Bangladesh and its powerful allies

Forrest Cookson

The first three instalments of this series have focused on Bangladesh’s relationship with three of its most notable allies: India, China, and the United States. The fourth instalment attempts to conclude Bangladesh’s position in 2022 in terms of politics and economics. Politics Bangladesh faces major challenges in 2022. The most immediate is the growing conflict between India and the United States together against China. It is simply impossible to know what might happen and how this will impact Bangladesh. But it is clearly a serious challenge. Bangladesh should expect growing difficulties with the United States and the EU over human rights and labour rights. In addition, both will be eager for Bangladesh to prepare for a free and fair election in early 2024. This is certain to generate friction. But this has been going up and down for years. Bangladesh has a weaker hand but tougher and more determined leadership. Recent actions such as the sanctions against seven RAB officials are unlikely to be followed with significant additional action. On the other hand, the authorities in Bangladesh would be well advised to avoid challenging the American claim. The United States is more concerned about the rising influence of China than about human rights abuses. But the real case for improved human rights management is that it is the best path for the nation. The three critical issues for Bangladesh that the three major foreign powers are engaged with are: 1. Dealing with the Rohingya. India and China are not any real help but the United States has been strongly supportive. This is an area full of risk. The government can never move towards a solution until it openly faces what everyone knows: The Rohingya will never return to Myanmar. 2. Praying that there is no border war between India and China when Bangladesh could not avoid choosing sides. The problem is any action favours one side or the other. 3. Election preparation where one must expect substantial pressure from the EU and the United States for an acceptable election. I think that the election preparation will be the key point of dispute in 2022. China really has no position on this; it is Bangladesh’s business. India will continue to favour the current regime. Economics The short run outcome of the Bangladesh economy has been much discussed (2022 refers to calendar 2022). There are four critical areas: RMG What will be the level of demand of the world for Bangladesh RMG products? In 2022, this will be strong. Prices will continue to be high. This is a temporary condition and the dollar value of exports will decline by the end of 2022 from the lower prices. However, the Bangladesh government should understand that the underlying strength of the RMG sector is weakening. A significant depreciation (5-7% by end of 2022) of the taka is mandatory to strengthen the industry, enable repayment of the substantial and growing NPLs held by RMG establishments, and provide room for a wage increase over the next two years. The government economists know very well that sales and profits can move in opposite directions. The depreciation of the taka will also provide encouragement for diversification of exports. The strong growth of exports in 2022 will trigger broad expansion of the economy. The government deficit will probably decline with respect to GDP so that it is expansion of exports that will drive private investment and lead to higher incomes. Inflation Inflation will increase and there is not much that can be done about this. Prices cannot really be controlled. The depreciation of the taka will raise import prices and these can be offset by a reduction in tariffs. This will lower the anti-export bias and contribute to increased exports in future years. Interest rates must rise leaning against inflation. The current caps maintained during a rising intention will harm the economy. The banking system The banking system will face serious difficulties as the costs of the pandemic on the economy is manifested by sharp increases in non-performing loans. The NPLs are real and will not go away even when dressed up as something different. For large loans, the banks will have to deal with a lot of difficulty but with a strong economy, the large firms will manage. But smaller enterprises will never be able to overcome the 18 months of very low profits and their NPLs will burden them indefinitely. The government will have to finance a loan forgiveness program to help the banks and the small businesses. This is an urgent step for 2022. Remittances Remittances through the banking system will decline compared to 2021 but total remittances including these through the hundi system will increase. The balance of payments will record some loss, leading to a decline in reserves. No reason to panic. My assessment is that 2022 will be a very good year for the economy if these steps are taken: Depreciate the taka, raise interest rates, lower tariffs, and build a loan forgiveness program for companies with loans outstanding from Tk 10lakh to Tk5cr. Here are the links to the first three articles in this series: Part one: India Part two: China Part three: United States Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics. This article is the fourth of a four-part series and is an expansion of an article “Prospects for Bangladesh 2022” published in the AmCham Journal October – December 2021.

(Courtesy Dhaka Tribune)