Previous Quarterly Editions
Expropriation Risk: 56 57 57 55 Political Violence Risk: 74 74 78 73 Terrorism Risk: 50 48 46 46 Exchange Transfer and Trade Sanction Risk: 56 57 57 55 Sovereign Default Risk: 64 62 62 60
TREND ▼ OUTLOOK ►
Bangladesh is quickly moving from ‘lesser developed’ to ‘lower middle income’ status. The recent strong growth in GDP has continued into fiscal 2018-19, with 7.5% now expected for the year as a whole (July-June). Exports have performed exceptionally well, with growth close to 15% in the first quarter powered by the key ready-made garments sector. This has helped to close the current account deficit that opened up last year, while in September the trade deficit fell by almost half year-on-year to 278 million dollars. In addition, remittance income in 2017-18 has been revised upwards to 17 billion dollars from 13.6 billion in earlier accounts. Domestic consumption is also becoming more self-sustaining, with the ratio of exports to GDP continuing to fall steadily from 16% in 2014-15 to 14% in 2017-18. The strength of the economy partly explains the success of Sheikh Hasina Wajed’s Awami League (AL) in the general election at the end of December. Since Hasina became prime minister in 2008, the country has enjoyed an unprecedented period of prosperity and stability. However, the election result, which gave the AL 288 of 300 seats in parliament and 90% of the popular vote, was controversial. More than 9,000 members of opposition parties were arrested or jailed prior to the poll, including the leader of the main opposition Bangladesh National Party, and ballot-box tampering was widely reported. Nonetheless, the international community has not questioned the outcome and China, India, Russia and the US all express satisfaction with Hasina’s past performance, especially her opposition to militant Islam. Yet there are fears that she and the AL are now building an authoritarian regime which risks burying problems for the future. Opposition of any kind finds few legitimate outlets and the notionally secular AL has itself taken up radical Islamist themes. Fears that Bangladesh was heading for confrontation with India over the latter’s citizenship policies in neighbouring Assam have eased following the intervention by India’s Supreme Court to slow the process. Bangladesh remains in negotiation with Myanmar and the UN over the Rohingya crisis, although in November it threatened to commence the forced repatriation of some 700,000 Rohingya refugees currently in camps in Bangladesh.
However, aware of the associated reputational risk, it has so far taken no steps in that direction as talks on international aid continue.
The crucial garment industry saw strong growth in the first quarter of 2018-19 as trade rivalry between Washington and Beijing improved opportunities for Bangladesh to sell into US markets. However, the sector’s recovery only reinforces the economy’s dependence on a single area of the economy that now provides 83% of exports. The government is aware that competition is fierce and the growth in sales to the US may only prove temporary.
Little progress has been made in recovering the status under the US government’s Generalised System of Preferences that Bangladesh lost in 2013 over safety conditions. The threat to garment workers from fire and other physical dangers remains a significant reputational risk for foreign retailers who have been buying from Bangladesh but can now find cheaper options. Although appreciating the need to reduce dependence on garment sales, the government has only slowly improved the country’s attractiveness to private investors and FDI remained below two billion dollars in 2017-18. A new plan to improve the reliability of gas supplies in the country’s energy mix will take a long time to make a discernible difference.
By Bangladesh standards, the general election on December 30 passed off quietly. However, this may have been because of pre-emptive strikes by the AL government against opposition groups in the days leading up to polling. The government has been particularly hard on members of the main opposition BNP and the Islamist Jamaat-e-Islami. With political parties facing such a tight crackdown, the task of challenging the government has increasingly passed to civil society groups, especially students and trades unions. However, opposition to Hasina’s blatantly ‘pro-India’ foreign policy may have eased with increased Chinese investment in infrastructure and declining Indian ‘provocation’ over issues such as the crackdown on eligibility for citizenship in adjacent Assam. Meanwhile, the Rohingya crisis is making it difficult for Bangladesh to stabilise its relations with Myanmar. Large-scale demonstrations in January by garment workers demanding higher pay, some of which were met by police using tear gas and water cannons, bought partial concessions from the government but no increase in the minimum wage. The AL government has made clear that it will side with employers, who have recently sacked thousands of workers after the recent work stoppages, in order to prevent any further disruption to the sector.
TREND ► OUTLOOK ▼
Hasina’s government has targeted members of the Jamaat-e-Islami movement, which has associations with militant Islam. However, her AL has also tried to attract more moderate Muslim support into its own ranks from its traditional home in the BNP. This brings the risk that more radical Islamist elements will covertly penetrate the AL itself. The Hefazat-e-Islam, which is an AL ally, has enjoyed success in persuading the government to honour sensitive Islamic symbols, even as attacks on secular publicists and on minority religions remain unprosecuted.
The trade deficit has been closing and inflation moderating as growth remains strong, while the taka has largely stabilised against the dollar. However, weak governance of the banking sector has seen the ratio of non-performing loans rising to 17% when restructured debts are included. Although the government has tweaked tax laws and deposit ratios to increase liquidity, the improvement has been marginal at best and credit remains tight. There are also concerns that, in issuing new private banking licenses, the government may be increasing the sector’s vulnerability.
In the approach to the general election at the end of December, the government gave a further boost to public spending with the result that the 2018-19 fiscal deficit is expected to exceed 5% of GDP. However, both public debt, which now stands at 35% of GDP, and external debt, at 12%, are very low by international standards, while foreign reserves continue to recover and reached 33 billion dollars in December.
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