As Bangladesh gears up for its upcoming general election in January 2024, it has successfully reached a staff-level agreement with the International Monetary Fund (IMF) on the first review of its $4.7 billion bailout program. However, concerns surrounding the nation’s political and economic future are still mounting.
Once celebrated as one of South Asia’s fastest-growing economies, Bangladesh now faces renewed uncertainty, with its challenges primarily stemming from external factors. Despite efforts by the Bangladesh government and assistance from neighbouring India, the country’s small-scale economy is finding it increasingly challenging to navigate the current global economic turmoil.
For years, Bangladesh enjoyed the status of being one of the world’s fastest-growing economies, but recent economic struggles have become apparent. The country has faced difficulties in financing imported fuel, primarily due to costly imports following Russia’s invasion of Ukraine, which significantly impacted its dollar reserves. The decline of these reserves by over a third posed a significant challenge to the country’s economic stability.
Why Bangladesh reaches out to IMF
Upon the completion of the first review, subject to approval by the IMF board, Bangladesh will gain access to approximately $681 million in loans. The IMF has applauded Bangladesh’s authorities for their substantial progress in implementing structural reforms under the IMF-supported program, but also highlighted the remaining challenges. Global financial tightening, combined with existing vulnerabilities, has made macroeconomic management challenging, resulting in pressures on the Bangladeshi Taka and foreign exchange reserves.
The IMF had previously approved $4.7 billion in loans to Bangladesh in January, providing an immediate disbursement of about $476 million. This made Bangladesh the first of three South Asian countries to secure such funds in response to their financial challenges.
Bangladesh’s central bank is hopeful that the IMF board meeting scheduled for December 11 will approve the second tranche of loans. The country is currently dealing with stubbornly high inflation, partly fueled by surges in energy and food prices, as well as a weakening currency.
Reasons for Bangladesh’s current economic turmoil
Under the leadership of Prime Minister Sheikh Hasina during the past three terms, Bangladesh witnessed remarkable economic growth, earning its place as South Asia’s second-largest economy, following only India. The nation boasts the highest per-capita income in the region and has made impressive strides across various social indicators.
There is no one reason for Bangladesh’s economic success as there are multiple factors including partly to the COVID-19 pandemic and the repercussions of the Russia-Ukraine conflict, both of which have led to a decline in exports and remittances.
Currency Depreciation and concerns of Inflation
The situation for smaller economies took a turn for the worse when the United States aggressively raised policy rates in response to record inflation exacerbated by the prolonged pandemic and the Ukraine war. This action triggered an exodus of investors from Asian markets, resulting in currency depreciation across many of these economies.
Currency depreciation has far-reaching consequences, including fueling inflation due to increased costs of imported food and energy. Additionally, it negatively impacts the current account balance, making it increasingly difficult for countries to finance necessary imports and service external debts. Bangladesh has been no exception, with the value of the Bangladeshi taka dropping by approximately 25 percent compared to the US dollar.
As of July 6, Bangladesh’s foreign exchange reserves had plummeted to $29.97 billion from $41.8 billion in 2022, marking a decline of about 28 percent over the past year. This sharp reduction is primarily attributed to challenges in the foreign exchange market, driven by the scarcity of the US dollar. Bangladesh is now grappling with difficulties in financing its imported fuel requirements, which are crucial for the country’s stability and development.
While India extended support to Bangladesh during the pandemic by supplying essential goods and raw materials for its industries, the deteriorating global economic conditions are starting to impact Bangladesh. All of this is unfolding at a critical juncture for the country as it approaches general elections.
US Pressure and defence ties with Bangladesh
In addition to economic challenges, Bangladesh is also contending with allegations of democratic backsliding, prompting actions from the Joe Biden administration. The United States has threatened to impose visa sanctions on several current and retired officials of the Rapid Action Battalion (RAB), a paramilitary force accused of assisting Hasina’s Awami League in previous elections and facing accusations of human rights violations.
The Biden administration’s actions, including omitting Bangladesh from democracy-focused summits while inviting countries like Pakistan and India, and its perceived neglect of Prime Minister Hasina during her visit to Washington, have raised concerns and emboldened Bangladesh’s main Opposition party, the Bangladesh Nationalist Party (BNP), as well as its former ally, the Jamaat-e-Islami (JeI).
The United States appears to be exerting pressure on Bangladesh to strengthen defense ties with the nation, driven by its strategic geographical location. The US has already provided frigates and military transport aircraft to Dhaka and is encouraging the Bangladeshi government to sign two foundational agreements—the General Security of Military Information Agreement and the Acquisition and Cross-Servicing Agreement. These pacts aim to enhance defense collaboration, facilitating opportunities for defense-related trade, information exchange, and military cooperation between the two countries. However, Bangladesh has not rushed to finalize these agreements.
In response, India has expressed its concerns to Washington regarding perceived destabilizing actions that could affect India’s security and the broader South Asian region. India is wary of America’s involvement in the context of the impending elections in Bangladesh and is apprehensive that concessions to JeI could pave the way for increased fundamentalism in Dhaka.
Both India and the US share a common understanding that the upcoming Bangladesh General Election must be free and fair. They advocate for the distancing of the Awami League from leaders with pro-Chinese and pro-Islamist inclinations, and they support the selection of non-communal candidates. These messages are expected to be conveyed to Prime Minister Hasina during her visit to Delhi next month, coinciding with her participation in the G20 summit.
Hasina’s government has made substantial progress in curbing fundamentalism and terrorism since taking office in January 2009. However, these achievements now face challenges due to the resurgence of the Jamaat. Furthermore, there is apprehension that China, with a significant presence in many South Asian nations, could capitalize on the evolving situation in Bangladesh. While the risk of Bangladesh falling into the Chinese debt trap is minimal, other strategic levers are in play. India and the United States aim to ensure that the election is conducted fairly and in a manner that promotes regional stability and security. The economic and political landscape in Bangladesh is at a pivotal juncture, with potential ramifications for the entire South Asian region.