Political Turmoil in Bangladesh: Impact on Financial Reforms and Banking Sector

Political unrest in Bangladesh is negatively impacting planned financial reforms and the banking sector, according to S&P Global Ratings. Prime Minister Sheikh Hasina fled the country following violent protests, leading to a power vacuum now filled by economist Muhammad Yunus. The ongoing instability threatens further financial and economic challenges.

Political unrest in Bangladesh is casting a shadow over planned financial reforms and is already weakening the country's banking sector, S&P Global Ratings announced on Wednesday. Prime Minister Sheikh Hasina resigned and fled to India last week after student-led protests against her spiraled into severe violence, resulting in about 300 deaths and thousands of injuries.

An interim government has been formed under the leadership of Nobel laureate economist Muhammad Yunus to address the power vacuum and organize elections. However, protests have broadened to target officials appointed during Hasina's tenure, such as the central bank chief and four deputies who have resigned. A new central bank governor has been appointed. S&P Global Ratings credit analyst Shinoy Varghese expressed concerns about potential policy inaction and slowdown in financial reforms.

The agency highlighted that the banking sector's weaknesses, such as liquidity shortage, thin capital buffers, and poor asset quality, have been worsened, and the resignation of senior central bank officials could delay ongoing structural reforms. Anti-government protests began in July over government job quotas as the economy, once the fastest-growing globally, faced youth unemployment, inflation, and shrinking reserves.

Amid these conditions, Hasina's administration sought a $4.7 billion IMF bailout, approved in January 2023. The unrest has exacerbated inflation, which hit 11.66% in July from 9.72% the previous month, leading to a nationwide curfew that paralyzed transport, offices, and the crucial garments industry. Moody's Analytics downgraded Bangladesh's GDP growth forecast from 5.4% to 5.1% for this year. It further noted that Bangladesh's recovery from the currency crisis depends on the new government's ability to address public concerns and restore social order.

(With inputs from agencies.)