Post-Protirodh

Bangladesh’s recovery after the July Revolution

Monsoon plays an important role in the Bangladeshi psyche. It is the time of days, often weeks, of drizzling and pouring rains, meals of khichuri and maachh-bhaja, women embroidering the traditional nakshi-kantha —all of which are evoked in the classical poetry and modern pop culture alike. It is, however, not a time of traditional festivals, owing to the rain and humidity. Nor has it been a time for politics —elections, street agitation, or military manoeuvres, most political milestones in Bangladesh had been in the dry season between October and May.

Until 2024, that is.

The Monsoon Revolution that toppled the despotic regime of Sheikh Hasina on 5 August presents many firsts for the country —the first time there has been a popular uprising during the rainy season, the first time the ousted leader fled the country, and the first time the fall of a government has been associated with a general breakdown in the state machinery and civil administration.

Consider the case of the police. Around half of the country’s 240,000 member police force were hired under Hasina. These recruitments were usually based on political affiliation, and the individuals were often in cahoots with local leaders of Hasina’s Awami League in running various criminal enterprises. The police were the main tool of the regime’s attempt to violently suppress the Monsoon Revolution, the official death toll from which stood at 1,581 at the time of writing. Consequently, the police also bore the brunt of revolutionary violence, with several members being killed and dozens of police stations burnt in reenactments of the Chauri Chaura incidence from over a century ago.

After Hasina fled, so did the police across the country. For several days, Dhaka was a city without cops. Some smaller towns and much of the rural hinterland still are. While Bangladesh, as an independent country as well as during its association with Pakistan, have seen many governments toppled, never has there been such a breakdown in law enforcement. The army has been deployed to maintain law and order until the civilian police force is reorganised. In the meantime, the country’s law and order situation remains shaky, with significant implications for commerce and industry.

The Bangladesh Bank, the country’s central bank, presents another stark case. Even in the morning of 17 December 1971, Dhaka officials of the erstwhile State Bank of Pakistan reported for duty to the Indian generals who had assumed control of the newly liberated city the previous evening. In contrast, the Bangladesh Bank Governor and several of his senior staff who were appointed by Hasina had also fled after 5 August.

These officials had reasons to flee. The country’s banking sector was systematically plundered by the fallen regime, with the complicity of former officials. Large loans were made to a few families with strong political connections, and much of the money has been siphoned overseas. The result is that 11 of the 60 or so banks in Bangladesh are practically insolvent, and several others are reeling with bad debt.

Stabilising the banking sector is the first task facing the trio in charge managing the country’s economic recovery: Ahsan Mansur, the new central bank governor and a former IMF official; Salahuddin Ahmed, a former central bank governor and now the de facto Minister of Finance and Commerce; and Wahiduddin Mahmood, a respected economist and the de facto Planning Minister.

The authorities have moved to reconstitute the boards of the banks facing the most problems. This is already restoring a semblance of confidence, with liquidity returning to these banks. The next step will be a thorough audit to understand the extent of the ‘hole’. Then will come solutions in the form of consolidation and recapitalisation. In the meantime, assistance is being sought from multilateral agencies to recover the funds that have been siphoned off overseas. For example, the Governor has mentioned that there are formal requests with the British authorities about up to £13bn that might have been laundered there.

After the banks, inflation and external sector stability are the two immediate economic priorities.

Inflation peaked at 11.7 percent in July, reflecting the economic shutdown caused by the Revolution, after running at near double-digit pace for over two years prior to Hasina’s fall. Over that time, the Bangladesh taka had depreciated by around 40 percent and the central bank had lost over $20b worth of reserves. The economic turbulence since 2022 reflected unorthodox policies pursued by the Hasina regime. Lending rate was capped well below inflation, making money cheaper than free for those who could get a loan —usually the regime cronies —while import controls wreaked havoc in the supply chain and an esoteric system of parallel exchange rates sowed confusion.

Economic orthodoxy was gradually returning to policymaking even before the Revolution. The new authorities are pushing for monetary and fiscal policy restraints to rein in inflation. Policy rates have risen, fiscal settings are being tightened, and import controls are being lifted.

The taka has remained stable since the fall of Hasina, buoyed by very strong remittance flows —one significant bright spot in the economy.

Remittances had been sluggish since 2022, even though record number of jobseekers had been leaving Bangladesh for work, and the recipient countries’ job markets had been red hot. The remitters were expecting taka to depreciate further and relied on informal networks which were buoyed by the money laundered out by the fallen regime’s cronies.

This entire dynamic has now reversed. The informal market has dried up significantly. Remittances have also been boosted by the strong support for the Revolution among the diaspora communities. The Hasina regime had alienated these communities by shutting down the internet in July. In response, calls for remittance boycott saw daily remittance decline by nearly $30m during the Revolution. Remittances have been flowing in at record numbers in recent weeks, boosting not just the balance of payments, but also buoying domestic household incomes and consumption.

The readymade garments sector, the other major foreign currency earner, presents a murkier picture. The general weakness in the law-and-order situation is particularly acutely felt in the country’s industrial areas. The garments industry had witnessed significant labour unrest in 2023 as wages failed to keep pace with inflation. These demands have flared up again, exacerbated by politically motivated sabotage by remnants of the Hasina regime, or simple criminal rascality. While order has returned since the deployment of army, it is too early to rule out further disturbances.

Looking further ahead into 2025 and beyond, the authorities will need to grapple with two interrelated imbalances. Bangladesh has been experiencing a current account deficit since the late 2010s, which was expected to continue to the late 2020s. This was driven by significant public expenditure on infrastructure and energy projects which ultimately relied on foreign financing. The rates of return on these investments, or the terms on which they were financed, were often opaque. The comically one-sided coal-fuelled power plant deal with the Adani Group is just one example of such projects driving the country’s twin deficits.

The authorities have established several commissions and task forces to examine these deals, while international agencies have promised assistance. For example, at the time of writing, an IMF mission is visiting Dhaka to discuss the government’s request for increasing and frontloading the country’s current program with the Fund. Thus far, the indications are positive, with as much as $10 billion possibly in the pipeline from various multilateral agencies over several years.

External imbalances, bad banks, and authoritarian politics — that’s what made the noxious Monsoon cocktail of the Asian Financial Crisis of 1997-98. Bangladesh has gotten rid of the authoritarian politics, but it will need to grapple with the banks immediately, and the current account deficit in the medium term, for the post-Monsoon recovery to be durable.

Bangladeshis are, of course, used to post-monsoon recoveries. That is the time to sow a new crop after monsoon flood has brought new, more fertile silt —as the Assamese singer Bhupen Hazarika sang in a 1970s classic ‘notun maati-te ashe foshol-er kaal’. Similarly, considerable political difficulties notwithstanding, the post-Revolution political order presents a fertile ground for tough reforms needed for a durable recovery. Reform is the buzzword in Dhaka after the Revolution, and there is an acceptance among the country’s political and economic establishment that hard choices need to be made to stabilise the economy first, and then return it to sustainable and durable growth eventually.

First published in the De/Cypher Asia.

I have re-posted this song. The last time was for my first op ed in an Indian magazine, warning about the storm that was brewing.

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