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Bangladesh—Political instability exacerbates economic risks
Sheikh Hasina—who led Bangladesh for 20 of the past 28 years—resigned as prime minister and fled Bangladesh this month following violent demonstrations. What began as student-led protests opposing public-sector job quotas quickly escalated into an anti-government movement. Despite robust GDP growth, unrest was driven by rising living costs, stagnant labour markets, violent crackdowns on dissent and corruption (Chart). Economist Muhammad Yunus—a Nobel laureate and microfinance pioneer—will lead an interim administration. Yunus is well credentialled to stabilise the economy, secure ongoing support from development partners, and restore business confidence. The interim administration’s composition will also satisfy student protestors.
However, amid a highly polarised society, challenges to restoring constitutional order are significant. Bangladesh has long been characterised by dynastic power politics and cronyism. A functional electoral democracy will require a) judicial and other institutions to be substantially strengthened, and b) new political leaders to fill the vacuum left by Hasina’s unexpected departure.
The political crisis also worsens economic and public finance risks. Bangladesh began a 42-month, US$4.7 billion IMF program in January 2023 to preserve macroeconomic stability. However, high commodity prices and global financial tightening continue to pressure foreign reserves and the taka. Fitch and S&P recently downgraded Bangladesh’s credit rating, the latter noting that the political situation “has exacerbated the banking industry’s frailties, including weak liquidity, thin capital buffers, and ailing asset quality”. Credit buffers may deteriorate further if lower remittances and factory closures are prolonged. Exports of garments were US$50 billion last financial year (90% of exports and 11% of GDP). Buttressing economic stability requires implementing long overdue economic reforms and improving governance. That said, a large pool of low-cost labour suggests Bangladesh—Australia’s 25th largest export market—would be hard to replace in the long term.
