Center For Research In Indo

Bangladesh economy- on free fall?

Dr Kasturi Bhadra Ray

 

Bangladesh spiraled into a crisis after nationwide protests over a job quota bill flared up. Following the agitation, Sheikh Hasina, Bangladesh Prime Minister fled to India for safety and security. Thousands of protesters stormed and looted prime minister’s residence. Several police stations, buildings and public places were ransacked and set on fire.

 

Violence in any nation, or even in a small area, costs hefty amounts as it hampers several economic activities. These include the day-to-day operations of local markets, hospitals, transport and offices, food delivery system and e-commerce. 

 

Curfews were imposed in Bangladesh and internet was shut down, further impacting the operations in the fragile economy. 

 

Violence also impacts human productivity (Anand 2024) .Bangladesh’s garments manufacturer’s body has called for a complete shutdown of all facilities causing a major disruption to the nation’s key industry. The garment and textile industry was finding it hard to stay afloat with the harsh reality of diminishing international orders, high energy price and mounting bank liabilities amid a challenging economic climate and ongoing agitation. 

 

Bangladesh’s garment factories helped pull millions out of poverty; especially first-time female workers (Frayer2022).It is the second largest clothing exporter behind China. However, its economy is very much entwined and dependent on the rest of the world– the international demand for its garments and textiles, its big diaspora that sends remittances home and the government’s reliance on imported fuel to run its electricity grid.

 

The country’s economic health largely rests on those three things — exports, remittances and fuel prices — all of which have taken a hit in recent months.

 

Bangladesh’s power grid is shaky and runs in part on imported fuel (Times of India 2022). That’s getting more expensive after Russia’s invasion of Ukraine. “While Bangladesh’s amazing growth was going on, what it was hiding is that infrastructure was always a problem. Power is always in deficit,” says Ahmed Mushfiq Mobarak, professor of economics at Yale University. So when any kind of shock happens — like Russia invades Ukraine, thousands of miles away — the country is immediately put on an edge. 

 

That’s of course true across the world. But Bangladesh is less equipped to handle the shock. In U.S., the price of gasoline depends on global fuel prices, but also on how much tax federal and state governments levy on top of that. But in Bangladesh, like many developing countries, the government subsidizes the price of fuel.

 

That changed in August, when the government decided it could no longer afford to keep fuel prices artificially low. In a single week, it raised the price of gasoline, diesel and kerosene by more than fifty percent. Local media called it the steepest price hike since Bangladesh’s 1971 founding.

 

Higher fuel prices directly increase the cost of running factories, making it harder for garment manufacturers to remain competitive in the global market.  The lack of domestic yarn production due to gas shortages forces manufacturers to import more expensive yarn, further increasing costs. 

 

The textile industry has been heavily affected by a severe gas shortage, leading to a significant drop in production. The gas crisis in Bangladesh has caused a drastic reduction in textile production, with some factories operating at less than thirty percent capacity and others closing down temporarily. 

 

As Bangladesh is one of the world’s largest suppliers of textiles and garments, this reduction has created bottlenecks in the global supply chain. The instability and failures to meet delivery deadlines or maintain price competitiveness pushed International buyers to shift orders to other countries with more stable production costs. Bangladesh’s garment industry, worth $55bn (£42bn) a year, is now facing an unsettled future resulting in a “10-20% drop in exports this year which  is no small amount when fast fashion exports account for eighty percent of Bangladesh’s export (Inamdar 2024).

 

In the meantime, a big source of income for Bangladesh from its diaspora, suffered a setback. Some thirteen million Bangladeshis live abroad. Many of them send money home. But this year, remittances fell by more than fifteen percent. Bangladeshis living abroad are tightening their belts. It could be in part because the U.S. dollar has become very strong. That means someone abroad needs to send less in order to have the same amount of Bangladeshi currency. However, figures from the central bank, Bangladesh Bank, show remittances to the country stood at $1.9bn in July 2024, a decline of $64mn. The figure was also down on the $2.5bn sent during June 2024.The intermittent internet access during the period was one of the reasons suggested for the reduced flows also. However, Asad Islam, professor in the department of economics at Monash Business School, says there are other reasons. For instance, many expatriates delayed or refrained from sending money to Bangladesh due to concerns about the stability and security in the country’s banking system. 

 

Bangladesh’s transformation into a global fashion powerhouse has been a remarkable success story, but recent turmoil has exposed deep vulnerabilities in its economy (Daily Bangladesh 2024). The country’s rapid rise from poverty to a lower-middle-income status has largely been fuelled by its garment industry, which clocks exports of billions of dollars each year. However, the current instability underscores that this economic success is precariously built on shaky foundations. The recent political upheaval, which led to the ouster of Prime Minister Sheikh Hasina and severe violence, has significantly disrupted the garment sector. Factory closures, interruptions in production, presently skyrocketing fuel prices, and withdrawal of major brands, highlight the fragility of an industry that has become the backbone of Bangladesh’s export economy. The potential 10-20 per cent drop in exports signals a worrying trend for a sector that already faces numerous challenges.

 

Bangladesh’s economic reliance on fashion has long been a double-edged sword (Daily Bangladesh 2024). The challenges facing Bangladesh are compounded by a range of structural issues. The garment industry’s economic impact is undermined by rising operational costs and shrinking foreign currency reserves, exacerbated by a history of financial mismanagement and corruption. Excessive spending on grand infrastructure projects and cronyism within financial institutions have drained resources and weakened economic stability. The new central bank governor’s acknowledgment of the need for reforms and additional financial support highlights the severity of these issues. Diversifying the economy is crucial for Bangladesh’s future resilience. The failure of past initiatives to create high-value jobs outside the garment sector underscores the need for a more strategic approach to economic development (Daily Bangladesh 2024). While the garment sector has created millions of jobs, it has also perpetuated low wages and poor working conditions, with factory workers often earning below the national minimum wage and now demanding fairer pay and improved conditions, reflecting broader frustrations with the country’s labour market. Thus, investing in human capital, a shift toward renewable energy sources to enhance energy security, reducing corruption, and fostering a more conducive environment for private and foreign investment are essential steps toward creating a more balanced and sustainable economy. The interim leadership faces a formidable challenge in steering Bangladesh through this crisis. The need for comprehensive reforms to address systemic issues, enhance institutional integrity, and promote economic diversification is urgent.

 

As the country navigates its current difficulties, including declining global demand and strained regional relationships, the path to recovery will require not only immediate stabilization efforts but also long-term strategic planning. Bangladesh’s experience serves as a potent reminder of the risks associated with over-reliance on a single economic sector. While the garment industry has driven impressive growth, it is clear that a more diversified and resilient economic strategy is essential for sustaining progress and addressing the complex challenges of the future.

 

References

Anand Akriti (2024)- “How Bangladesh crisis may impact its economic growth: Explained”, Mint, Aug 7, 2024, 07:47 PM IST

Daily Bangladesh (2024):” Bangladesh garment industry faces crisis”, September8, 2024.

Frayer L (2022): “How Bangladesh went from an economic miracle to needing IMF help,” November 9, 2022. 

Inamdar N (2024):”Fast fashion drove Bangladesh – now its troubled economy needs more”, BBC News, 4 September 2024. 

Times of India ( 2022): “ Over 80% of Bangladesh hit by power blackout after national grid fails,” October 4, 2022.

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