The economic challenges faced by Bangladesh amid its political churn

Bangladesh’s economy is confronted with two core challenges: high inflation and weak macro-economic stability

Former Prime Minister Sheikh Hasina’s Awami League government, which ruled Bangladesh for 15 years, fell in the face of mass protests against a controversial job quota rule on August 5. The reasons behind the dramatic fall, captured on live television and tracked globally, are not quite straightforward: Both economic and non-economic factors acted as catalysts.

Garment workers break for lunch during work hours, in Dhaka on July 24, 2024. Garment factories and banks reopened in Bangladesh on July 24 after authorities eased a curfew imposed to contain deadly clashes sparked by student protests over civil service employment quotas. (Photo by Maruf Hasan / AFP)

As I write this piece on Tuesday, August 6, steps are being taken to form an interim government until a formally elected, democratic government is in place in Bangladesh.

This big political shift has taken place at a time when the country faces sharp economic challenges - there is no denying that at the moment the economy of Bangladesh is confronted with at least two core challenges: high inflation and weak macro-economic stability. Despite impressive successes in a number of socio-economic indicators and consistently high growth for years, there are a number of challenges including the ones mentioned above.

These challenges have partially been attributed to the falling value of the taka (Bangladesh’s currency) against the US dollar and a declining trend in foreign remittance earnings and modest export inflows. For the last few months, the rate of inflation has been over 9% with a several-fold fall in the value of Bangladesh taka against the US dollar (from 95 taka/dollar in August 2022 to 118 taka/dollar in August 2024).

The depleting foreign reserves ($26815.2 million as of June 2024, which was $39599.9 million, in July 2024) is another area of concern for policymakers and Bangladeshi economists.

Though a number of steps — especially in terms of monetary policy — have been taken by the Central Bank of Bangladesh to mitigate the country’s economic woes, their impact has been minimal because of delayed policy interventions and, in fact, in some cases, wrong policies.

Against this backdrop of severe economic challenges, the sudden ouster of Hasina and the uncertainties involving a regime change will have crucial implications for the economy; certainly, in the short run.

With near hyperinflation already in place, prolonged curfews, internet blockages and unrest have already affected the supply chains of several commodities. It is therefore extremely important to restore the supply chains of important commodities, especially food items. The other challenge -- reversing the inflation rate even to a tolerable level, say, by a few percentage points, will take time.

Multiple economic challenges

On one hand, it is crucial to take quick steps to extend and deepen social safety net measures to a significant extent; on the other, it is crucial for the new administration to take strict measures to rectify the market management system.

Another complex area for the interim government to face is to revert the declining trend in foreign exchange reserves. In the short run, that will require stimulating both exports as well as remittance flows. In the case of the former, boosting private investment at this time, when the government is in transition while keeping the inflation rate under control is certainly a complex task. It will take time to restore business confidence, and clear pending orders and backlogs.

Encouraging remittance flow will require a number of steps. A gradual movement towards a market-driven exchange rate regime should be implemented while the surging trend in capital flights and black money circulation should be dealt with through strict policy measures. Quick yet well-planned monetary policy initiatives will be helpful in this regard.

While dealing with short to medium-term economic challenges, the interim government should not forget about the medium to long-term priorities.

The primary focus area in this context should be to generate employment for the youth. The student movement and protests to force the government to retract the quota system in public sector jobs should be considered a reflection of Bangladesh’s bleak employment scenario.

A detailed road map to generate quality jobs and facilitate self-employment initiatives for the youth must be drawn up and implemented: This should be aimed at both high-skilled as well as low-to-medium-skilled youths.

Here, it becomes more complex. The agenda of employment general is closely related to reforms in the education sector. A thorough reform of the sector is required to streamline the multiple education streams and increase budgetary allocation in the sector. The reforms should focus on improving the quality of education and allocating sufficient resources is important in this regard.

Certain fundamental and structural changes are also essential in the health sector, including that of bringing efficiency in the delivery of public health services. One fundamental issue at this time of crucial political transition is to concentrate on the two fundamental pillars of Bangladesh's economy — the ready-made garments sector and remittance earnings. At all stages of development, these growth drivers should be protected and promoted through carefully framed policy support.

In order to confront multiple economic challenges, the most crucial requirement is to ensure political stability and to restore law and order.

The government must set its priorities right while focusing on the key fundamentals for development. As demanded by student protestors, an overall reform of key economic institutions especially those in the financial sector and fiscal sectors, and increasing revenue earnings are essential to tackle and resolve economic challenges. In this regard, it is needless to mention that the reform initiatives must focus on ‘treating’ the long-term illness of widespread corruption, nepotism and favouritism often backed by political leaders.

Special emphasis must be given towards tackling capital flight. Such reforms are fundamental to bring back the economy to its pre-Covid pandemic growth trajectory in the short to medium term and to ensure high and sustainable economic growth with distributive justice in the longer term.

In this connection, the long-term economic goal of the country, in my view, should be focused on the quality of development that focuses on tackling inequality, reducing poverty and generating ‘decent’ employment opportunities. The student movement of July 2024 revealed the strength of Bangladesh’s youth population and the commitment of its citizens to a fair and just society. Therefore, with strong political commitment and willingness to initiate reform, such youth power can certainly transform Bangladesh’s economy for the better and propel it to a bright future.

Sayema Haque Bidisha, is professor, Department of Economics, University of Dhaka. The views expressed are personal