Previous Quarterly Editions
Expropriation Risk: 57 57 55 55 Political Violence Risk: 74 78 73 74 Terrorism Risk: 48 46 46 46 Exchange Transfer and Trade Sanction Risk: 57 57 55 57 Sovereign Default Risk: 62 62 60 60
TREND ▲ OUTLOOK ►
Bangladesh continues to make strong economic progress, with the Asian Development Bank expecting growth of 7.8% for the economic year ending in June and 8% in 2019-20. Although exports have performed well, growing by 14% during 2018-19, the current account deficit that reached 3.6% of GDP last year is closing only slowly amid rising prices for oil imports and capital goods for infrastructure projects. As a result, foreign exchange reserves have been squeezed with import cover down from 5.8 to 4.9 months. The currency has also been affected, with the taka falling by almost 2% against the dollar across the year. Nonetheless, the deficit is more than covered by strong overseas remittance earnings which reached 19 billion dollars last year. Strong growth also makes a fiscal deficit of 5% of GDP sustainable. In politics, the Awami League (AL) government of Sheikh Hasina Wajed has consolidated its sweeping but controversial victory in the December 2018 general election. It still dominates the opposition parties including the Bangladesh National Party (BNP) whose leader, former prime minister Khaleda Zia, remains in jail. While formal political opposition is now very weak, there is concern that Islamist militancy is not being entirely checked and that Hasina’s government has become partly complicit with it. In January, conflict broke out following strikes by workers in the key garments industry, which provides 83% of Bangladesh’s exports and employs four million workers. When workers rejected government offers of an increase in the minimum wage, nine days of violent street clashes between strikers and police followed and thousands of workers were dismissed. The conflict has now subsided following acceptance of a wage increase and the government’s agreement to extend a 5% export subsidy to manufacturers that was due to end in June, which is now meant to offset the cost of higher wages. The strikes should not have a significant impact on annual export sales. Besides increased wages, garment manufacturers, who have strong ties to parliament, argue that the subsidy is needed to combat intensifying international competition and continuing currency depreciation. Elsewhere, the crisis caused by the influx of 700,000 Rohingya refugees from neighbouring Myanmar shows few signs of abating. Although a repatriation agreement with Myanmar was reached last November, few actual repatriations have taken place due to continuing security issues. In conjunction with the UN, Bangladesh is considering development of Bhasan Char, an uninhabited island in the Bay of Bengal, as a long-term home for the refugee camps. However, some experts argue that effective isolation of the Rohingya would worsen the humanitarian situation.
TREND ► OUTLOOK ▼
The recent industrial unrest in the garment sector highlights Bangladesh’s export vulnerability. While garment exports have continued to grow, other exports such as leather and jute have stagnated and resulted in acute dependence on a sector that is itself under increasing pressure from competition in other low-cost countries, notably Vietnam. In addition to pressures on wage rates, garment manufacturers face a depreciating currency and exclusion from the US government’s Generalised System of Preferences since safety concerns emerged in 2013. The economy has been moving towards a greater dependence on domestic consumption, which a bumper rice harvest in 2018-19 should further help. Nonetheless, such development is slowed by lack of interest by foreign investors in most other sectors of the economy and foreign direct investment remains below two billion dollars a year. Moreover, the benefits derived from improved infrastructure, which India and China are competing to provide, could take several years to arrive.
With the ruling AL now holding all but 12 of the 300 seats in parliament following the December 2018 general election, it has shown no inclination to work with the little political opposition that remains. This means that protest has transferred from parliament to the streets, as with the demonstrations for improved wages in the garments industry that were met with tear gas and water-cannon. Student organisations have also taken to violent protests over a range of issues, such as criticism of the authorities after fires in high-rise buildings in Dakar killed 70 people in February and 25 in March. Islamist action against secular ‘bloggers’ and journalists continues, apparently unchecked by the government. Externally, opposition to Hasina’s blatantly ‘pro-India’ foreign policy appears to 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.
TREND ► OUTLOOK ▲
While Hasina’s government has targeted members of the Jamaat-e-Islami movement, which has associations with militant Islam, the 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, now an AL ally, has persuaded the government to honour sensitive Islamic symbols, even as attacks on secular publicists and on minority religions remain unprosecuted.
While the risks associated with the trade deficit and currency depreciation appear manageable, concern is growing over the state of the banking sector. The government’s response to high levels of non-performing assets (NPA) and constricted liquidity has been to liberalise banking laws and issue more licences for new private banks. Ten have been licensed in 2018-19, pushing the number of operational banks to 62. Banks may also ‘write-off’ NPAs after just three years rather than five years as previously. This has only marginally improved the position of NPAs, which have fallen from 17% to 15% of loans over the year, but it has significantly increased the risk of private bank default.
The government gave a further boost to public spending in the run-up to last year’s election, with the result that the 2018-19 fiscal deficit will exceed 5% of GDP. However, both public debt, which now stands at 35% of GDP, and external debt, at 12%, are low by international standards, while a recent fall of 4% in foreign reserves is not significant.
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