Bangladesh Political Turmoil Threatens Financial Reforms

Political upheaval in Bangladesh has led to delays in financial reforms, impacting the banking sector, as noted by S&P Global Ratings. Prime Minister Sheikh Hasina resigned amid violent protests, leading to an interim government. Economic challenges persist, driving the country to seek a $4.7 billion IMF bailout.

Political turmoil in Bangladesh is projected to slow planned financial reforms and has already contributed to weaknesses in the banking sector, S&P Global Ratings announced on Wednesday.

Prime Minister Sheikh Hasina resigned and fled to India last week following severe student-led protests, which escalated into some of the most violent unrest since Bangladesh's 1971 independence from Pakistan, resulting in 300 deaths and thousands of injuries. An interim government led by Nobel prize-winning economist Muhammad Yunus has been appointed to fill the power vacuum and organize elections. However, the protests have expanded to target officials appointed during Hasina's term, leading to resignations by the central bank chief and four deputy governors. A new central bank governor has since been appointed.

S&P Global Ratings credit analyst Shinoy Varghese stated, "We see risk of policy inaction and a potential slowdown in financial reforms." The banking industry's weaknesses, including lack of liquidity, thin capital buffers, and deteriorating asset quality, have worsened, and the departure of senior central bank officials may delay ongoing structural reforms. The anti-government protests began in July over quotas in government jobs and have intensified as Bangladesh struggles with youth unemployment, inflation, and dwindling reserves. These challenges led Hasina's government to request a $4.7 billion bailout from the International Monetary Fund, which was approved in January 2023.

Weeks of unrest have driven inflation to 11.66% in July, prompting the government to impose a nationwide curfew, shutting down transport, offices, and the significant garments industry for several days, up from 9.72% the previous month, according to official data. Moody's Analytics last week provisionally revised Bangladesh's GDP growth forecast for this year to 5.1% from 5.4% previously. "Bangladesh's recovery from the currency crisis hinges on the ability of any replacement government to meet public concerns and reestablish social order," Moody's said in a note. The Asian Development Bank, a crucial development partner for Bangladesh, stated it would collaborate with the interim government to work towards macroeconomic and fiscal sustainability.

The ADB emphasized that expanding private sector development to enhance competitiveness and create new employment opportunities is a second priority. This includes working with the interim government to streamline government-to-business services to reduce the cost of doing business in Bangladesh, said the ADB in a statement.

(With inputs from agencies.)