Bangladesh

major macro economic indicators

(e): Estimate (f): Forecast *Fiscal year 2023 from July 2022 to June 2023

RISK ASSESSMENT

Economy hampered by social unrest and persistent inflation

The Bangladeshi economy has faced significant challenges in 2024: high inflation has hampered domestic demand, while social unrest has reached unprecedented levels. Stubbornly high inflation has eroded household purchasing power, negatively impacting private consumption (around 67% of GDP). While the year started on a positive note for the country's vital garment sector, with ready-made garment exports (representing around 80% of total exports) up 11% year-on-year in the first half of 2024, curfews and internet outages due to quota protests in early July forced many garment manufacturers to cease operations, causing Bangladesh's imports and exports to come to a virtual standstill.

In addition to the significant negative impact of quota-related protests at the end of 2023, high inflation has sparked protests and demands for wage increases, which have already strained the apparel sector. The country's competitive advantage in labour costs has weakened, risking intensified competition from other garment production centres. In addition, as Bangladesh prepares to lose its “least developed country” status by 2026, it faces the challenge of phasing out subsidies in the garment sector to comply with World Trade Organization rules.

In the first half of 2024, inflation averaged 10% and is expected to remain high for the rest of the year and into 2025. The country saw inflation soar in 2023 and 2024, on back of a significant taka depreciation and higher energy prices. The central bank maintained its tight monetary policy and raised interest rates twice in the first half of 2024, unlike its regional peers which mainly opted for the status quo. Owing to persisting inflationary pressures, the central bank could raise its key rate again in 2025. Such a move could put the brakes on private investment, complicating the path to economic recovery and stability.

Fiscal consolidation and depletion of foreign exchange reserves

In its FY25 budget (ending in June 2025), the government proposed a total expenditure of BDT 7.97 trillion (up 11.6% from the revised FY24 budget) or USD 68 billion, with revenue of BDT 5.41 trillion (up 13.2% from FY24) or USD 46 billion, leading to a deficit of BDT 2.56 trillion or USD 22 billion, representing approximately 4.6% of GDP. In dollar terms, increases in expenditures and revenue compared with FY24 are much lower due to taka depreciation, and in light of the high inflation the country is facing, the budget is contracting. Public services, interest payments, and education and technology are the categories earmarked for the largest budget allocations, at 22.1%, 14.2% and 13.9% respectively. While almost all categories saw an increase in the budget allocated compared to FY2024, the agriculture sectors saw a significant decline of 15.5%. This decrease is attributable to the expected drop and stabilisation of fertilizer prices, allowing the government to rule out its subsidies in the sector. To finance the deficit, the government intends to borrow mainly from domestic sources (63% of total deficit financing). While borrowing locally in taka allows to avoid foreign exchange risks amid depleting forex reserves, it could however create a crowding-out effect to the detriment of the private sector. Despite recurrent deficits, public debt remains modest in relation to GDP because of high economic growth. Implementing the budget is uncertain given the quota protests that prompted Sheikh Hasina's government to resign.

In the first half of 2024, the current account recorded a surplus of BDT 188 billion (around USD 1.6 billion), down 8.7% on the surplus of BDT 206 billion recorded in the same period in 2023. The surplus was largely driven by secondary income thanks to strong expatriate remittances. Imports (in USD) fell by 0.5% year-on-year, while exports declined by 0.9%. Foreign exchange reserves remain vulnerable, covering only 4.3 months of imports on average from January to July 2024. To remedy the situation, the central bank implemented measures to reduce imports by increasing the required ratio of import payments that companies must make to banks when opening letters of credit, resulting in a sharp reduction in imports. In addition, in May 2024, the central bank switched to a more flexible exchange rate regime via a crawling peg system, limiting its intervention in the foreign exchange market in amid strong depreciation pressure, which is costly for reserves. Several disbursements have been made by the IMF since the acceptance of the reform programme accompanied by the EFF and FEC, which explains the fiscal consolidation reforms introduced. In addition, foreign exchange reserves can be bolstered by loans from countries such as South Korea or China. However, despite some improvements, with foreign exchange reserves up 11% on June 2024, their level remains low, covering only 4.3 months of imports. In addition, the quota protests temporarily disrupted remittance flows, putting further downward pressure on reserves.

The banking system is currently fragile and is expected to remain so, with the number of non-performing loans (NPL) on the rise. In March 2024, NPLs jumped to an all-time high of BDT 1820 billion (approx. USD 15.4 billion), representing 11.1% of total loans. The IMF has urged for stricter loan classification rules and proposed a reduction in the overdue time for term loans, which could potentially lead to a further increase in NPLs.

Political and social tensions amid a fragile democracy

Sheikh Hasina, leader of the Awami League (AL), won her fourth consecutive term as Prime Minister of Bangladesh in January 2024, but her term of office came to a premature end. Violent protests prompted Seikh Hasina to resign and flee the country on 5 August, 2024. Prior to the protests, the country was already experiencing significant political and social tensions. The main opposition party, the Bangladesh Nationalist Party (BNP), boycotted the elections. The AL won 271 of the 350 parliamentary seats, followed by the Jatiya Party with 13 seats and the “independents” with 62 seats, raising concerns about the lack of opposition representation. Turnout was very low, officially at 40% compared with 80% in 2018, although disputed figures suggest it could be even lower. The BNP denounced the election as fraudulent and rejected the results, contributing to high social tensions.

Economic challenges and opposition to the ruling party led to widespread protests, which were met with violent crackdowns resulting in casualties and arrests of political dissenters. In 2018, university students protested job quotas that allocated 56% of public sector positions, giving 30% of jobs to descendants of 1971 War of Independence fighters, and the remaining 26% to women, underrepresented districts, people with disabilities, and ethnic minorities. These protests succeeded in abolishing the quotas. However, unrest reignited in July 2024, following a High Court decision on 5 June ruling that the cancellation of the 30% quota for descendants of freedom fighters was illegal. Protests started peacefully but quickly escalated into violence that resulted in over 1,000 deaths. The government responded by deploying the army, imposing a curfew, and cutting off Internet services, leading to a near-total communication blackout. The Supreme Court eventually ruled that 93% of government jobs should be merit-based, with only 5% reserved for freedom fighters. Protests nonetheless continued, sparking the resignation of Sheikh Hasina.  

Seikh Hasina's resignation could lead to weaker ties with Narendra Modi's India. Ms. Hasina's years in power were marked by several attempts to achieve closer ties with India which earned her criticism from the opposition. India is one of Bangladesh's main trading partners, and the two countries also launched rupee-denominated trade transactions in July 2023 to reduce dependence on the US dollar. However, tensions and differences persist between the two countries, notably over the Rohingya conflict and growing violence against Muslims in India. 

Last updated: October 2024