Overcoming damage to restore an investment-friendly economy

In the wake of the student movement aimed at reforming the quota system, Prime Minister Sheikh Hasina has resigned and left the country. This event marks a significant moment in Bangladesh's political history. The students began their peaceful and non-violent movement on July 1, seeking quota reforms. However, the movement later turned violent. By mid-July, the protests had escalated to violent attacks on key state establishments, including the Bangladesh Television Building, the metro rail, and the Roads and Highways Department. There is debate over who exactly carried out these attacks, as the students claim they were not involved in any attacks on state property. Hence, it is difficult to determine the exact culprits.

As the movement became violent, law enforcement agencies attempted to suppress it with a firm hand, resulting in many deaths. Some estimates suggest the death toll could be over three hundred, with a majority of the casualties being students. Additionally, many children and teenagers lost their lives. The large number of fatalities during the protests is undeniably tragic and unacceptable. The financial cost of such a loss cannot be quantified. Only those who have lost their loved ones can truly understand the magnitude of this loss. In Bangladesh's history, no student movement has ever resulted in such a significant number of casualties. This particular student movement was also unique in its nature. Although it began with demands for quota reform in government jobs, it eventually escalated to a single demand: the resignation of the Prime Minister and all government ministers.

The student movement has significantly impacted the country's economy. For several days, all factories and production facilities were effectively shut down, and the transportation system was severely disrupted. In summary, apart from the agriculture sector, every other sector has suffered damage. Some estimates suggest the financial losses across various economic sectors could range from 1 trillion to 1.2 trillion BDT. This is not the final estimate, as no official statistics have been released yet. However, it is evident that the movement has caused substantial economic damage, and it will take a long time to recover from this setback. The country's economy is already facing several complex challenges, and the financial loss during the protests will be considered a significant blow. Efforts must be made to increase production in every sector to compensate for this loss.

For nearly two years, Bangladesh has been grappling with high inflation rates, with the current average inflation rate being 9.5%. Efforts to reduce inflation to a manageable level have been unsuccessful. The budget for the current fiscal year aims to bring the inflation rate down to 6.5%. The monetary policy implemented for July-December also targets a 6.5% inflation rate. However, the student movement in July is expected to cause an increase in inflation. Therefore, any potential reduction in inflation will be disrupted. The inflation statistics for July will provide a clearer picture of the direction in which it is heading.

The World Bank has already placed Bangladesh on the red list due to rising food inflation. According to the Bangladesh Bureau of Statistics, food inflation was in double digits for 7 out of the last 12 months. The average inflation rate for the fiscal year 2023-24 was 9.72%, the highest in a decade. Inflation never fell below 9% throughout the fiscal year. Following the post-COVID-19 Ukraine war, global inflation rose abnormally, with the United States reaching an inflation rate of 9.1%. Through measures like increasing the policy rate, the U.S. managed to reduce its high inflation, currently at 3.4%. Even Sri Lanka, a country facing significant economic problems, reduced its inflation from 79.80% in 2022 to 2.40%. Due to the economic damage caused by the student protests, there is a risk of inflation rising further in the future. Thus, the most urgent issue now is to find ways to quickly reduce inflation. The general populace is already severely affected by the upward trend in inflation.

Another pressing economic concern is the declining foreign currency reserves. Despite efforts, foreign reserves are not increasing to the expected levels, and this trend could lead to serious problems in the future. Over the past year, foreign reserves have decreased by $10 billion. According to the International Monetary Fund (IMF) accounting method, the reserves stood at $20.48 billion at the end of July. Export earnings and remittances play a crucial role in building foreign reserves, but both sectors are currently struggling. In July, export earnings were lower compared to the previous two months. In May 2024, goods worth $4.273 billion were exported, while in June, it was $3.886 billion, and in July, the earnings were $3.819 billion. Remittances also faced issues, with the amount received in July being the lowest in the past ten months. The protests led to curfews nationwide, three days of public holidays, and internet shutdowns for several days, disrupting the flow of remittances. Additionally, there is an increasing trend among expatriate Bangladeshis to send remittances through unofficial channels like hundi instead of banking channels. During the protests, there were campaigns urging expatriates not to use banking channels. If this situation is not quickly resolved, it could lead to a remittance crisis in the future.

After the new government takes office, extensive reforms will be necessary in various sectors of the economy. The banking sector, in particular, urgently needs reform. A high-level commission could be formed to oversee banking sector reforms. Effective measures must also be taken to recover the large amount of non-performing loans. According to Bangladesh Bank, the banking sector's non-performing loans amount to about $1.85 trillion BDT, but this is not the actual figure. When written-off loans, loans claimed in pending projects, and rescheduled loans are included, the amount of non-performing loans is estimated to be around $3.75 trillion BDT. Non-performing loans significantly contribute to the current liquidity crisis in the banking sector.

A strong commission could be formed to oversee overall financial sector reforms. Ensuring that the bond market and stock market function effectively is crucial. If the stock market operates well, it would reduce the pressure on banks to provide long-term loans. The revenue sector in Bangladesh is also not in good shape, with revenue collection often falling short of targets. Consequently, the government has to borrow from domestic and foreign sources to meet various development expenses. Currently, the tax-to-GDP ratio is less than 8%, while neighboring countries have much higher ratios. Efforts must be made to increase tax collection by expanding the tax network and making the collection process more transparent and accountable.

The recent student protests have sent various messages about Bangladesh to the international community. Without political stability, foreign investors are reluctant to invest in a country. Before making investment decisions, foreign investors prioritize the security of their capital and adequate profits. Efforts must be made to improve Bangladesh's image in the international arena.

Author: Economist and Executive Director, Policy Research Institute (PRI)
Transcribe: M A Khaleque