The prolonged political unrest is weighing on the export growth and hindering the country’s investment environment, says Moody's, a global credit rating agency.
“Export growth, which had been immune to political turmoil in the past, has begun to weaken,” said Moody’s in its latest forecast released yesterday.
This is the first time in five years the agency has forecasted the poor state of the country’s economy.
Over the last five years, it had given Bangladesh a stable sovereign outlook of Ba3 for five consecutive years.
The continuation of the rating by the agency had showed optimism about the country’s macroeconomic stability and growth prospects.
Between July 2014 and January this year, the first seven months of the fiscal year ending on June 30, 2015, exports grew by just 2.1% year on year, according to data from the Export Promotion Bureau, compared with 15.1% a year earlier, with manufacturing commodities, including specialised textiles and contracting.
“This is due in part to a process of consolidation within the textile, knitwear, and garment industry, which comprises 84% of Bangladesh’s total exports,” the rating agency said.
It said labour and safety standards in the industry have been under scrutiny by global textile purchasers since 2012, and efforts to comply with more stringent standards have likely contributed to a decline in orders.
“Protracted political tensions also risk distracting the government from its economic reform programme,” it said.
Moody’s said, last Saturday, opposition activists in Bangladesh violently attacked a bus and truck, tragically killing several people and ratcheting up already mounting political tension.
“This intensifying political unrest, which is manifesting itself in increasingly frequent strikes, violent outbreaks, and a nationwide transport blockade, is credit negative for Bangladesh because it is weighing on the sovereign export performance, investment activity, and headline growth.”
Moreover, these political tensions risk undermining the reform progress made under an ongoing program with the International Monetary Fund (IMF).
Since April 2012, Bangladesh has worked closely with the IMF under a $900m extended credit facility, it said, adding that although it has cleared four programme reviews so far and secured $644m in financial assistance by implementing several important reforms, the successful completion of the programme involves the passage of further structural measures, including the introduction of a new value-added tax and steps to improve the state-owned banking system.
“Such measures become more challenging to achieve in a factious political environment,” said Moody’s.
It, however, said despite rising political tensions casting a shadow on Bangladesh’s economy, the country’s external payments position has not yet been significantly affected.
Foreign-exchange reserves as of early February had risen to $22.2bn from $18.1bn a year ago. External debt is relatively low at 20.7% of GDP, and is primarily concessional, which also limits vulnerability to volatility in external capital flows.
According to Moody’s, renewed political tensions in Bangladesh began when Prime Minister Sheikh Hasina’s ruling Awami League party confined Khaleda Zia, the leader of the main opposition Bangladesh Nationalist Party (BNP), to her party office in Dhaka, Bangladesh, just before the one-year anniversary of parliamentary elections held in January 2014.
The BNP responded by imposing a nationwide transport blockade, which has been in place since January 5, and simultaneously calling for general strikes.
Relations between the Awami League and the BNP have been highly polarised, rooted in a deep personal rivalry.
Political tensions have historically flared up in the run-up to elections, marked by frequent street protests that receded thereafter and thus had a limited effect on economic activity.
This time, however, protests have been marred by violent outbreaks, and have persisted for a prolonged time. The last election, held in 2014, was the first since the Awami League in 2011 abolished the system of appointing a caretaker government.
The BNP refused to participate on procedural grounds, which resulted in an uncontested victory for the Awami League.
