Bangladesh's Epic Political-Economic Odyssey and the Pursuit of Rebirth

The Calm Before the Storm: Economic Background and Initial Growth (2014-2019)

The government focused on major infrastructure investments, enhancing transportation, energy, and digital networks.

In the late 2010s, Bangladesh's economy was stable yet unremarkable, with foreign exchange (FX) reserves hovering around $11 billion. The government maintained a conservative fiscal approach with moderate deficits, supported by controlled monetary policies that kept inflation in check. After the 2014 elections, the Awami League's continuous victory sparked a significant economic boost in Bangladesh through heightened capital expenditure.

The government focused on major infrastructure investments, enhancing transportation, energy, and digital networks. This drive for modernization spurred job creation, improved public services, and fueled overall economic growth, strengthening investor confidence and setting the stage for sustained development. Although growth was steady, there were no signs of sustainable expansion that would later unfold.

The Surge: Growth and Expansion (2020-2022)

Optimism was high, and it was widely believed that external shocks would not significantly affect the economy.

The COVID-19 pandemic hit Bangladesh hard, causing significant economic disruptions. Private sector growth slowed considerably due to the pandemic, resulting in limited investment opportunities. The slowdown in economic activity and cross-border trade closures contributed to a surge in FX reserves, as import demand decreased, and remittances continued to flow in. Following the pandemic, Bangladesh saw an increase in its foreign exchange reserves, which reached a peak of $48 billion in 2021, driven by strong exports, increased remittances, and reduced import costs due to lower global oil prices. This also led to an excess of liquidity in the banking system. Buoyed by these reserves and liquidity, the government embarked on large-scale infrastructure projects, supported by an expansionary monetary policy from the Bangladesh Bank (BB). Interest rates were kept low to fuel economic activity, and the money supply increased to fund government spending. Optimism was high, and it was widely believed that external shocks would not significantly affect the economy. The government also believed it had a buffer to support significant capital expenditure and infrastructure development.

Moreover, during the COVID-19 pandemic, the Bangladesh Bank provided financial incentives to businesses, but these were often misallocated, going to entities that did not contribute effectively to economic recovery. This misallocation led to increased liquidity, which, over time, fueled inflationary pressures, exacerbating the economy's long-term challenges.

The War and the Collapse: Impact of Russia-Ukraine War and Policy Missteps (2022-2023)

The government initially underestimated its potential impact on the global and domestic economy and continued its expansionary policies.

The Russia-Ukraine war marked a turning point for Bangladesh's economy. When the Russia-Ukraine war began in early 2022, the government initially underestimated its potential impact on the global and domestic economy. Confident in Bangladesh's economic resilience, it continued its expansionary policies, including significant capital expenditures, printing money, and maintaining a low lending rate to support businesses, particularly those linked politically. The Bangladesh Bank (BB) avoided raising interest rates, maintaining the lending rate at 9% to ensure that these corporations could borrow cheaply. These businesses capitalized on low borrowing costs to invest in inventory, which was appreciated due to inflation, further escalating prices. The BB's reluctance to raise rates contributed to inflation and mounting economic vulnerabilities.

Meanwhile, as global inflation soared, Bangladesh felt the strain. As import costs rose but remittances didn’t grow that much, FX reserves dwindled. BB’s continued money printing to finance government spending exacerbated inflationary pressures, destabilizing the financial sector and deepening the economic crisis.

Corruption and Institutional Decay (2014-2024)

Internal corruption, particularly in the banking and capital markets, played a significant role.

External shocks did not solely sow the seeds of economic turmoil; internal corruption, particularly in the banking and capital markets, played a significant role. After Prime Minister Sheikh Hasina’s second election win in 2014, corruption began to infiltrate critical economic sectors. The banking sector became a haven for politically connected entities to secure favorable loans with minimal oversight, leading to an increase in NPLs. The capital market also suffered, with regulatory bodies turning a blind eye to insider trading and market manipulation. This corruption undermined investor confidence and weakened the overall financial infrastructure, exacerbating the impact of external economic shocks.

The Crisis Unleashed: Economic Downturn and Government Response (2023-2024)

Inflation soared, and Non-Performing Loans increased significantly

As the economic situation deteriorated, inflation soared, and Non-Performing Loans increased significantly. The government's attempts to curb inflation by restricting imports led to supply-driven inflation, worsening the situation. By August 2024, with rising discontent and economic instability, Prime Minister Sheikh Hasina was ousted following a student-led uprising. An interim government led by Nobel laureate Dr. Muhammad Yunus took charge, signaling a shift towards more market-oriented policies to stabilize the economy.

The transition to this new government, though initially smooth, was marked by significant challenges. At least 650 students and other demonstrators were killed during nearly three weeks of clashes with security forces. The unrest disrupted air and sea traffic, leading to an estimated economic impact of over $10 billion. Bangladesh's FX reserves continued to decline, with the IMF projecting further reductions in import cover over the next two years. Despite these challenges, the DSEX Index rose 15% following the prime minister's departure, reflecting optimism about the country's future under Yunus' leadership.

The Dawn of Reform: Economic Reforms and Policy Recommendations (2024)

With the interim government in place, economic data previously suppressed began to surface. Inflation rates were reported at over 11% and double-digit NPL. The new BB governor indicated a shift towards more transparent, market-driven policies.

To stabilize Bangladesh’s economy, several key reforms are necessary. Monetary Policy should focus on allowing interest rates to rise to curb inflation and stabilize the currency. Fiscal Reforms are needed to increase government revenue through tax reforms, reduce fiscal deficits, and transition from direct infrastructure spending to Public-Private Partnerships (PPPs). Banking Sector Reforms must address high levels of Non-Performing Loans through independent Asset Reconstruction Companies and recapitalize banks to meet Basel III standards. Likewise, Capital Markets require removing restrictive controls, enhancing treasury bond market liquidity, and broadening participation. Trade Policy should reduce tariffs and non-tariff barriers, strengthen trade relations, and pursue Free Trade Agreements. Finally, Legislative Reforms are crucial, including codifying central bank independence, modernizing corporate and banking laws, and introducing transparency measures.

Lessons from the Abyss: Lessons from Sri Lanka and Future Outlook

Bangladesh can learn from Sri Lanka's recent economic crisis. By adopting transparent, market-driven reforms and strengthening institutions, Bangladesh can navigate its current challenges. The reforms initiated under IMF guidance in May 2024 provide a foundation for future growth. With decisive action and visionary leadership, Bangladesh could emerge from its current plight as a resilient, dynamic economy in South Asia.

The Epic Journey Ahead: Path to Renewal

Bangladesh has the potential to overcome its current challenges and forge a path to unparalleled prosperity.

At this critical juncture, the role of Bangladesh’s youth is paramount in shaping the nation’s future. Historically, the youth of Bangladesh have been instrumental in driving social and political change, from the Language Movement of 1952 to the Liberation War of 1971. The energy, innovation, and resilience of the younger generation offer a beacon of hope for the country’s economic revival. By embracing entrepreneurship, advocating for transparency, and participating actively in civic life, the youth can lead the charge toward a more prosperous and equitable Bangladesh.

To harness this potential, the government must invest in education, technology, and skills development, ensuring that young people are equipped to compete in a globalized economy. Additionally, creating an environment that encourages innovation and entrepreneurship will be critical in transforming Bangladesh into a dynamic, resilient economy capable of withstanding future challenges.

The road ahead will be arduous, but with the right policies, leadership, and the unwavering resolve of its people, Bangladesh has the potential to overcome its current challenges and forge a path to unparalleled prosperity. The promise of a resilient, thriving economy is within reach, waiting for the nation to grasp it with both hands.