The recently sworn-in Yunus-led interim government in Bangladesh is poised to face a range of pressing economic challenges. Chief among these are surging living costs driven by high inflation, a growing deficit in foreign reserves, substantial external debt, and an unstable foreign exchange market.
The interim government will also encounter the complexities of rising interest rates, declining investment, and liquidity shortages within the banking sector. Compounding these issues is the potential instability in the banking sector, particularly with concerns over ownership changes following the recent political transition.
Economists urge that controlling inflation and restoring stability within the banking sector should be top priorities. They note that irregularities and corruption in this sector had long been swept under the carpet, but now demand immediate attention.
Commenting on inflation, experts suggest that in Bangladesh, price hikes are more often driven by market syndicates than by broader macroeconomic factors, presenting a chance for the new administration to dismantle these entrenched groups.
Dr Zahid Hossain, former lead economist of the World Bank's Dhaka office, told The Business Post that the interim government is well-positioned to tackle market syndicates, as it gained its mandate from students and the public rather than large business interests. He also noted the importance of increasing market monitoring and ensuring that the supply chain remains undisrupted.
High inflation
Following efforts to revitalise the post-Covid economy, Bangladesh has been grappling with a severe dollar shortage, leading to a significant devaluation of the Taka. In the recently concluded FY24, the local currency depreciated by more than 25 per cent against the US dollar.
This devaluation resulted in a sharp increase in the prices of imported goods, further exacerbating inflation. Bangladesh is currently experiencing one of the highest inflation rates in South Asia, second only to Pakistan. In June this year, inflation stood at 9.72 per cent, with food inflation exceeding double digits.
Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), told The Business Post that controlling inflation is one of the key challenges the interim government is going to face. He advised the government to coordinate its fiscal and monetary policies while also focusing on effective market management. He said that the new administration must have accurate import data to maintain a balance between production and demand. Additionally, Mustafizur Rahman stressed the importance of ensuring sustained investment and restoring confidence among businesspeople.
Reserve crisis
The newly sworn-in interim government, led by Dr Muhammad Yunus, has started its journey with the $16.57 billion net reserve left by the outgoing Awami League government led by Sheikh Hasina, which may prove insufficient to cover three months of import expenses.
To address the reserve crisis, the $4.7 billion loan programme initiated by the outgoing administration in cooperation with the International Monetary Fund (IMF) is ongoing. Bangladesh has already received three instalments of this loan, with discussions underway for the fourth. Government officials remain optimistic that the fourth instalment will be released without major issues, given the leadership of Dr Yunus.
An official from the Ministry of Finance, speaking on condition of anonymity, told The Business Post that concerns over the fourth instalment have eased since the formation of the interim government under the leadership of Dr Yunus.
Meanwhile, Bangladesh Bank introduced the crawling peg system in May this year as a condition for the third instalment of the IMF loan, which adjusts the exchange rate of the Taka against foreign currencies within a set range. Currently, under this system, the exchange rate for the US dollar stands at Tk 118.
Banking sector
The interim government led by Dr Muhammad Yunus faces a significant challenge in addressing widespread irregularities and corruption within the banking sector. As of March this year, non-performing loans (NPLs) have exceeded Tk 1.82 lakh crore. Meanwhile, amid the political transition, Bangladesh Bank Governor Abdur Rouf Talukder has been absent from his duties.
The deputy governors on Wednesday left the central bank following protests by staff, leaving Bangladesh Bank in a state of leadership vacuum. Additionally, several banks, including Islami Bank Bangladesh, owned by the S Alam Group, are experiencing instability, with internal factions reportedly expelling each other from offices.
Dr Ahsan H Mansur, speaking to The Business Post, stressed the need for the interim government to take immediate action to clean up the financial sector.
"Irregularities and corruption were the dirt swept under the carpet for too long, but now they are starting to emit a foul odour, making the consequences unavoidable. The issues of bad loans, misconduct, and corruption must be addressed without delay," he added.
Cash crunch hits banks
Bangladesh is currently facing a severe cash crunch, affecting the daily operations of banks across the country. Some banks are struggling to secure funds even in the call money market, which typically provides short-term liquidity. To manage the situation, Bangladesh Bank has stepped in to offer overnight loans to banks, similar to those in the call money market.
The recent leadership transition has led to a sudden surge in cash withdrawals from banks. It is believed that individuals who had deposited money from questionable sources are now withdrawing their funds due to the uncertain political climate. In response, Bangladesh Bank issued a notice on Wednesday, limiting cash withdrawals to Tk 1,00,000 per account for that day.
Industry insiders note that the liquidity crisis in the banking sector has been ongoing for some time and has worsened recently. In an effort to control inflation, the central bank's contractionary monetary policy has tightened the money supply in the market, exacerbating the liquidity crisis. To mitigate the crisis, Bangladesh Bank has been regularly providing cash support to banks.
Dr Ahsan H Mansur expressed concern over the situation, noting that banks are showing profits by recognising interest on loans as income without actual loan recovery. This "profit" is then used to pay dividends and taxes, even though no real income has been generated, which is impacting the liquidity of the banks, he added.
Interest rates & investment concerns
To rein in inflation, Bangladesh Bank has raised the policy interest rate to 8.5 per cent. Meanwhile, the ongoing liquidity crisis has led to increased demand in the call money market, driving up call money interest rates and, consequently, the cost of borrowing.
One of the key objectives of the quota reform movement was to create employment opportunities for educated young people, which requires increased investment in the private sector. However, business leaders are concerned that rising interest rates could pose a significant obstacle to this goal.
Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said that stabilising law and order and improving infrastructure and the economy would help normalise the business environment.
“To improve the investment climate, the National Board of Revenue (NBR) must be brought under transparency and accountability, as it often acts as a barrier to investment. The interim government needs to adopt a more investment-friendly approach,” he suggested.
Revenue crisis
Despite the recent increase in loan interest rates within the banking sector, inflation remains close to 10 per cent, and revenue collection targets are still far from being met. Experts suggest that the interim government is likely to face a significant financial crisis as a result. How the new administration plans to navigate this challenge remains to be seen.
Sources within the Ministry of Finance say that a detailed report on the current economic situation has been prepared for Dr Salehuddin Ahmed, the newly appointed adviser overseeing the finance ministry in the interim government and a former Bangladesh Bank governor. The report outlines the current state of the financial sector, including the latest import and export data.
