Bangladesh's economy sinks deeper into crisis amid growing uncertainty

Business leaders indicate that the absence of predictability is causing hesitation in investment decisions

Shasha Denims, an export-focused apparel company with a National Export Trophy to its name, planned to invest Tk 6 billion to expand its business and open a new factory in early 2024.

The company is now dirching the plan due to changing economic realities, said its Managing Director Shams Mahmud.

He explained that it is not viable to run a business by taking loans at high interest rates.

Shasha Denims currently employs 1,600 workers across three dyeing units. In the fiscal year 2022-23, the company reported annual revenue of Tk 7.88 billion.

The company had been trying to set up a factory with 210 new looms at the Dhaka Export Processing Zone, expecting to generate an additional $12.5 million in revenue.

It had also planned to invest in another garment factory.

These projects were expected to increase turnover by Tk 4 billion and generate 2,000 jobs.

However, with interest rates surpassing 14 percent, the 100 percent export-oriented and publicly listed company was forced to revise its plans.

Now, Shasha Denims is investing only Tk 1.6 billion. “We are only making the investments that are necessary,” Shams said.

His remarks reflect the economic challenges facing businesses, where survival has become the priority over expansion.

When the Awami League government presented the new fiscal budget in June 2024, the economy was already under strain.

However, the political turmoil in July and August, along with a deteriorating law and order situation, eroded business confidence further.

Even after five months under the interim government, recovery has remained elusive.

Excluding the export sector, this is the first time since the COVID-19 period that almost all economic indicators are running with negative growth.

People are starting to question if the crisis is getting worse.

Abul Kasem Khan, vice-chairman of AK Khan & Company Limited, said: “Uncertainty is affecting everyone—both businesses and individuals. Business depends on predictability. The lower the risk, the greater the certainty. Right now, we are going through extreme uncertainty.”

He added that everyone is navigating a “new situation” and looking to the interim administration for stability.

“Things are slowly getting back on track, but there are still many questions. When will the election be held? There is no roadmap yet. What if policies change after a new government takes over? Such uncertainty deters both local and foreign investment.”

Abul Kasem Khan, a former president of the Dhaka Chamber of Commerce and Industry, said: “We do not concern ourselves with whether the government is political or non-political.

“What matters to us is improving law and order.”

He pointed out that the main challenge being felt right now is the decline in law and order. The chaos hasn't settled, which leaves business owners fearful.

Kashem stressed that where there is disorder, it needs to be firmly dealt with.

Business leaders pointed to more than just law and order concerns—policy uncertainty, gas shortages, soaring interest rates, liquidity crisis in banks, and the burden of taxes and harassment.

They said these challenges are holding them back from making the bold investments needed to push the economy forward.

TAD Group’s factories produce 300,000 to 350,000 garments daily and export 6 to 7 million units per month to international markets.

The group’s Managing Director Ashiqur Rahman Tuhin also expressed concerns about uncertainty.

He said, “In this situation, investors are all thinking ‘Let’s wait and assess things a bit more carefully’.”

“I wouldn’t say that confidence has not returned after the image crisis in the export sector. But issues in the economy and power sector remain, especially the gas shortage.

Liquidity is also tight in banks, making it difficult for many factories to open back-to-back letters of credit.”

“This uncertainty is preventing new investors from entering the market, and even those already in business are hesitant to expand,” Ashikur added.

FDI INFLOWS ALSO SHOW NO SIGNS OF IMPROVEMENT

The impact of the political turmoil in July and August has also been reflected in foreign direct investment, or FDI, inflows.

Official data reveals that FDI plummeted by 71 percent in the three months following the unrest.

Standard Chartered Bank Chief Executive Officer, or CEO, Naser Ezaz Bijoy described the decline in new FDI as "unsurprising".

He explained that investment decisions are based on long-term planning. "For new foreign investments, political stability and a favourable business climate must be visible to investors," he said.

At present, the country does not offer that sense of stability, leading most investors to withhold their funds, observed Naser, a former president of the Foreign Investors' Chamber of Commerce and Industry, or FICCI.

In response to the government’s recent decision to increase duties and taxes on over a hundred products, the FICCI expressed “deep concern”.

The organisation warned that policies formulated without adequate research or stakeholder consultations would erode investor confidence and hinder foreign capital inflows.

According to Bangladesh Bank’s latest report, net FDI in the first quarter of the current fiscal year (July-September) declined by nearly 71 percent compared to the same period last year.

During this quarter, Bangladesh attracted $969 million in foreign direct investment, but withdrawals amounted to $865 million, resulting in a net inflow of just $104 million.

In contrast, during the same quarter of FY 2023-24, the country received $907 million in FDI while investors repatriated $546 million, resulting in a net investment of approximately $360 million.

This means that not only has foreign investment declined year-on-year, but the latest figures also show a sharp drop from the previous quarter.

The decrease is also stark compared with the previous quarter of FY 2023-24 (April-June), where net FDI was $272.2 million.

During the period, foreign inflows totalled $1.08 billion, with $810 million repaid.

This represents a 61.74 percent decline in net foreign investment in the July-September period.

Zahid Hussain, former lead economist at the World Bank’s Dhaka office, told bdnews24.com that the political instability during that time caused the reduction in foreign investments.

“Such a political situation hasn’t occurred in the last 15 years. As a result, foreign investors are closely evaluating the political climate before investing in Bangladesh.”

WHERE DOES ECONOMY STAND?

Amid the “unstable” period marked by law and order deterioration, following protests, unrest, and power change that began in July, while remittance inflows and export earnings have shown improvement, other key economic indicators remain troubling.

Revenue collection, the implementation of development projects, and foreign loan disbursements have all decreased.

Taking into account the first half of the current fiscal year, despite multiple hikes in interest rates, inflation remains unchecked.

Export revenues and inflation trends are positive, yet foreign currency reserves are still below $20 billion.

Meanwhile, the burden of foreign debt has increased, along with the growing pressure to repay loans.

Import costs have surged, while manpower exports have declined.

In addition, Due to contractionary monetary policies, the flow of private sector bank loans has dropped to its lowest point in 42 months.

Indicator	July-Dec '24	July-Dec '23	Change (%)
Remittance	$13.77 billion	$10.79 billion	27.56
Export	$18.12 billion	$16.46 billion	10.09
Net FDI	$0.10 billion	$0.36 billion	-71
Import	$27.69 billion	$27.76 billion	-0.24
Foreign Currency Release	$3.53 billion	$4.06 billion	-13.06
Foreign Debt Repayment	$1.98 billion	$1.57 billion	26.11
Foreign Debt Commitment	$2.29 billion	$6.98 billion	-67.19
Revenue Collection	Tk 1.26 trillion	Tk 1.30 trillion	-2.62
LC Opening (Consumer Goods)	$2.56 billion	$2.65 billion	-3.15
LC Settlement (Consumer Goods)	$2.40 billion	$2.77 billion	-13.40
LC Opening (Capital Machinery)	$0.71 billion	$0.96 billion	-26.45
LC Settlement (Capital Machinery)	$0.86 billion	$1.10 billion	-21.90
Inflation	10.89%	9.41%	1.48 percentage points
Private Sector Bank Loans	1.41%	3.46%	-2.05 percentage points
Non-Performing Loan Ratio	16.93%	9.93%	7 percentage points
ADP Implementation Rate	17.97%	22.48%	-4.51 percentage points
GDP Growth	1.81%	6.04%	-4.23 percentage points
Reserves	$19.93 billion	$20.09 billion	-$0.16 billion

The political turmoil following the change in power and the deterioration of law and order have disrupted the country’s overall production.

In the first quarter, Gross Domestic Product, or GDP, growth was just 1.81 percent, marking the lowest post-pandemic expansion seen so far.

Without investment, job creation will stagnate, exacerbating unemployment.

Abul Kasem Khan remarked that the anticipated easing of barriers to the “cost of doing business” under the Mohammad Yunus-led government has not materialised.

"Ensure equal opportunities in business. Simplify licensing procedures. The momentum has yet to return," he said.

"There is still harassment in tax audits and tax payments by the NBR. Many people wonder whether they should focus on doing business or resolving audit issues. Time is spent dealing with audits and paying [value-added tax]."

The former president of DCCI questioned why, under the new system, businesses continue to feel apprehensive about taxes.

He said, "Businesspeople are not criminals; they create jobs and contribute to social welfare through taxes.

“With millions of people engaged in business in Bangladesh, if the right environment is not created for them, the crisis will deepen."

The impact of the instability caused by the deterioration of law and order after the change of power is still evident, as clearly reflected in government statistics.

Revenue collection between July and November of the current fiscal year has dropped by Tk 34.08 billion, or 2.62 percent, compared to the same period last year.

Even when considering the month of November alone, revenue collection has fallen by 8.95 percent compared to November of the previous year.

The interim government's slow-moving policy have resulted in less than a fifth of the Annual Development Programme, or ADP, being implemented in the first six months.

From July to December, ADP implementation stood at 17.97 percent, down from 22.48 percent the same period last year.

Private sector bank loan growth, already in decline, further dropped to its lowest point in 42 months, standing at 7.66 percent in November.

In May 2021, during the COVID-19 pandemic, loan growth for the private sector had fallen to 7.55 percent.

Foreign loan commitments in the first five months of the current fiscal year have decreased by 91 percent, while disbursements have dropped by 27 percent.

According to the Economic Relations Division, or ERD, Bangladesh received loan and grant commitments amounting to $5.86 billion from July to November in the 2023-24 fiscal year.

In comparison, the same period in the current year saw only $522.6 million, a 91 percent decrease.

Over the past five months, the government has repaid $1.71 billion in principal and interest on external loans.

This means that during this period, the amount spent on debt servicing exceeded fresh disbursements by $160 million (an 11 percent increase).

In the 2023-24 fiscal year, Bangladesh secured a total of $9.86 billion in external loans. During the same period, the country repaid nearly $3.36 billion in principal and interest.

Typically, loan disbursements exceed repayments. The trend was similar in the previous two fiscal years. However, this time, foreign exchange reserves have once again dipped below $20 billion within a month.

According to the most recent data from the central bank, Bangladesh’s foreign exchange reserves stand at $19.93 billion as per the BPM6 (Balance of Payments and International Investment Position) method recognised by International Monetary Fund, or IMF.

Moreover, import expenditure continues to rise, with the latest figures showing a 9.32 percent increase in import costs in October compared to the same month the previous year, amounting to an additional $500 million in expenses.

WHAT STEPS CAN BE TAKEN?

Abul Kasem stressed the importance of offering citizens the opportunity to work and ensuring their security.

He also suggested that in the short term, if chaos persists, the interim government should take strong action to restore order.

Moreover, he urged the government to meet business leaders every 30 to 60 days, listen to their concerns, and engage in discussions to address their challenges.

Though he disagreed with much of the caretaker government's policies of 2007-08, he praised the initiative of the “Better Business Forum”, which brought together public and private sector representatives to understand and improve the business environment.

AK Khan Company vice chairman believes that engaging with business leaders in the current government can help resolve many of the issues faced today.

On Nov 26, 2007, under the leadership of the then chief adviser of the army-backed caretaker government, Fakhruddin Ahmed, the Better Business Forum was formed with 38 members, including representatives from both the public and private sectors.

The forum’s first meeting took place on Dec 15 that year, where five working groups were formed to address business financing, infrastructure, macroeconomic policies, business start-ups and operations, and skill development.

These groups made several recommendations, with 114 proposals ultimately being finalised.

The recommendations were categorised into “immediate”, “short-term”, “medium-term”, and “long-term” actions.

The recommendations for the immediate action category included establishing separate funds for small and medium enterprises, or SMEs, with 40 percent allocated for small industries and 60 percent for medium industries.

Other suggestions included offering tax holidays, simplifying VAT procedures, and lowering interest rates on bank loans.

TAD Group MD Ashikur Rahman also highlighted the importance of improving the business environment.

He added that the country’s export performance, particularly in ready-made garments, relies heavily on its international image.

During the July revolution, foreign customers experienced difficulties, and although the situation has improved, long-standing issues remain.

"Power shortages, especially gas, have been a significant problem," he said.

Ashikur added that many companies were unable to fulfil commitments due to these shortages, leading customers to place orders in other countries.

April-May is approaching, a period often referred to as the "booking period" for garment exports.

He believes that, unless there is a resurgence of political instability or a loss of buyer confidence, this time could bring positive results for Bangladesh.

Naser Ezaz, former president of FICCI, stressed the importance of leveraging this period to enhance the investment climate.

He argued that a stable environment under an interim administration would encourage existing foreign investors to expand their operations.

Political cooperation, he added, is vital for fostering economic stability.

"If the government can demonstrate progress in law enforcement, inflation control, and anti-corruption efforts, investment confidence will rise, facilitating a swift return to normalcy," Naser said.

Economist Zahid is looking towards future political governments to restore rhythm to the economy.

According to him, the business climate remains unfavourable, and if the situation does not improve, overseas investment may continue to decrease.

"Whichever political party comes to power, if they can create a conducive business environment, investment will increase."

He thinks that the first two to three months of the current fiscal year saw a stagnation in economic activities, and its consequences will need to be addressed.

He also pointed out that the improper use of foreign loans taken by the previous government added pressure on debt repayment.

Centre for Policy Dialogue, or CPD, Honorary Fellow Mustafizur Rahman explained how the ongoing macroeconomic crisis is affecting the people.

He said, “The value of the currency has depreciated, which has increased import costs. VAT on various goods has been raised, and due to high interest rates, production costs have also risen."

"Businesses that took loans for investment are now having to repay more than their targets. In this situation, they are unable to increase production and supply. As a result, fixed-income and low-income people are suffering."

Mustafizur commented that the interim government has failed to meet many expectations.

"Our problems have accumulated. Unless the issues in the banking sector are resolved and defaulted loans are recovered, interest rates cannot be reduced."

"We had hoped the government would firmly ensure no disruptions in the supply chain and eliminate the influence of middlemen. But they couldn't manage that."

He recommended creating an enabling environment for imports, production, and investment, with a focus on mid-term investment, increasing production, and providing targeted support to low-income families.

[Writing in English by Sheikh Fariha Bristy]