The new year ushers in a deepening economic crisis, exacerbated by money laundering, corruption, mismanagement, and looting. Economists and analysts warn that persistent challenges, such as stagnation in business and trade, labor unrest, declining investment and employment, massive defaults on loans, high inflation, and volatility in the dollar market, will continue to impact the economy. They stress that recovery will depend on political stability and effective government policy.
Industry experts predict the industrial sector will face intensified difficulties due to strict import controls, while a contractionary monetary policy designed to curb inflation could limit the flow of capital into the economy. This may drive up loan interest rates, hinder investment, and slow job creation.
For the interim government, key economic priorities will include increasing revenue amidst recession, addressing vulnerabilities in the banking sector, and ensuring strong financial governance. Tackling these challenges will be essential for stabilizing the economy and laying the groundwork for future recovery.
High inflation, which has plagued the economy throughout the previous year, is expected to continue into 2025. According to the latest data from the Bureau of Statistics, inflation in 2024 surpassed 10 percent, though the accuracy of this figure remains a point of contention.
Since the change in government, inflation has averaged around 11 percent, with food prices soaring by 13.88 percent in recent months. Meanwhile, the national wage rate has stagnated at 8 percent for several months, resulting in incomes growing more slowly than inflation, which is placing increasing financial strain on households.
Despite efforts to combat inflation through interest rate hikes and tax reductions, the new government has struggled to curb rising prices. Economists warn that the government's decision to print money could exacerbate inflation if it continues into 2025.
Fahmida Khatun, executive director of the Center for Policy Dialogue, a private research organization, said, “The economic decline of the past two to three years will likely persist into the next year. Recovering from this economic turmoil will take time.”
Following the July coup, the Ministry of Finance and the Central Bank implemented various measures to stabilize the economy, but challenges remain. Inflation, dwindling foreign exchange reserves, financial sector corruption, and stagnating investment have created a fragile macroeconomic environment. Although the government has raised policy interest rates and adopted a contractionary monetary policy in an attempt to reduce inflation, these measures have not yielded the desired results. Inflation continues to climb, and tightening monetary policy alone cannot address its root causes.
Khatun further stressed that declining investment and rising interest rates will likely stifle business growth and trade, with small businesses expected to bear the brunt of the economic pressures. She urged the government to take urgent action to restore stability in the banking sector, suggesting that weak banks should be merged to strengthen the financial system.
Default loans set to surge
Bangladesh Bank Governor Ahsan H Mansur has issued a stark warning that Default loans in the banking sector could nearly double within the next six months. He stated, "We are currently conducting a health check of the country's financial sector. Default loans, which currently stand at 12.5%, are projected to reach 25-30% in the future. Next month, they will likely rise to 15%, then 17%, and may gradually approach 30%. This default has already occurred; it is now just being accounted for. We have begun efforts to address this."
Experts in the sector have expressed concerns that the total amount of Default loans could exceed five lakh crore taka if the International Monetary Fund (IMF) conditions are implemented. This risk stems from the IMF's recommendation to revise the definition of Default loans and adopt international standards for loan rescheduling policies. Loans, issued under irregularities during the Awami League government's tenure, are now defaulting one by one, further exacerbating this negative trend in the financial sector.
Maintaining export growth a major challenge
The garment industry faces significant hurdles in maintaining export growth, with challenges such as labor unrest and broader economic crises affecting the sector's outlook.
Mohiuddin Rubel, former director of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), highlighted that sustaining growth in the ready-made garment sector in the coming year will be difficult. "Political instability has tarnished the country's image to some extent, and security concerns have hindered factory operations for many owners. As a result, buyer confidence has waned," Rubel explained. He also pointed to both domestic and foreign conspiracies as additional obstacles. "Overcoming these issues and getting exports back on track will be a major challenge," he added.
Stagnation in business and trade
Several industrial sectors, along with medium and small entrepreneurs, are grappling with a significant slowdown in business and trade. Traders face difficulties in accessing Letters of Credit (LCs), forcing many to suspend operations. The lack of sales is apparent in grocery stores and on the streets, where commerce has virtually ground to a halt. This widespread inactivity is causing a cash flow shortage within communities. Moreover, new investments are not entering the country, and employment opportunities remain stagnant. Consequently, the challenges stemming from the dollar crisis and high loan interest rates are expected to persist into the new year.
Mohammad Hatem, President of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), remarked, "Raising the policy interest rate directly leads to higher bank loan interest rates. This has intensified the burden on businesses. With no new investments in sight, the business community is struggling to survive. When bank interest rates rise, everything is disrupted—installment payments increase, and profits shrink."
Zahid Hussain, former chief economist at the World Bank's Dhaka office, noted, "Political uncertainty has created a climate of hesitation in business and trade. Entrepreneurs are concerned about the political direction over the next year to a year and a half, and who will come to power. To stimulate investment and employment, it is essential to restore the confidence of the business community."
Global agency’s economic forecasts
Fitch Ratings: The global credit rating agency has maintained a negative economic outlook for Bangladesh in its latest Asia-Pacific (APAC) Sovereign Outlook report.
S&P Global and Moody's: Both of these major credit rating agencies have downgraded Bangladesh’s credit rating, reflecting concerns about the country's economic stability.
International Monetary Fund (IMF): The IMF has warned that Bangladesh’s economy is in a more vulnerable state following political instability. Inflation remains uncontrollable, exceeding the IMF’s expectations. The IMF projects real GDP growth will fall to 3.8% in the 2024-25 fiscal year, largely due to political unrest, floods, and strict policies.
World Bank: The World Bank has revised its growth forecast for Bangladesh, predicting a 4% growth rate in the current fiscal year.
Economists' insights
Khondaker Golam Moazzem, research director at the Center for Policy Dialogue (CPD), identified three major risks to the country’s economy over the next two years: corruption, inflation, and a range of 17 challenges, including high tax rates, that could stifle business and trade.
Mashrur Reaz, chairman of the Policy Exchange think tank, acknowledged the difficult economic conditions at the start of the new year. “We are grappling with persistent macroeconomic problems that have plagued the country for the past two and a half years,” he stated, pointing to inflation, balance of payments issues, fluctuating foreign exchange rates, and a struggling banking sector as primary concerns. He blamed many of these issues on the previous government's policies and widespread corruption.
Reaz underscored the urgent need to increase the supply of goods in the market, which has been constrained by import restrictions, leading to shortages and driving up inflation. “To stabilize the situation, we must normalize imports and strengthen foreign exchange reserves,” he said, though he warned that inflation would not subside quickly. He also noted that the central bank had recently injected 22,000 crore taka to support six troubled banks and urged Bangladesh Bank to take a cautious, measured approach—similar to the past five months—by assessing the situation, preparing a recovery plan, and protecting depositors' interests, potentially through mergers for banks unlikely to recover.
Additionally, Reaz pointed out that inflation has raised the cost of doing business, while reduced market demand, higher interest rates, and difficulties faced by small and medium-sized traders—especially in accessing letters of credit (LC)—are further complicating the economic landscape. “Special attention is needed for these traders,” he stressed.
Courtesy of: Masud Rumee’s post, originally published in Kaler Kantho.
Translated by: Jisan Al Jubair
Bd-pratidin English
