Can Bangladesh overcome economic doldrums amid reform pressure?

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In the first half of the year, the Awami League government felt the squeeze of economic instability. Now, a new administration will have to face the challenges of making major reforms to key economic sectors while also bringing some relief to the lives of common people.

The Muhammad Yunus-led interim government must revitalise a stagnating economy, put growth back on track, and boost trade and investment amid the limitations of a contractionary monetary policy.

They will also have to find a way to relieve the persistent hikes in commodity prices and find ways to increase employment and government spending from the very start of the year. In addition to these multifaceted indicators, it must also pluck out some thorns, such as resolving worker dissatisfaction in industries such as garments, overcoming a power and fuel supply crisis, resolving the liquidity crisis at banks, managing high interest rates, and disentangling the mess of loan defaulting.

The task is far from easy. The interim government will have to carefully navigate a balance between increasing tax revenue and managing spending to prevent reserves from depleting and build a solid foundation amid a shifting landscape of power and political polarisation.

But not every aspect of the economy was a disappointment in 2024. Despite worries of a drop, export earnings have remained robust. And remittances, which have jumped since the changeover in power, remain a ray of hope.

Instead of looking back, Finance Advisor Salehuddin Ahmed and his team will have to chart a path forward as they work to repair the economy while clearing away the tangle and debris of irregularities. They have the chance to bring new direction to the fragile economy.

After all, the government changeover has already brought a fresh wind to the finance sector. The familiar faces at regulatory agencies, including Bangladesh Bank, have been replaced and new faces have been empowered.

Economists and analysts say that the new year can be a milestone moment in Bangladesh’s economy due to the new opportunities open to the country. Now everyone, including the general public, wants to free the economy from the bane of irregularities and turn it in a more welfare-oriented direction.

But the turnaround is unlikely to be radical enough to bring drastic change in the span of a year, says Zahid Hussain, former chief economist of the World Bank’s Dhaka office.

“There is very little chance of the economy becoming fully active and prosperous in 2025. But, if we can turn the economy around and start moving towards prosperity, then I’d say we’re fine.”

And so 2025 is an important year for Bangladesh to reap the benefits of the mass uprising in July and August, which has had such a profound effect on Bangladesh’s politics.

Just as 2025 started with an election, it is ending with talk of another. As a result, politics will play a key role in the economy next year.

Economist Zahid Hussain said: "The prerequisite for restoring economic stability is political stability. If there is uncertainty in that arena and political parties start taking to the streets, then it will not be possible to focus on economic management.

"We cannot say that economic stability will come with political stability, but we can guarantee that there will be no economic stability without it.”

Development expert Humayra Ferdous, associate professor at American International University, has urged the government to stress food security in the new year.

She said, "Food security will be a big challenge going forward if inflationary pressure does not decrease and businessmen do not regain confidence. The problem will increase further if production is not increased. Investment in agriculture must be boosted by any means.’’

Under the changed circumstances, CPD Honorary Fellow Mustafizur Rahman emphasised creating a strong foundation for the economy. He says that if this is done, the future will be fine.

“But we will have to accept a growth rate that is a little lower next year as well,” he said.

The first step is to control inflation, he said, calling it the main issue plaguing the economy. He also urged investment in the tax sector in order to drive up revenue collection and ensure the financial stability of the economy.

INFLATION CUTS DEEP THROUGHOUT THE YEAR

The year began with an upward trend in the prices of daily commodities that put the squeeze on the budgets of those with limited incomes. The bubbling hope that the government changeover would ease prices soon dissipated. Economic momentum has also flagged, making it more difficult to rein in inflation.

Just as inflation put persistent pressure on lives and livelihoods, the government was also in trouble. The instability in the wake of the changeover has only exacerbated the key economic issues. Investment, production, and trade have all faltered due to the repeated attempts to raise the policy interest rate to control prices.

Inflation has not dipped below 9.5 percent throughout the year, with a low of 9.67 percent in February. In July, at the height of the mass uprising, it shot up to 11.66 percent. Though it eased slightly over the next couple of months, it jumped back up to 11.38 percent in November. Food inflation has been particularly high, rising to 14 percent that same month.

Mustafizur says it will take time to see positive results from the government's hiking of the policy interest rates. But, before that, the supply chain and market management must be fixed.

"We still receive news of syndicates in the market. We haven’t been able to stop it. Extortion still persists in the supply chain.

M Abu Eusuf, a professor in the Department of Development Studies at Dhaka University, believes that market management is the main driver behind the inflation headache affecting the macro economy and urged the government to be more attentive in this regard.

He also recommended increased spending on the social security sector to protect people with limited incomes from dire hardship due to inflation.

THE WOUNDS FROM IRREGULARITIES

A white paper compiled on the state of the economy gives a sense of what the interim government has inherited from the previous regime.

According to the paper, the economy has been undercut persistently by rampant corruption and irregularities during the decade and a half rule of the Awami League.

The report is the first time an accounting of that corruption has been attempted.

The 400-page report says that as much as 40 percent of the country’s development budget was “embezzled” with an average of $16 billion being “laundered” abroad every year from the banks and the stock market through irregularities and manipulation. Corruption in the power sector includes illegal transactions of another $3 billion.

In a statement on Dec 1, the day the report was submitted, the Chief Advisor’s Office said: “The report has uncovered a portrait of corruption, looting and terrible financial fraud during Sheikh Hasina's regime that is alarming."

GREED DESTABILISES BANKING SECTOR

The banking sector is at risk of being buried under defaulted loans.

For years influential people, particularly those allied with the Awami League government, had been taking out money from the sector through manipulation and fraud. The new financial advisor and governor are speaking openly about past irregularities and corruption and are also loudly discussing reforms.

Many essential posts in the finance sector, including that of the Bangladesh Bank governor, have seen a reshuffling after the changeover in government.

A wave of change has also seen new executives and management taking over the public and private banks which had become hubs of irregularities and manipulation with the tacit approval of the previous government.

Economist Ahsan H Mansur, who took over as governor, freed the boards of 11 banks - including Islami and Exim Bank - from the control of the widely discussed and criticised businessman Mohammed Saiful Alam and Nazrul Islam Mazumder, who was known as the backbone of the banking sector.

In addition to the new boards, administrators were appointed to oversee these banks.

Bangladesh Bank has also formed a six-member task force to reform the banking sector, which is grappling with widespread loan scams and immense amounts of defaulted loans.

However, there has been little improvement in the situation in the short period since the interim government took charge. Many banks are struggling with liquidity crises. The exchange rate of the dollar has also jumped up by Tk 10 within a few months.

Amid the interim government’s initiatives and reforms, the non-performing loans in the banking sector stood at nearly Tk 2.85 trillion as of September – 16.93 percent of total loans disbursed.

A total of nearly Tk 16.83 trillion in loans has been disbursed by the sector as of September.

This figure jumped up by Tk 740 billion in the July-September quarter from the previous quarter - more than two and a half times compared to the previous three-month period.

Mohammad Hatem, president of the BKMEA - a clothing sector organisation - wants to see reforms in the banking sector as well as the National Board of Revenue, or NBR in 2025. He said that reforms to the finance sector, especially to banking and customs, are more urgent.

RESERVES STILL UNDER PRESSURE, BUT REMITTANCES BRING RELIEF

After the interim government took office, Bangladesh’s stock of foreign reserves fell below $19 billion as per the BPM6 calculation following the payment of previous debts. After two months of reserves floating around the same mark, Bangladesh Bank took steps to increase reserves by buying dollars. In the third week of December, reserves exceeded $20 billion for the first time under this administration.

To comply with the International Monetary Fund's conditions, Bangladesh’s net reserves should be at $15.30 billion at the end of December. To achieve this, Bangladesh Bank is buying additional dollars held by commercial banks. This has further driven up the price of the dollar.

However, reserve earnings, which have been under pressure over the past few years, have brought some relief under the difficult circumstances as more money is entering through banking channels.

This year, aside from March and July, over $2 billion has been sent home by expatriates every month.

Export earnings are also trending up, and the benefits of this can be utilised in the economy, said Abu Eusuf.

If the flow of foreign exchange can be increased, it is possible to bring stability to the macro economy along with resolving the reserve crisis.

Eusuf suggested quickly disbursing the large loan agreements with development partners to do so.

Since the introduction of the “crawling peg” exchange rate system in May, the price of the dollar has risen by Tk 10 to stand at Tk 120.

The central bank recently stated that banks can pay up to Tk 123 taka to buy remittance dollars, which is why more dollars are coming into the banking channel, believes Citizens Bank Managing Director Mohammad Masoom.

DIP IN TAX REVENUE CAUSES CONCERN

The budget’s target for revenue collection in the current fiscal year has been set at Tk 4.8 trillion. But in the turbulent period that began in July, instead of growing its tax revenue, the NBR has not yet been able to break out of its negative trend.

The latest updates say that in the July-October period of the current fiscal year, the NBR was able to collect 1.03 percent less revenue than the same period in the previous fiscal year. The year-on-year jump in revenue in the same period of the previous year was 14.36 percent. When examined as a single month, revenue collection increased by 0.84 percent in October year-on-year, but it wasn’t enough to break out of the negative growth trend.

As all economic indicators, including imports, exports and production, are slowing down, analysts believe that it is natural for revenue collection to continue to decline.

Meanwhile, pressure from the IMF has increased. The agency has set a tough condition for the increase of the tax-GDP ratio to 0.6 percent in the current fiscal year before disbursing the fourth tranche of the loan.

CPD researcher Towfiqul Islam Khan says that the government is having to go through tough reforms, such as moving towards reducing tax exemptions to increase revenue which may lead to distrust among businessmen.

However, he notes that if tax evasion cannot be prevented, revenue collection will not increase.

LABOUR DISCONTENT STIRS EXPORT WORRIES

A debate regarding inflated export earnings raged throughout the year. When a miscalculation was revised, it led to a shocking shortfall in export earnings of $20 billion less in two fiscal years from what was previously reported.

Then, the government changed. The Anti-discrimination Student Movement’s protest and other violence affected export-oriented sectors, including ready-made garments. One factory after another closed for many days due to labour discontent. This created additional pressure on manufacturing.

However, despite fears that export earnings would drop due to various internal and global reasons before and after the change of government, it did not happen.

Even as news swirls of buyers turning away, increased export earnings have been reported. The export sector brought in over $20 billion in the last five months.

The BKMEA’s Hatem hopes that ready-made garment exports can increase further if the labour unrest problem is resolved.

However, Abu Eusuf suggests increasing imports to maintain export growth. He said there are now some restrictions on opening LCs and the exchange rate has not stabilised, which means traders are not getting dollars easily in line with their demands.

That issue must be resolved, he said.

GROWTH SLOWS, SOCIAL SPENDING ‘MUST RISE’

The ousted Awami League had hoped the economy would grow at a rate of 6.8 percent in its budget for the current fiscal year. However, the interim government has reduced this target to 5.25 percent in the face of the overall economic damage.

The IMF, which is providing Bangladesh with substantial loan assistance, believes that this will not be possible either. After a recent visit to Dhaka before the release of the fourth tranche of a loan, the organisation’s forecast says that Bangladesh’s growth rate cannot be expected to exceed 3.8 percent in this fiscal year.

Under the circumstances, economic analyst Zahid says it is important to stress the “rationalisation” of government spending in the new year instead of expanding it in order to boost the economy while implementing reforms.

“Reducing wasteful spending means completely eliminating it from the budget,” he said.

“The place for spending increases is the social sector. The economy is currently going through a difficult situation. To ensure that low-income people can cope with it, we need to increase spending on the education sector so that they don't stop going to school. They can't buy school books or pens because they have to buy food. If they can't pay tuition, they take their children out of school for now. If that is the case, it isn’t just trouble for the family but for the country as a whole."

He also pushed for increased spending on maternal health programmes so that "malnutrition doesn't increase" during a time of spiking.

Zahid said that the revenue collection issue is unlikely to be resolved quickly, but called for a review of the sectors that have been given extended subsidies.

Highlighting the lack of diversification even in export subsidies in the context of reducing government spending, he said. If changes are not made to their management, there will be no substantial difference.

The analyst also spoke out in favour of reducing the size of the Annual Development Programme and cutting down on the waste in the sector.

{Writing in English by Shoumik Hassin]