Bangladesh, the eighth most populated nation in the world, is facing uncertain times in the wake of its fierce revolution that resulted in a military-backed government change and its subsequent appeals for international loans totalling $6.5 billion.
Bangladesh was perceived internationally as having a rapid economic development trajectory as recently as 2022. But as of right now, nothing more exemplifies how Bangladesh’s economic success story is coming apart than its desperate pleas for a fresh $3 billion bailout from the IMF, $1.5 billion from the World Bank, $1 billion from the Asian Development Bank, and cooperation from the Japan International Cooperation Agency.
Before the global economic consequences from the Ukraine war started to weigh on Bangladesh’s finances, the Sheikh Hasina regime brought political stability and great economic growth to Bangladesh, despite her almost 15-year reign growing increasingly dictatorial.
Bangladesh’s growth and stability stand in contrast to Pakistan’s ongoing political and economic challenges. The two countries diverged in 1971 following a liberation war marked by significant violence and loss of life.
Uncertainty awaits
After Sheikh Hasina was overthrown in a youth-led uprising, the military chose an interim civilian-led government that is currently fighting to reestablish the rule of law and revitalise an economy severely damaged by widespread mob violence and destruction. Bangladeshi politics has historically involved the military as a major actor. The military’s influence over the government in a democratic context is concerning, and in Bangladesh, this has contributed to significant instability.
Apart from hundreds of deaths during the anti-government protests, the new regime contended that some of the rioters had stolen weaponry from law enforcement and other persons. Additionally, mobs in Dhaka took some police officers hostage, resulting in the deaths of at least 44 officers.
Political tensions have increased due to the new government’s involvement in human rights violations, including purges, arbitrary detentions, and restrictions on freedom of speech. Many individuals, including academics, journalists, and political opponents, have faced serious charges that led to their imprisonment.
Recently, a 75-year-old retired Supreme Court justice was severely beaten in a magistrate’s court, suffering injuries that required emergency surgery. This raises concerns about whether Bangladesh might follow a similar path to Pakistan, where ongoing political dysfunction and economic challenges have resulted in persistent conflict. In Pakistan, elections have struggled to reduce the military’s influence over politics.
In Bangladesh, the military has increasingly taken on a prominent role in national decision-making, with the army commander emerging as a key leader. Former military general M. Sakhawat Hussain, now a minister in the interim government, made headlines by threatening political extortionists, stating he had “asked the army leader to break your legs.”
The 84-year-old Nobel Peace Prize winner Muhammad Yunus is in charge of an interim government that is unconstitutional.
Bangladesh’s economy is in terrible shape, with foreign reserves fast depleting, prices skyrocketing, the banking system in disarray, and most economic activity coming to a complete halt. Regaining the trust of international investors will be difficult in light of the widespread looting, vandalism, and arson that have occurred since July 2024. Travel advisories to Bangladesh are still in force for many nations.
The resurgence of some groups poses a serious challenge to law and order in Bangladesh, similar to the situation in Pakistan.
While Prime Minister Sheikh Hasina’s government had taken strong measures against faction groups, recent protests led to the release of hundreds of radical elements from jails. Attacks on jails started more than two weeks before the overthrow of the government, but they picked up steam following Hasina’s forcible flight to India.
In a televised speech on August 5, Bangladesh’s chief of army, General Waker-uz-Zaman, announced Sheikh Hasina’s resignation and departure, saying he was “taking full responsibility” and would assist in “forming an interim administration.”
However, a partisan administration of three former military generals, a hard-line Islamist cleric, and two student protest leaders have taken office in place of a broad-based government of national unity.
Bangladesh is currently experiencing significant political divisions, which have contributed to cycles of violence and retaliation. Without efforts toward national healing and reconciliation, these divisions are likely to lead to increased tensions and economic instability.
The current status of economy
The economy of Bangladesh may confront new difficulties as a result of the present political unrest. A downturn in economic growth will be among the most noticeable effects right away since volatility breeds doubt and erodes investor confidence.
Official figures denote that the GDP of the nation has grown by 6.6% annually on average during the last ten years. According to Moody’s ratings agency, this growth for the year ending in June 2025 will be significantly less than 6%.
To get the nation’s economy back on track, the Muhammad Yunus-led interim administration must promote political stability and restore law and order.
Before the latest round of upheaval, Bangladesh was already dealing with several economic difficulties. Among these has been a protracted period of high inflation since 2022. In July, the rate of inflation surged to a record 14.1%, with food inflation reaching a 12-year high of 11.66%.
The current situation is likely to persist. Supply chain disruptions from movement restrictions during the unrest have led to shortages, and high inflation is affecting lower-income individuals more significantly.
In Bangladesh, unemployment and the slow emergence of new jobs, particularly among educated youth, have long been problems. Currently, over twice as many Bangladeshi people as the worldwide average, 40% of those between the ages of 15 and 24, are not enrolled in school, employed, or receiving training.
Private sector investment in the country, a significant source of employment creation, has remained flat. Furthermore, the current unrest will provide additional harm to the investment environment.
From $48 billion (£36.6 billion) in August 2021 to just over $18 billion (£13.8 billion) in May 2024, Bangladesh’s foreign exchange reserves have dropped significantly. The International Monetary Fund (IMF) set a minimum reserve requirement for countries to clear import payments, which the current level of reserves hardly matches.
A protracted period of unrest can lead to a worsening of the situation as export and remittance income decline. Having accounted for two-thirds of the GDP per capita increase in Bangladesh between 2001 and 2020, these are the country’s two main sources of growth.
Repairing the economy
The primary goal of the transitional administration will be to prepare the way for a smooth handoff to more permanent leadership. It will also probably have to deal with the urgent economic issues facing the nation.
Dealing with inflation is an urgent priority. The central bank has been under fire in recent years from IMF and Bangladeshi economists for improper use of monetary policy. For example, despite mounting inflationary pressure, interest rates on bank deposits and loans were limited to 6% and 9%, respectively, between April 2020 and June 2023.
The government, under Sheikh Hasina’s leadership since 2009, also took out large loans from the central bank to improve its appalling tax mobilisation efforts. However, because borrowing from the central bank increases the amount of money in circulation, it typically increases inflationary pressure.
With the appointment of renowned economist Ahsan H Mansur as the new governor of the central bank, there is optimism that the bank will carry out its mandate.
However, a large number of the economic issues facing Bangladesh are systemic. Reforms are required, for instance, in the banking industry to address problems including excessively high loan default rates, subpar governance, and insufficient risk management procedures.
According to data from the Bangladesh Bank, 11% of loans are either not repaid at all or are subject to late repayment. However, the real percentage is probably far higher.
To guarantee that banks implement sound financial practices, greater regulatory monitoring and greater openness are required. The interim administration has declared that a banking commission will be established shortly.
In addition, Bangladesh collects far less tax money than other nations of comparable development. The next administration will have to increase tax compliance, expand the tax base, and boost revenue collection effectiveness.
Public spending should be able to rise as a result of these measures. In comparison to similar countries, Bangladesh’s public spending has decreased significantly in recent years, accounting for only 15% of GDP. Over Hasina’s 15 years in office, around $150 billion (£115 billion) was embezzled from the nation.
According to the US-based think tank Global Financial Integrity, most of the stolen money came from bank loans that corporations and influential people took out.
Lastly, Bangladesh must stop depending so much on the clothing sector. With ready-made clothing making up 85% of all export earnings, it is the nation’s largest export sector by far.
However, broadening the export market would not be a simple task. In 2026, Bangladesh is expected to leave the United Nations’ list of the least developed nations. Consequently, it is unlikely that the nation will gain the commercial advantages it already enjoys in other nations, including having no export taxes.
Furthermore, the nation receives relatively little foreign direct investment. The new government needs to move toward trade liberalisation, easing investment restrictions, and removing structural obstacles like financing availability to make investing in Bangladeshi companies more alluring to foreign investors.
Right now, Bangladesh stands at a critical juncture as it navigates the aftermath of a turbulent revolution and the establishment of a military-backed interim government. While the nation previously enjoyed rapid economic growth, the current climate is marked by severe financial instability, escalating inflation, and significant political divisions. The urgent need for international loans highlights the economic challenges ahead, including restoring investor confidence and addressing systemic banking issues.
As the new administration seeks to stabilise the country, it must prioritise political reconciliation and implement essential reforms. Only through unity and effective governance can Bangladesh hope to regain its footing and work towards a sustainable economic future, moving beyond its reliance on the garment sector and fostering a more diverse and resilient economy.