Bangladesh has gone from being a global “basketcase” – Henry Kissinger’s words – to being hailed as an emerging Asian tiger. But now, South Asia’s standout economic success story has hit the buffers. Inflation’s at multi-year highs, growth is slowing, foreign-exchange reserves have rapidly shrunk and there rampant corruption.

So how did the development superstar become unstuck? “Inflation and the currency crisis are two blisters on our economy which need immediate surgical treatment,” says Zahid Hussain, a former lead bank economist at the World Bank.

While Bangladesh’s GDP-per-person of $2,600 is still higher than India’s, Dhaka’s been forced to go cap-in-hand to the IMF for a $4.7-billion bailout to tide it over a hard-currency shortage and prop up its economy.

But even sealing the IMF deal in January hasn’t bettered Bangladesh’s prospects. Just last week, Moody’s Investor Services cut Bangladesh’s credit rating to B1, putting it four notches below investment grade and driving it deep into “junk” or speculative territory. While Bangladesh isn’t in the same boat as crisis-racked Sri Lanka or Pakistan, Moody’s called the financial risks facing the country “persistent.”

Forex situation dire

In the last couple of years, Bangladesh’s foreign exchange situation has become dire. Since mid-2021, battered by surging import costs, Bangladesh’s dollar reserves have slid by 40 per cent to $29 billion. Now, the spectre of crude oil shortages is looming because the country hasn’t been paying its bills.

Bangladesh is also running short of the coking coal needed to operate its power plants, again because bills haven’t been settled. Coal shortages have even shut down one unit of the Payra mega-power plant. As a result, the country that proudly proclaimed it had achieved nationwide 100-per-cent electrification is now enduring sweltering, hours-long power cuts even in the capital city.

The outlook is complicated by the fact that elections are due in early January 2024. Seventy-five-year-old Awami League Prime Minister Sheikh Hasina could face a tougher fight than before amid rising voter discontent over higher food and fuel costs. Violence in the streets could be on the cards. Ultimately, though, it’s a contest Sheikh Hasina’s expected to win given her drive to turn the country into a virtual one-party state – she and her allies won 288 seats of 300 seats in the last polls. She’s put her rival, Khaleda Zia, who leads the Bangladesh Nationalist Party, under intermittent house arrest, worn down the rest of the Opposition and cowed the media into submission.

Unprecedented US warning

The Americans, though, have just complicated the electoral battle by issuing an unprecedented warning that anyone found interfering with free and fair polls won’t be allowed entry into the US. What’s more, their families will also face the visa ban. The US warning, part of its “values-based foreign policy,” has caused a considerable consternation in Bangladesh with everyone from election officials, police officers and the Opposition included in its extraordinarily wide-ranging terms.

On Thursday, June 1, the government delivered its annual budget, announcing higher taxes and removal of subsidies to meet stiff IMF conditions but nothing to win over poorer voters whose lot was worsened by the pandemic. In fact, many observers accused the government of favouring the well-off over the poor. There’s a minimum tax of TK 2,000, for instance, even on people earning below the current tax threshold. Commented the Daily Star newspaper: The government “made changes to its tax credit rule on investment that benefited higher-income individuals and put more burden on low-income taxpayers.”

How did the positive picture of an economy, whose growth model was widely admired turn so negative so fast? In the recent past, Bangladesh’s autocratic prime minister, Sheikh Hasina, has been stumbling from one error to another – on interest rates, macroeconomic policy and by introducing unconventional exchange-rate policies.

Interest rates fixed for 12 months

Says Ahsan H. Mansur who heads the Dhaka-based Policy Research Institute: “The single biggest mistake was keeping interest rates fixed for 12 months despite higher inflation.”

That wasn’t all. Sheikh Hasina’s Awami League government had maintained a de-facto fixed exchange rate system but suddenly last September decided it would no longer support the taka and it allowed the currency to float. The result was extreme currency volatility so the government instructed the Bangladesh foreign exchange dealers to fix a rate that was widely flouted in the black market. Then, the government made the situation worse by introducing a different exchange rate for exports and imports.

Quickly, the flow of dollars into the country via official routes dried up, even from Bangladeshis working abroad. In 2022, almost 1.1 million Bangladeshis went to work abroad. That compared to around 600,000 in 2021 and lower numbers in preceding years. Nevertheless, remittances have fallen steeply, showing that more workers than ever before are using informal channels to send back their money.

'Whole system underground'

Says Hussein: “The whole system’s gone underground. Even the export dollars are not coming back. The export receipt numbers are very hard to reconcile with the export shipments.” The Bangladesh central bank is also now insisting it has to give clearance for any letters of credit of over $3 million which is a further burden on trade.”

Bangladesh grew at an annual rate of 7 per cent for the 10 years before the pandemic and logged 7.1 per cent growth in 2022. But this year growth is expected to be just 5.3 per cent while inflation is at over 9 per cent,

Some of the seeds of Bangladesh’s economic woes were laid quite some time ago. One problem is that Sheikh Hasina opted for growth at all costs. During the electrification drive, she ruthlessly cut through red tape to ensure her ambitious targets were met. The result is that electricity costs are high and there’s no competition between companies. Now, with fuel shortages, her much-vaunted electrification drive is in danger of fizzling.

Thrust on mega infrastructure

The thrust has always been on mega-infrastructure building with projects like the Padma Bridge, the Cox’s Bazar rail link, the Dhaka Elevated Expressway and the Rooppur Nuclear Plant. But the problem is that mega-projects like these, while being sound long-term investments, don’t bring in quick economic returns. The $13-billion Rooppur plant is also stalled because of sanctions against Russia, with which it is being built. Says Mansur: “We’re facing political headwinds.”

The government’s been making other moves that are raising eyebrows. Even though she’s always stressed she runs a secular government, Sheikh Hasina is planning a nationwide mosque-building spree for an estimated $1 billion. But the drive’s unnecessary as private individuals are always more than willing to erect new mosques. Says a leading commentator: “She calls herself secular. At the same time, she’s building these 560 mosques. Bangladesh has so many mosques, some of which are already empty or only have two or three rows filled up.”

Bangladesh’s rise towards prosperity has been driven by its readymade garment industry which has made huge leaps even while India’s sector has lagged. But the overdependence on readymade garments is also a major weakness. The worry is that Bangladesh may soon lose the preferential trade terms linked with its least developed status as competition from lower-cost producers like Cambodia sharpens. Bangladesh aims to emerge from being a least-developed country by 2026.

Unsuccessful attempts at diversifying

Efforts to diversify into other sectors like pharmaceutical and electronics have been largely unsuccessful, hampered by red-tape, corruption and an ongoing brain drain. Says a new World Bank report, “The current export basket is as heavily dependent on readymade garments (at 83 per cent of total exports in 2020) as it has been in the past two decades.”

Sheikh Hasina has always had to play a delicate balancing game between India, China and the US. She’s India’s clear favourite amongst Bangladesh’s various political players. But China’s made big inroads, implementing many mega-projects of which Hasina is proud. The Chinese ambassador just announced most of China’s projects are nearing completion and it’s looking for new ones.

The Americans and Sheikh Hasina have a more problematic relationship. But Washington laying down the law on democracy in Bangladesh is seen as a sign it considers worries about pushing the country into China’s arms exaggerated given Dhaka’s critical export reliance on the US.

Overhaul tax system

Can Bangladesh pull out of the weak position that’s it right now? Mansur says it needs to overhaul its tax system to bring in more money. The tax-to-GDP ratio used to be 11 per cent but is now just 7.5 per cent. Says Mansur: “How can you run a country with so little revenue?” He adds: “They haven’t done anything significant to modernise the tax system which is inefficient and corrupt.”

So with this range of problems, is it likely that the country of 167 million can achieve its goal of being an upper-middle-income status over the next couple of decades? Bangladesh’s challenges are formidable. Economists say the Awami League needs to loosen its grip on the country that is stifling business and industry and prompted foreign investment to stagnate. Contracts, jobs and licences all flow through the ruling party, often going to political cronies. Bangladesh is ranked the worst place for doing business in South Asia and is high on global corruption indices.

Then, there’s that other pressing challenge: climate change. The World Bank says the low-lying country could see a third of its agriculture production wiped out by mid-century and millions of Bangladeshis forced to migrate. It all means Bangladesh needs to move smartly to ensure its previous hard-won economic gains aren’t reversed.