Previous Quarterly Editions
Expropriation Risk: 62 62 62 64 ▲Political Violence Risk:51 51 51 51 ►Terrorism Risk:40 40 38 36 ▼Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ►Sovereign Default Risk:57 47 57 65 ▲
TREND ▲
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Like all small South Asian nations, Bangladesh has had to juggle its relationships with two large and mutually hostile neighbours – China and India. India is the more significant neighbour given the large land border Bangladesh shares with that country. Unsurprisingly, integration with India through legal and illegal trade flows is substantial. However, areas of conflict, including over sharing of river waters, especially of the Teesta, and illegal migration, also define the relationship.
Regarding China’s relationship with Bangladesh, this is principally strategic and built and sustained through a trade and investment relationship that ensures Bangladesh’s dependence on Chinese raw materials for its export-intensive textile industry and Chinese investment and aid. These have received a boost as part of China’s global Belt and Road Initiative, which aims to spread Chinese investments and infrastructure of various forms.
The complexity of its geographical and economic location forces Bangladesh constantly to strive to present a picture of balanced alignment with the two large neighbours, one of which, India, has clearly opted for closer ties
with the U.S. and its Western allies, while the other, China, not only is the core of the new ‘East’ but has enlarged it in recent times through collaboration with Russia.
However, three factors seem to be shifting that balance in favour of the East. The first is unresolved issues between India and Bangladesh, not the least of which is the sharing of the waters of the Teesta, as noted above. Expectations that Bangladesh Prime Minister Sheikh Hasina's visit to India in early September 2022 would yield results in the form of an agreement were not met.
The second issue is migration, with the current Indian National Democratic Alliance government yielding to demands from north-eastern states pushing for a reduction in the numbers of the Bengali-speaking inhabitants, not all of whom are Bangladeshi and many of whom migrated from Bangladesh to the region decades back. This migration issue has also taken on a new dimension with India reticent to share the responsibility of housing Rohingya refugees who have fled west from Myanmar because of state repression.
Finally, being a dominantly Muslim country, the third issue is that the Bangladesh government is uneasy about the pro-Hindu and anti-Muslim agenda of India’s ruling party and organisations related to it. Bangladesh’s government has had to appease radical Muslim sections who are critical of the Indian government’s stance. These tensions with India could push Bangladesh closer to China.
TREND ▲Following the Russian invasion of Ukraine in February 2022 and the sharp rise in oil and food prices in global markets, the economic situation facing Bangladesh has taken a turn for the worse. The trade and current account deficits on Bangladesh’s balance of payments have widened significantly, because of a spike in the import bill. The current account deficit rose from 1.1% of GDP in 2020-21 to 4.2%. Foreign exchange reserves have fallen by around 13% over the year ending mid-August 2022, from around USD45 billion to USD39.55 billion.
In response, the government has initiated discussions with the International Monetary Fund (IMF) for emergency support. Unable to sustain imports at higher prices, and short of diesel and gas, power utilities have not been able to sustain supplies, leading to long blackouts. The government has called for austerity in the use of power and implemented rationing of power, causing much hardship.
Pricing has also shifted the burden of managing the crisis onto the shoulders of 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. Public bus fares have risen by more than 20%, while waterway transport operators have asked the government to approve a 50% increase in ticket prices.
Pending a turnaround in the external environment, Bangladesh’s government is resorting to measures such as policies to limit leakages on account of trade mis-invoicing and money laundering activities. If pressured into mobilising whatever foreign exchange it can, the government may adopt measures that adversely affect those engaging in legal transactions as well. But with Bangladesh approaching the IMF for support, it is unlikely to opt for measures the involve expropriation of any kind.
TREND ►
Bangladesh is prone to political violence principally because of the hostile competition for power between the two blocs, one led by the Awami League and four-time Prime Minister Sheikh Hasina and the other by the matriarch of the opposition, Khaleda Zia.
With elections slated to be held in a little more than a year’s time from now, conflict leading to incidents of violence are likely to spike. The opposition Bangladesh Nationalist Party (BNP), though considerably weakened, is aiming to leverage the deteriorating economic situation to gain popular support. Additionally, the BNP claims the Awami League, the party that leads the ruling coalition, lost popular support long ago and came to power using force and by rigging elections.
Violence and an official crackdown on the opposition resulted in uncontested seats and low turnouts. Similar violence is likely as the next election approaches. Two BNP activists were killed on the southern island of Bhola in July 2022, when police opened fire on what the opposition party claimed was a peaceful demonstration.
TREND ▼
While Bangladesh has had a history of left-wing and radical Islamic terrorism, the government has been successful in recent years in controlling the tendency by deploying its ‘zero tolerance’ policy of the Sheikh Hasina government. No Islamic extremism-related killing was reported in 2021, compared with two terrorist fatalities in 2019 and 15 in 2018, which affected four civilians and eleven terrorists.
The fragile balance of payments situation has put pressure on the domestic currency, the taka. Unable to defend the currency with depleting reserves, the central bank decided by mid-September to allow the currency to depreciate – the taka fell by 11% over a single week.
According to the finance minister, the government’s policy would now veer towards allowing demand and supply to determine the value of the currency. For those planning to repatriate assets by selling them for takas and converting the proceeds, a significant loss is likely. 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.
In the context of the difficult global economic situation facing Bangladesh, the potential for sovereign default is high for three reasons. One is the absence of dollar reserves to service foreign currency debt, the cost of which would rise with a strengthening dollar and higher international interest rates. The second is the inability to mobilise the larger volume of taka resources needed to service foreign currency debt, while the third factor is a likely increase in domestic interest rates, intended both to address inflation and to defend the currency.
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