The Ukraine war pushed many South Asian economies into crisis in 2022, but the situation in Bangladesh – in purely economic terms – has been much less serious than that of countries such as Sri Lanka and Pakistan.
Despite soaring import bills and a doubling of inflation, the International Monetary Fund and UN in October forecasted 6 per cent growth for 2022-23, which is markedly better than the region – 4.8 per cent – or the world as a whole – 1.9 per cent.
The IMF Executive Board voted on January 30 in Washington to approve a $4.5-billion economic support package for Bangladesh, with the first payment of close to $450 million to go out in February. So why isn’t the mood of pessimism and alarm in Bangladesh dissipating, given all of these favourable conditions?
The short answer is that this crisis is about much more than the cost of petrol and electricity, or how much foreign exchange the country has. At its heart, it is about the widespread loss of confidence in the Bangladeshi government’s will to properly perform its duties of economic stewardship, whether protecting the vulnerable, supporting the middle class or enabling entrepreneurs and established businesses to succeed.
As the IMF and World Bank leaderships took pains to publicly indicate, Bangladesh’s record of both human development and economic growth so far has been truly impressive. The country has moved from being among the very poorest nations in the world in 1971, to middle-income status in 2021, with social indicators that in many cases have overtaken both India and Pakistan.
This has been achieved by very different engines working at the same time. On the one hand, there is a huge but efficient domestic NGO sector focused on innovative, grassroots work on health, education and economic development at the community level in Bangladesh's villages. Another driver of positive change was the remittances from an estimated 10 million migrant workers in the Gulf, India and South-East Asia. Finally, over the past dozen or so years, the country’s ready-made garment exports to a steadily growing global market massively expanded, and now stand at more than $35 billion a year.
Together, human development, migrant remittances and garment manufacturing jobs brought new opportunities, new prosperity and a growing sense of optimism over the past two decades. Bangladesh seemed to be well on its way to reaching its goal of achieving what the World Bank defines as "upper middle income" status by 2031, joining the likes of Mexico, Serbia and Malaysia.
But as I noted previously on Bangladesh’s development story, the greatest accomplishment of the government has been to stay out of the way of its energetic social and commercial entrepreneurs, rather than delivering good governance per se. Corruption has remained a serious problem, with Bangladesh consistently scoring in the bottom 20 per cent of Transparency International’s global index, the worst in South Asia with the exception of Afghanistan.
The collection of taxes and duties has been poor, and most seriously, the weakly regulated banking sector has become an increasing source of concern for its growing portfolio of non-performing loans. The Ukraine war and its impact on energy prices were, of course, external to the Bangladeshi economy, but the government’s level of exposure to those shocks and the quality of its crisis management have brought to the fore a pervasive sense that a rotten political and bureaucratic culture had made things far worse than they needed to be.
For example, the government’s declining willingness to invest in existing domestic gasfields, or in developing coal reserves, or in pursuing industrial-scale renewable energy production led to a much greater reliance on imports and swings in a volatile global market than was necessary. While this was profitable for importers, the results for the rest of the economy were far more dire. This was magnified by the seemingly indiscriminate emergency controls placed on foreign exchange transactions by the government when reserves started to rapidly dip.
This prevented power-plant operators from importing the gas and coal they needed, which have been running below 50 per cent capacity. The result was rolling power cuts, and an unstable national grid. This in turn has affected Bangladesh’s industries, including the ready-made garment sector that provides up to 80 per cent of the country’s exports.
The bigger players are now looking to establish their own power generation capabilities – either solar or fossil fuels – to keep their factories going because they lack confidence that public systems will cater for their needs. But exchange controls are also throttling the ability of companies to make investments in productivity, which will put a damper on growth down the road as well.
Meanwhile, plummeting confidence in the banks has made millions of Bangladeshi expatriate workers and their families increasingly nervous about using formal channels for remittances, once again shrinking the formal financial sector as well as the state’s tax base and foreign currency reserves.
In short, the old model has stopped working, and even a change in external circumstances will not be enough to put all of Humpty Dumpty back together again. But there is cause for hope. Unlike the regime in Sri Lanka, Bangladesh’s leadership has been sensitive to donors and markets, and the IMF in turn seems to largely agree with public sentiment. The conditionalities on the loan disbursal require a 26-month programme of reforms: improved tax capture; improved regulation of the banking sector; investments in renewable power generation and more protection for vulnerable segments of the population.
This rare but fortunate alignment between the global financial institutions and public sentiment in a recipient country represents an opportunity for the Bangladeshi government. It is a chance to forge a new path by cleaning house and rebuilding its legitimacy with its people. The failure to seize this opportunity will not only derail its goal of sustained growth, but intensify political and economic instability, quite possibly beyond this government’s ability to contain. The next two years will reveal what course the government has chosen to embrace.