Political chaos is sweeping through Bangladesh, threatening to derail crucial financial reforms and further destabilize an already fragile banking sector, according to a sobering report from S&P Global Ratings released on Wednesday.
The country has been plunged into uncertainty following the dramatic resignation and flight of Prime Minister Sheikh Hasina to India last week. Her departure was prompted by an explosive wave of student-led protests that escalated into some of the worst violence since Bangladesh’s hard-fought independence from Pakistan in 1971. The unrest has left a trail of devastation, with 300 people dead and thousands injured, pushing the nation to the brink.
In the wake of this upheaval, an interim government has been hastily installed, led by the respected Nobel laureate and economist, Muhammad Yunus. His task? To fill the gaping power vacuum and guide the country through to elections. Yet, the protests have only grown in intensity, now targeting key figures from Hasina’s administration, including the central bank governor and four deputy governors, all of whom have been forced to resign. A new central bank governor has been appointed, but the challenges ahead are daunting.
“We’re witnessing a heightened risk of policy paralysis and a significant slowdown in much-needed financial reforms,” said Shinoy Varghese, a credit analyst at S&P Global Ratings.
The situation in the banking sector, already precarious, has deteriorated further. Liquidity is drying up, capital buffers are razor-thin, and the quality of assets is plummeting. With the departure of senior central bank officials, the momentum for ongoing structural reforms has been all but lost.
The roots of this crisis trace back to July when a movement against quotas in government jobs erupted. Bangladesh, once hailed as the world’s fastest-growing economy with a GDP of $450 billion, is now grappling with skyrocketing youth unemployment, spiraling inflation, and depleting foreign reserves.
Desperate to avert a full-blown economic collapse, Hasina’s government turned to the International Monetary Fund (IMF) for a lifeline, securing a $4.7 billion bailout in January 2023. But the situation has only worsened. Weeks of violent unrest have stoked inflation to a staggering 11.66% in July, up from 9.72% just a month earlier. The government’s response? A nationwide curfew that brought the country to a standstill, halting transport, closing offices, and crippling the vital garments industry for days.
In light of the unfolding crisis, Moody’s Analytics has slashed Bangladesh’s GDP growth forecast for the year to 5.1%, down from an already bleak 5.4%.
“Bangladesh’s road to recovery from the currency crisis now hinges on the ability of any successor government to address public grievances and restore social order,” Moody’s noted in a recent report.
The Asian Development Bank (ADB), a critical partner in Bangladesh’s development journey, has vowed to collaborate with the interim government to steer the country back towards macroeconomic and fiscal stability.
“Our immediate priority is to ensure economic stability, but equally important is fostering private sector growth to boost competitiveness and create jobs,” the ADB said in a statement. “This involves working closely with the interim government to streamline government-to-business services and reduce the cost of doing business in Bangladesh.”
