It is a period of economic boom and political tranquility. There are shiny new buildings, expressways, and bridges. Shopping malls abound with imported luxury brands. To be sure, there are dark spots –inequality is rising, and dissent is stifled. But these are ignored in the superficially laudatory articles in the foreign media. Meanwhile, foreign financiers lend to the country willingly.
Until, of course, things change. And they change rather quickly. All those things that were glossed over previously suddenly loom large. Turns out the country’s banks are saddled with bad loans issued to politically connected cronies and crooks. The currency tanks. Inflation soars. With peaceful democratic avenues closed, a spasm of violence ensues.
A persistent current account deficit, banking sector woes, and authoritarian politics make for a volatile cocktail that is redolent of Southeast Asia of the mid-1990s – but as things stand, they also describe a Bangladesh of the mid-2020s.
Let us consider each of these elements in turn.
Over the past decade, Bangladesh has become a capital importer, running a current account deficit even before the COVID-19 pandemic. And, according to the International Monetary Fund’s (IMF’s) latest assessment of the country’s economy, the deficit is likely to persist well into the late 2020s.
A nation’s current account reflects the difference between its aggregate savings and investment, with a deficit signifying inadequate savings to meet its investment needs. With around 30% of GDP saved, the savings rate in Bangladesh cannot be said to be low – by way of comparison, Pakistan’s savings rate has tended to be around 15% of GDP. Rather, as Chart 1 shows, Bangladesh’s current account deficit reflects a strong investment boom before the pandemic that is set to resume in the coming years.
Further, Chart 2 shows that while private investment is set to recover to the pre-pandemic levels relative to GDP, shaking off recent woes, public investment is projected to scale new heights in the medium term. Of course, in and of itself, this is very sensible. Bangladesh is a developing country desperately in need of infrastructure – roads, railways, electricity generation, and so on. There is nothing wrong with financing some of these projects from external sources, provided the projects are well governed.
There are two elements to this. First, financing of many of these projects is quite one-sided against Bangladeshi taxpayers, the power purchase agreement with the Adani Group being a particularly egregious, but far from the only, example. Second, these projects are usually implemented with woeful management, resulting in significant cost overruns. According to the World Bank, for example, infrastructure projects were among the costliest in the world even in 2017.
While the persistent current account deficit may well have an upside to it, at least theoretically, there is nothing positive about a wobbly banking sector. Bangladesh’s banking sector is saddled with non-performing loans – where the borrower has failed to make interest or principal payments for an extended period. Chart 3 shows that the problem is particularly acute in the state-owned banks, which are also not well capitalised (Chart 4) – that is, they are not well placed to cover the risks associated with their lending.
Both the governance problems around the infrastructure megaprojects as well as the woes in the banking sector ultimately point to the country’s authoritarian political economy whereby the ruling regime, instead of governing with a mandate from the voters, has been relying on the support of powerful oligarchs who are given access to loans and opportunities without oversight.
Chart 5 shows the regression of electoral democracy in Bangladesh over the past decade using the V-Dem index. This index captures the extent to which governments are elected under free and fair elections with guaranteed freedom of association and expression. Countries are given a score between 0 and 1, the latter being most democratic.
In 2022, Bangladesh had a score of 0.27, compared with 0.4 in India and 0.39 in Pakistan. Bangladesh’s slide to authoritarianism reflects a one-sided election in January 2014 where the incumbent Awami League won 153 seats out of 300 unopposed, and a blatantly rigged election in December 2018 when ballot boxes were stuffed the night before the polling day.
Bangladesh’s turn towards a dictatorship is set to continue with the third consecutive one-sided election on January 7 – the opposition parties are boycotting the election in light of their past experience as well as the fact that over 20,000 of their members have been interned since late October through a draconian crackdown.
Prime Minister Sheikh Hasina may look unassailable politically. But so did President Suharto of Indonesia in 1996. Contrary to the nostrum pushed by authoritarian leaders that they can make the tough decisions needed to address economic challenges, experiences in Southeast Asia (and indeed in many other countries around the world) suggest that authoritarian regimes with poorly governed banking sectors and mega projects often end up in significant political and economic crisis.
Instead of making tough decisions and taking on the vested interests, authoritarian regimes relied on the very same vested interests for their survival. The resulting cronyism only exacerbated the crisis, not resolved it. In Thailand and Indonesia, for example, the Asian Financial Crisis of 1997 was followed by years of political conflict and economic stagnation.
Bangladesh, of course, has been experiencing considerable economic difficulty in the past couple of years, with the taka depreciating by over 40% against the US dollar despite the central bank burning through about half of its international reserves while inflation remained at double digits. The country’s noxious politics and unsound economic fundamentals make for a very combustible brew that could spill over beyond the border.
Jyoti Rahman is a Bangladeshi economist. His analyses are archived at: https://jrahman.substack.com/ and he can be contacted at Jyoti.rahman@gmail.com