Widespread Impact of Political Crisis on Bangladesh Economy

By Tajul Islam

As Bangladesh navigates the current turmoil, the path to economic recovery seems increasingly difficult, requiring prompt and decisive action from the interim government to bring stability and restore confidence among both the public and investors.

The political unrest has introduced uncertainty, which is directly affecting economic growth. Both local and foreign investors are hesitant to commit their funds in a country where the future appears uncertain. This creates a negative feedback loop: political instability weakens investor confidence, leading to reduced investment, which in turn hampers economic growth. The ripple effect spreads across industries and businesses, with smaller enterprises being particularly vulnerable to these shocks.

Since early 2022, Bangladesh has been battling high inflation, driven by global supply chain disruptions and compounded by domestic policy challenges. By July 2024, inflation had skyrocketed to 11.66 percent, the highest in 13 years, with food inflation reaching a staggering 14.10 percent. For millions of low-income households, this situation has become untenable, as the soaring cost of essential commodities places a heavy burden on their already stretched finances.

The persistence of inflation is primarily linked to ongoing supply chain disruptions and shortages, both of which have been exacerbated by the political turmoil. The disruption in the transportation and distribution networks, fuelled by protests and strikes, has caused severe delays and scarcity of goods in the market. The result is a continuous upward spiral in prices, making everyday necessities unaffordable for the average citizen. For many, the rising cost of living has depleted their financial reserves, pushing them further into economic hardship. Addressing inflation should be a top priority for the interim government as it strives to stabilize the country’s macroeconomic environment.

Another key issue adding to the country’s woes is the alarming rate of youth unemployment. As of 2024, about 41 percent of young people aged 15-24 in Bangladesh are neither in education, employment, nor training (NEET), a figure almost double the global average. The high level of youth unemployment has exacerbated social tensions, with many young people feeling disenfranchised and alienated. This economic frustration is contributing to the broader sense of instability, as disillusioned youth are more likely to participate in protests and social unrest.

The lack of job opportunities for young people not only stifles economic growth but also poses long-term challenges for the country’s development. If Bangladesh cannot create more opportunities for its young population, it risks losing the potential benefits of its demographic dividend. Addressing youth unemployment should be a key focus of the interim government’s economic recovery efforts.

The macroeconomic challenges are compounded by the ongoing political unrest. Since 2022, foreign exchange reserves have been dwindling, export growth has slowed, and remittance earnings have shrunk. These factors, combined with the inflationary pressures and rising unemployment, paint a bleak picture for the nation’s economic outlook.

Small businesses, in particular, are struggling to stay afloat in this uncertain environment. Many have been forced to scale back operations, reduce productivity, or close down entirely due to the disruptions caused by political instability. This not only affects business owners but also has a knock-on effect on employees, suppliers, and the wider economy. The importance of restoring stability cannot be overstated-without it, the chances of economic recovery are slim.

The RMG sector, which accounts for around 80 percent of Bangladesh’s total exports, has been severely affected by the political unrest. Worker protests over low wages, unpaid salaries, and inadequate benefits have led to widespread disruption in the industry. On September 12, 2024, alone, 219 garment factories in Gazipur and Ashulia were shut down due to protests, with several factories being vandalized or set ablaze after negotiations between workers and factory owners failed.

While there have been accusations of external political elements fuelling the unrest, the root of the problem lies in the longstanding grievances of the workers. The minimum wage of Tk 12,500, set by the government in 2023, has been seen as inadequate by workers, and many factory owners have yet to meet even this baseline requirement. The demands for higher wages and better working conditions have been ignored for years, and the growing frustration among workers is now boiling over into mass protests and industrial action.

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) held a meeting on September 14, 2024, to address the ongoing crisis in the sector. Attended by industry leaders and advisers from the interim government, the meeting highlighted the need for urgent action to resolve the workers’ grievances and restore stability to the industry. Major General Moin Khan of the 9th Infantry Division of the Bangladesh Army, who also attended the meeting, acknowledged the legitimacy of the workers’ demands but stressed the importance of resolving the unrest to protect the industry. The army has pledged its support to maintain law and order in the sector.

Addressing the unrest in the RMG industry is crucial, not only for the economy but also for Bangladesh’s reputation as a reliable exporter on the global stage. The interim government must take swift action to mediate between workers and factory owners, ensuring that a fair and sustainable wage agreement is reached. The minimum wage board’s recent decision to review workers’ wages, taking inflation and the rising cost of living into account, is a step in the right direction, but more needs to be done to restore trust and stability in the sector.

One of the key tools available to the interim government in addressing the economic crisis is monetary policy. The recent appointment of a new central bank governor has raised hopes that monetary tools will be more effectively used to curb inflation. Stabilizing prices through better market management, and coordinating monetary, fiscal, and tariff policies, is essential to restoring economic stability.

At the same time, the government must focus on improving foreign exchange reserves, increasing remittance inflows through formal channels, and boosting exports. These measures are critical to restoring confidence in the economy and ensuring that Bangladesh remains competitive on the global stage, despite the political turmoil.

While the interim government’s primary focus must be on addressing the immediate economic challenges, long-term structural reforms are also necessary for sustained economic recovery. The banking sector, for example, has long been plagued by high levels of non-performing loans, poor governance, and regulatory weaknesses. Strengthening transparency, improving regulatory oversight, and enhancing financial practices are essential steps to restore confidence in the banking system.

Similarly, reforms in the taxation system are crucial for increasing government revenue. Bangladesh’s tax-to-GDP ratio, currently at 7.8 percent, is among the lowest in the world. Expanding the tax base, improving tax compliance, and enhancing the efficiency of tax collection should be key priorities for the government. These reforms must also include efforts to curb corruption within the tax administration and ensure a fairer and more equitable system.