Bangladesh Needs USD 6.5 Billion In Aid, Soaring Inflation Amidst Political Unrest A Major Worry: Bangladesh Central Bank Governor

Bangladesh is seeking USD 6.5 billion in financial support from international agencies to stabilise its economy, according to the country’s new central bank governor Dr Ahsan H Mansur.

“This includes a demand of USD 3 billion from the IMF, USD 1.5 billion from the World Bank, and USD 1 billion each from the Asian Development Bank and the Japan International Cooperation Agency,” Dr Mansur said in an interview to the BBC.

In tandem with these efforts, Dr Mansur also said that the central bank plans to raise interest rates from 8.5 percent to 9 percent within days, with further hikes expected up to 10 percent or higher in the coming months.

These measures are aimed at curbing inflation, which has surged due to a variety of factors such as a spike in the prices of essential commodities, a weakening currency and declining remittances.

While the country has been facing these problems for more than a year now, the situation has particularly exacerbated due to the political unrest that has severely impacted garment exports, a key component of Bangladesh's economy.

Contributing to Bangladesh's economic woes are factors such as poor corporate governance, a culture of willful loan defaults, rising fuel and electricity prices, customs evasion, and rampant money laundering.

Experts point out that the South Asian country's economy has been witnessing a crisis since the middle of 2022. In response to liquidity and forex challenges, the country implemented preventive measures and sought assistance from the International Monetary Fund (IMF) and other global lenders to prevent a meltdown.

The IMF in its response had agreed to extend an aid worth USD 4.7 billion. However, considering the ongoing political instability which had its genesis in the nationwide violent protests and subsequent expulsion of the former Prime Minister Sheikh Hasina, the new administration is of the opinion that the promised aid won’t be enough to bring the country’s economy back on track.

Last week, Chief Adviser Muhammad Yunus, who has been entrusted with the task of running the interim government by the country’s army, signaled that his administration is committed to "comprehensive reforms" before holding the next general election.

However, Dr Mansur suggested that these elections may not take place for another three years or more considering the gravity of the prevailing situation in the country.

The central bank governor also expressed concern regarding the country's banking sector, pointing to the widespread flight of deposits and a sharp increase in non-performing assets linked to defaults by business groups allegedly associated with the ousted Awami League government.

Dr Mansur underscored the urgency of recovering stolen funds, some of which have been siphoned off to locations like Singapore, Dubai, and London. To address these issues, the central bank governor is advocating for the establishment of a Banking Commission, tasked with auditing banks and recommending measures such as board and management changes, capital injections, or mergers, particularly for smaller banks.

He also noted that the government might need to inject USD 15-30 billion to recapitalize some of the country’s Islamic banks, which could lead to their effective nationalization to protect depositors.

Alongside these banking reforms, Dr Mansur expects the new government to implement significant spending cuts, even amid ongoing economic turmoil. While the previous government had already reduced spending and lowered the fiscal deficit target to 4.6 percent, as per him further cuts in spending might be needed to free up credit for the private sector.