Bangladesh’s economic miracle is fading due to excessive debt burden and political uncertainty

It has been over 100 days since Bangladesh’s former PM Sheikh Hasina resigned after weeks of protests. An interim government has since taken office, led by Chief Advisor Muhammad Yunus, an economist and Nobel laureate known as “banker to the poor.” This interim government is on a mission to stabilize the battered economy. In this note, we review the latest economic developments in this country to conclude that the situation is becoming more fragile, especially given the heavy debt burden, notwithstanding the ongoing IMF program. China seems to be the winner of such uncertainty with India as a loser.Despite continued growth counted in local currency (BDT), the economy has contracted in dollar terms for two years since 2022. External demand was a main growth driver even though the current account deficit continues to widen.   Headwinds are increasingly apparent due to domestic political uncertainties but also the result of US elections and the less bearish Fed. In the latest World Economic Outlook in October, the IMF has lowered its forecast of Bangladesh’s economic growth to 4.5% from 6.6% for FY2024-25.With downbeat external demand and widening current account deficit, the BDT is under great pressure which feeds domestic inflation as Bangladesh relies heavily on food and energy imports. To stem off inflation, interest rates have been kept high, putting even more pressure on the government’s debt dynamics. The weak currency also plays against debt repayment, especially to external creditors as forex reserves are being dragged down.Still, Bangladesh is better positioned than other cash-strapped countries since it locked in a $4.7bn bailout from the IMF in January 2023. With a remaining balance of $2.39bn over the next 20 months and relatively loose standards set by the Fund, further disbursements should still take place, at least in the near future, but uncertainty remains as to whether the agreed borrowed amount will be enough.The outlook for the Bangladesh economy hinges heavily on domestic politics but also the geopolitical landscape. So far, no date has been set for the elections yet but the interim government, and in particular the Chief Advisor Yunus, seems to be getting closer to China than former PM Hasina was. Meanwhile, India is somewhat losing the upper hand as New Delhi had long supported Hasina, whose extradition from India is requested by Bangladesh interim government. India has also been blamed for having overlooked Bangladeshi opposition parties in the past few years, which may add more friction between Modi and the new government. That said, the signed deals on transport and energy projects between India and Bangladesh should stay unscathed for a time but new ones are likely to end up in the hands of Chinese companies.