Bangladesh’s economic crisis: The consequences of failed policies and corruption

Over the past several years, Bangladesh's economy has experienced significant turmoil, as evidenced by an alarming devaluation of the Bangladeshi taka, rising external debt, and a widening trade deficit. These economic challenges have created hardships for citizens and businesses alike, leading many to question the efficacy and intentions of the former authoritarian government. 

A combination of ineffective policies, corruption, and mismanagement have contributed to Bangladesh's current economic crisis, revealing the structural weaknesses that went unchecked during the period of authoritarian rule.

Currency depreciation and inflation: A costly combination

The most immediate and visible sign of Bangladesh's economic distress is the sharp depreciation of the Bangladeshi taka (BDT) against the US dollar. Since 2022, the exchange rate has spiralled, moving from approximately Tk85 per USD to over Tk120 per USD by 2024. This dramatic devaluation has several implications:

Higher cost of imports: Bangladesh is heavily reliant on imports for essentials such as fuel, food, and industrial inputs. The weakening taka has significantly increased the cost of these goods. This translates into inflation, affecting everything from food prices to transportation costs.

Diminished purchasing power: The currency's depreciation erodes purchasing power, making it more difficult for everyday citizens to afford necessities. The inflationary effects of this devaluation are particularly harsh on lower-income families, who bear the brunt of rising food and energy prices.

The previous authoritarian government's failure to implement sound currency management policies and the absence of proactive measures to control inflation have deepened the current economic crisis. Instead of creating an environment for economic stability, mismanagement of monetary policy has led to volatile currencies and rampant inflation.

Unrestrained import expenditures and mismanagement of trade policy

Bangladesh's imports, measured in Bangladeshi taka, have steadily increased over the years, reaching unprecedented levels. While rising imports might indicate growing demand and economic development, Bangladesh's imports largely outpace its exports, leading to a ballooning trade deficit.

The failure of the former government's trade and economic management policy has made Bangladesh overly dependent on imports. Rather than investing in boosting local industries and diversifying export goods, the authoritarian government continued to rely on short-term solutions, failing to promote a sustainable trade policy. 

Corruption also played a role in driving up import levels; numerous allegations emerged of politically connected businesses obtaining favourable import contracts, leading to inflated import bills and reduced foreign reserves. 

Soaring external debt: A growing threat to stability

Bangladesh's external debt has surged dramatically, increasing from around $25 billion in 2014 to nearly $60 billion by 2023. Under the former authoritarian government, borrowing became a go-to solution for funding large infrastructure projects and other high-profile investments. 

While infrastructure development can boost long-term growth, the opaque allocation of these funds raised concerns about mismanagement and corruption. Several of these high-profile projects were plagued by cost overruns, delays, and allegations of embezzlement by individuals linked to the ruling elite.

The consequences of this debt accumulation are now painfully clear. With the currency depreciating, servicing external debt in USD has become a costly burden on Bangladesh's economy. 

This debt load limits the government's ability to address other pressing issues, like poverty alleviation and healthcare, as a significant portion of revenue is diverted to debt repayment. The unsustainable debt policies, coupled with high levels of corruption, have left Bangladesh facing a debt trap that could take years to overcome. 

Trade deficit: A structural weakness ignored

The trade deficit in Bangladesh has reached concerning levels, indicating that the country imports significantly more than it exports. This deficit reflects both a lack of export competitiveness and an over-reliance on imported goods, especially fuel and food. During the tenure of the authoritarian government, export diversification was largely ignored, and the economy remained overly dependent on the ready-made garment industry. 

While this industry is crucial to the economy, the failure to support other sectors limited Bangladesh's export potential, making the economy vulnerable to global market fluctuations.

The government's lack of vision for export promotion and diversification contributed to the worsening trade deficit. Policies were not in place to support small and medium enterprises, technology-driven sectors, or agricultural exports that could have broadened the export base. Instead, the reliance on a few export sectors left Bangladesh in a precarious position, unable to balance the trade account. 

Corruption: The root cause of economic deterioration

Corruption within the previous government only exacerbated Bangladesh's economic troubles. Allegations of cronyism, embezzlement, and abuse of public funds have plagued several major sectors, including infrastructure and banking. 

State resources were often directed towards projects that favoured political elites rather than towards initiatives that would have fostered long-term economic stability. Corrupt practices syphoned off valuable resources, diverting funds from education, healthcare, and public services, which could have benefitted millions of Bangladeshis.

Furthermore, corruption weakened regulatory bodies, which were meant to provide oversight and enforce financial discipline. By manipulating contracts and diverting funds, government officials and their allies enabled a culture of impunity, where economic policy was dictated by political interests rather than economic priorities. This lack of accountability fostered an environment where mismanagement and waste became commonplace, contributing directly to the current economic crisis.

Policy recommendations for recovery

To overcome these challenges and restore economic stability, Bangladesh must implement significant policy changes:

Strengthening currency management: The government should adopt measures to stabilise the taka, such as increasing foreign reserves, encouraging foreign direct investment, and curbing inflation. A stable currency will help manage import costs and restore confidence in the local economy.

Encourage export diversification: Bangladesh must prioritise export diversification to reduce its dependence on a single industry. Policies should focus on supporting emerging industries, such as technology and agricultural products, to boost the country's competitiveness in the global market.

Implementing fiscal discipline and debt management: The government should implement strict fiscal discipline and a comprehensive debt management strategy to prevent further accumulation of unsustainable debt. Transparent allocation of funds and prioritisation of high-impact projects will be essential for sustainable development.

Combating corruption and strengthening institutions: It is crucial to restore public trust by combating corruption and strengthening institutions. Independent oversight and transparent procedures for public projects can help reduce corruption, allowing public resources to be directed where they are most needed.

Encouraging domestic industries: Policies to support local industries and reduce import dependency should be pursued. Investing in the domestic production of essential goods will alleviate pressure on foreign reserves and create more local employment opportunities.

Bangladesh's current economic challenges are the product of years of misguided policies, unchecked corruption, and weak governance. The last authoritarian government prioritised short-term gains and political agendas over sustainable economic management, leaving the country vulnerable to a series of economic crises. 

However, with determined efforts to reform economic policies, tackle corruption, and invest in sustainable development, Bangladesh can begin to reverse these adverse trends and build a more resilient economy. It will take time and commitment, but a brighter economic future is possible if lessons from the past are learnt.

Md Abdullah Al Mahmud is the Founder and CEO of Thriving Skills Limited

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.