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Country Report Bangladesh

Country Report

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The political environment in Bangladesh has calmed in recent months and the AL government is likely to sit out its term in office. Growth is strengthening, albeit only very slightly, and the current account surplus will narrow further.

Strengths (+) and weaknesses (-)

(+) Low labour costs

Bangladesh has some of the lowest wage costs in the world, which make it one of the main locations for the production of cheap clothing in Asia. The generally positive attitude of the government towards foreign investors supports the sector. The garment sector is at times criticized by western countries for poor labour and safety standards.

(+) Fairly healthy external (liquidity) position

The current account is generally in surplus, FX reserves cover about 5 months of imports and external debt is low at 20% of GDP.

(-) Political instability and polarisation

A polarised political spectrum and personal animosity between the leaders of the two main party blocks create political instability and hinder effective policy implementation. In the past, the military has stepped in on more than one occasion.

(-) Very weak infrastructure and poor business climate

Economic development is hindered by poor public institutions, low level of infrastructure, regular power outages, annual floods in vast areas of the country and endemic corruption. As a result, poverty is widespread, with more than 40% of the population living on less than USD 1.25 a day.

Key developments

1. The political environment has calmed in recent months

Political tensions have eased in recent months and it is likely that the Awami League (AL) government will remain in power until the next regular elections in 2019. However, if support for the country’s second-largest party, the Bangladesh Nationalist Party (BNP), increased again, the BNP would be able to once again launch massive strikes and protests demanding early elections.

Political tensions and social unrest increased strongly ahead of the January 2014 parliamentary elections and the BNP – which was in the opposition at the time - boycotted the elections because it did not agree with changes to the electoral rules that favoured the ruling party. After the elections, in which the AL won a large majority of the seats in parliament again (234 out of 300 seats), the BNP called for new elections. The international community subsequently expressed its concerns about the elections. Although the legitimacy of the government can be rightfully questioned, the chance that re-elections will take place has fallen significantly. International pressure has eased and the AL government enjoys favourable approval ratings. The government has been ignoring any questions about its legitimacy – refusing to have any dialogue with the BNP and to hold early elections – and instead has been focusing on implementing its economic development agenda. The BNP’s position, meanwhile, is weak. It is not represented in parliament, the leader of the party, Khaleda Zia, is facing corruption charges and there is an internal leadership struggle going on. As a result, the BNP currently has to focus on strengthening its internal structure and on gathering popular support by exploiting failures of the government. If the BNP were to gather sufficient popular support, it would again be able to increase pressure on the government to hold early elections by staging large protests and strikes, which would be disruptive for the economy. 

2. Growth to strengthen, but only very slightly

Economic growth has started to strengthen in 2014, albeit only very slightly. Real GDP growth is estimated to come in only a bit higher than last year’s 6%. In the run-up to the January 2014 parliamentary elections, political unrest had taken a toll on growth. The important garment sector saw orders being cancelled and investment growth suffered from increased uncertainty about the country’s political future. Bangladesh’s economy has been benefiting from the calming of political tensions since the summer, while continued growth in the agricultural sector – barring very poor monsoon rains - and a steady inflow of remittances inflows will continue to support private consumption growth. In 2015, growth is forecast to strengthen somewhat further to around 6.3%.

Outrage in the EU and the US about a series of garment factory incidents has negatively affected the garment industry in Bangladesh, as orders from western retailers have fallen since. Inspections are being conducted this year by non-government organisations that represent US and EU retailers. Although it is unlikely that - given the scale of the issue - all problems will be solved, the inspections and subsequent closure of a number of factories will likely lead to a higher degree of comfort among western retailers to sell garments produced in Bangladesh. This could have a positive impact on the garment sector and might boost overall growth beyond current estimates.

Figure 1: Growth picking up very slightly
Figure 1: Growth picking up very slightlySource: EIU
Figure 2: Remittances are vital
Figure 2: Remittances are vitalSource: EIU

3. Current account surplus is narrowing, but external (liquidity) position is quite sound

The current account surplus has been narrowing, and will continue to do so. As usual, the surplus on the current transfers balance is badly needed to cover the deficits on the trade, services and income balances. However, remittances inflows are expected to grow more slowly in the years ahead, as - partly due to migration restrictions in Gulf countries - the number of Bangladeshi moving abroad has been decreasing. Consequently, the current account surplus is expected to narrow to 0.5% of GDP in 2015, down from 2.8% of GDP in 2012.

Bangladesh’s external liquidity position will remain quite sound, however. As a result of consecutive years of current account surpluses (since 2005) and annual FDI inflows equal to between roughly 0.9% and 1.3% of GDP, Bangladesh is estimate to have amassed about USD 20bn in FX reserves by end-2014. This is equal to 5.5 months of imports. Meanwhile, external debt is relatively low at some 20% of GDP and debt servicing costs are consequently also low at about 7% current account receipts.

Factsheet of Bangladesh
Factsheet of BangladeshSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

With an average income per capita of USD 829 (USD 2,557 in PPP) in 2013 and over 40% of the population living on less than USD 1.25 a day, Bangladesh is a poor country. With 155 million inhabitants, it is also a densely populated country. The majority of the population lives in the fertile lowlands of the Brahmaputra and Ganges rivers, which puts them at risk of flooding during the monsoon season. Even though about half of the population works in the agricultural sector, the ready-made garment sector, which benefits from low labour costs, is vital for the economy and accounts for almost 70% of exports. Remittances are another essential source of foreign currency.

Owing to its Muslim majority, Bangladesh became part of Pakistan after the end of British rule over (Hindu-dominated) India. In 1971, Bangladesh (East Pakistan) declared independence from (West) Pakistan in a short but bloody war. Since independence, coups have been a regular feature in Bangladesh and the military continues to play an important role in the country. After the country had been under military rule since 1975, a referendum re-introduced democracy in 1991. Currently, the political scene in Bangladesh is dominated by the Awami League (AL) and the Bangladesh Nationalist Party (BNP). The secular, centre-left AL, which has been in power since 2009, focuses on improving ties with India and limiting the influence of religion in politics. The Islamic, centre-right BNP leads the opposition and tends to be more nationalistic. Much of the political polarization is due to personal animosity between the leaders of the AL and BNP parties. The January 2014 elections were boycotted by the BNP and won by the AL, which has increased political tensions. However, chances are the AL government will sit out its term in office.

Economic indicators of Bangladesh
Economic indicators of BangladeshSource: EIU
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