Despite printing money to provide liquidity support, weak banks are still failing to meet customers’ demands for funds.Pause
Loans taken during the previous government’s tenure remain unpaid, escalating non-performing loans. Inflation has also increased.
Meanwhile, the rise in interest rates on bank loans has halted business expansion and new investments. Most entrepreneurs are struggling as costs for business and investment have surged.
To curb inflation, Bangladesh Bank raised the policy rate to 10%, causing bank loan interest rates to climb as high as 15%.
Small, medium, and large businesses, heavily reliant on bank loans, are the hardest hit.
The rate of opening letters of credit (LCs) has dropped by 7%, and production has fallen by 25% to 40%.
The economy, already battered by money laundering, corruption, mismanagement, and plundering during the previous government, shows no signs of recovery.
In the five months since the interim government took charge, the fall in foreign currency reserves has been halted.
However, trade remains stagnant, industries are marred by labor unrest, and negative trends in investment and employment persist.
Particularly in July and August, economic activities were severely disrupted. Food inflation surpassed 14% in July.
Factories experienced incidents of vandalism and arson in August, followed by widespread floods. For months, industrial zones have faced unrest over demands for wage increases.
Yet, there is positive news in remittances. December saw a record $2.64 billion in remittances, the highest in the country’s history.
Exports have also seen growth. In December, goods exports brought in $4.627 billion, a 17.72% year-on-year increase, improving foreign currency reserve conditions.
By year-end, total reserves rose to $21 billion.
The interim government has reduced import duties and taxes on essentials like rice and edible oil and taken measures such as lowering LC margins to facilitate imports.
However, these measures have not curbed rising prices. Food inflation remained high at 13.80% in November.
Meanwhile, stock market reforms have begun, unnecessary expenses in development projects are being curtailed, and government operating costs are being reined in.
These reforms suggest that the economy might improve in the future.
However, old challenges like dollar market volatility are likely to persist into the new year, according to economists and analysts.
Stakeholders warn that strict import controls could further exacerbate industrial sector crises.
Reduced liquidity might push interest rates higher, which would hinder investments and slow job creation.
Bangladesh Bank Governor Dr Ahsan H Mansur has warned that non-performing loans could nearly double within six months.
Speaking at a recent event, he said: “We are examining the financial sector’s health. Non-performing loans could reach 25% to 30% in the near future, up from the current 12.5%. Next month, it could hit 15%, then 17%, and eventually 30%.”
He emphasized that much of this defaulted debt already exists but will soon be reflected in official figures.
Meanwhile, Economic Adviser Dr Salehuddin Ahmed said: “The economy is relatively strong now.”
Responding to questions after a cabinet meeting on January 2, he said: “I won’t say this is true across all sectors. Some discipline has returned to the banking sector, and Bangladesh Bank is trying to support weaker banks.”
Former World Bank Chief Economist for Dhaka, Dr Zahid Hussain, said that the stagnation in trade and business will take time to resolve.
“Business owners are concerned about the direction of politics in the next one to one-and-a-half years, including which party might assume power,” he said.
An analysis of central bank data reveals that 2024 was marked by economic distress.
The crisis began in 2022 with the onset of the Russia-Ukraine war, which triggered runaway inflation and declining foreign currency reserves. Net reserves fell below $13 billion (per IMF calculations) in April.
Simultaneously, money laundering increased significantly, exacerbating pressure on the dollar.
The dollar shortage disrupted essential imports like fertilizers and fuel, leading to overdue payments. International credit rating agencies downgraded Bangladesh’s creditworthiness, exposing vulnerabilities in the economy.
In August, during and after the fall of the Awami League government, the economy faced significant disruptions.
Withdrawal limits were imposed on bank funds, further slowing economic activities. Commodity prices rose sharply.
After the interim government assumed power, the financial sector—particularly banks and the stock market—faced more visible challenges, coupled with unrest in industrial zones.
Together, these factors slowed trade and commerce.
Following the government’s fall, significant labor unrest erupted in major industrial zones around Dhaka, lasting until October.
In an effort to curb inflation, the government adopted a contractionary monetary policy by raising policy rates after the July-August uprising.
However, this has yet to succeed, as inflation continues to rise.
The apparel sector, plagued by labor unrest and other challenges, faces uncertainty in maintaining export growth.
Entrepreneurs in this sector report a nearly 50% increase in production costs, while foreign buyers have reduced the prices of Bangladeshi apparel.
According to BGMEA data, 100 garment factories closed in the past six months, leaving 50,000 to 60,000 workers unemployed.
At least 158 factories are struggling to pay wages on time. Eurostat reports that between January and October last year, European buyers reduced the prices of Bangladeshi garments by 4.92%.
Former BGMEA director Mohiuddin Rubel said: “During the interim government’s tenure, many owners struggled to operate their factories due to security concerns. As a result, buyers’ confidence has somewhat eroded.”
BKMEA President Mohammad Hatem said: “Buyers have reduced prices while bank loan interest rates have risen. Together, these factors have increased entrepreneurs’ costs.”
He said that no one is considering new investments under these circumstances.