Garment Industry -- between international retailers, trade unions and factory owners. This Accord replaced and improved upon another accord that expires soon that included clauses that subject retailers to legal action if their factories fail to meet labour safety standards.
With economic conditions and the health status of the population under severe strain, the risks of a political backlash are high. In mid-August, the government, pointing to the economic hardship affecting millions, relaxed restrictions and allowed markets, malls and factories to open, though cases were in the neighbourhood of 5,000 a day in late August. Relaxations have been announced, but, with cases high and vaccine coverage low, health experts have warned of potentially serious consequences.
One silver lining is the external sector. Foreign exchange reserves have been in the neighbourhood of USD45bn for months running up to July 2021. This is partly because of robust remittance inflows and the fact that, under pressure from exporters and workers, the government has had to allow garment factories to reopen, sustaining exports. Apparel exports, that fell by 18% to USD27.94bn in financial year 2019-20 (July-June), rose to USD38.76bn in 2020-21, as demand revived in the United States and Europe. As if to flag its strong external position, Bangladesh in May announced that it would offer foreign exchange support to a dollar-strapped Sri Lanka through a USD200mn swap arrangement.
Being a small, export-dependent nation Bangladesh has sought to strengthen economic ties with the rest of the world and attract foreign investors. The country has signed around 30 bilateral investment agreements, which considerably reduces expropriation risk.
However, in some areas such as pharmaceuticals, policy has veered towards state procurement, regulation of transfer pricing practices and encouragement of domestic manufacturers. The health emergency triggered by the coronavirus may intensify that. In addition, bureaucratic interference, corruption and an inadequately responsive judicial system do adversely affect the ease of doing business.
Politically, matters are relatively stable as the Awami League, with close to 300 of the 350 seats in parliament, is secure in power. But violent demonstrations by radical Islamist groups such as the Hefazat-e-Islam are an issue.
Managing external relations is a challenge for Bangladesh, given its two large neighbours, China and India, that are at loggerheads. However, thus far Prime Minister Sheikh Hasina has been able to strike a workable balance. Despite the communal religious stance of the pro-Hindu Bharatiya Janata Party leading the Indian government, Bangladesh, with its predominantly Muslim population, has kept relations on an even keel. China, wary of Bangladesh’s past closeness to India, has also been pacified. Therefore, friction with neighbours is unlikely.
Radical Islamic groups have been active in Bangladesh for some time, with incomplete data suggesting that close to 200 militants belonging to different groups faced arrest in 2020. The current government has managed to control the activities of extreme Islamic groups. However, individual groups assert themselves periodically. Yet together with indictments by the war crimes tribunal that has been working since 2010, Bangladesh is seen as the most successful among South Asian countries when it comes to countering terrorism.
Given Bangladesh’s strong external position and comfortable reserves, the probability of a sudden collapse in the value of the domestic currency is low. With exports and remittances holding up through the pandemic, the risk is in fact minimal. On the other hand, the decision of the central bank to absorb excess foreign exchange inflows and shore up reserves, prevents any appreciation of the currency. In the circumstances, the risk of restrictions on converting domestic to foreign currency or vice-versa are extremely low.
Even before the pandemic, inadequate resource mobilisation combined with enhanced spending on infrastructure had resulted in a rise in the fiscal deficit-to-GDP (gross domestic product) ratio from 3.4% in the financial year ending June 2017 to 4.6% in 2018 and 5.4% in 2019. The figure remained at 5.4% in the pandemic onset year 2019-20, but is budgeted to rise to 6.2% in 2020-21. This will require borrowing of 2.15 trillion takas (USD25.3bn), of which 1.01 trillion takas will be from external sources. The rise in the ratio is a cause for concern, though with outstanding government debt at around 30% of GDP, public debt is not overwhelmingly large and well below the average across developing countries as a group.
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