Oxford Economics: Political Calm Returns, Economic Risks Mount

Bangla Press Desk:   Although political stability has returned following the formation of a BNP-led government through the national parliamentary elections, economic risks in Bangladesh have increased since last August, according to a report by Oxford Economics.

The report, titled “Political Calm Returns, but Transition Risks Remain”, was published on Thursday. It states that Bangladesh’s overall economic risk score has risen by 0.4 points to 7.1, compared with the Asia-Pacific regional average of 5.1.

In the global risk index, Bangladesh currently ranks 141st out of 164 economies. While the peaceful election has reduced political uncertainty, the report notes that it will take time for confidence to be fully restored.

Oxford Economics assesses economic risk based on five indicators: market demand, market costs, exchange rate stability, sovereign creditworthiness, and trade credit. Risks are scored on a scale of one to 10, with 10 representing the highest level of risk.

According to the report, Bangladesh’s greatest vulnerability lies in trade credit, where it received the maximum score of 10. High levels of non-performing loans — particularly in state-owned banks — coupled with weak supervision and limited credit information, have compounded the problem. Banks tend to favour large borrowers and the services sector, while households and the housing sector receive relatively less credit despite posing lower risks.

Market costs remain high, with a score of 8, driven by elevated interest rates and mounting defaulted loans. The market demand score stands at 7, compared with the regional average of 5.1. Political instability, regulatory challenges, uncertainty surrounding development projects, and dependence on Middle Eastern countries for remittance inflows have increased demand-side risks.

Exchange rate risk is assessed as moderate, with a score of 5. Although a floating exchange rate regime has been introduced, Bangladesh Bank continues to intervene in the market. Following a sharp depreciation early last year, the taka has stabilised somewhat. Foreign exchange reserves have recovered but remain below pre-pandemic levels. Continued reforms under the International Monetary Fund (IMF) programme could strengthen stability in the medium term.

Sovereign creditworthiness remains at high risk. Structural weaknesses in the banking sector, low per capita income, institutional concerns and an unfavourable business climate continue to weigh on the score. The report also warns that climate change risks may affect the government’s credit profile over the long term. Despite reduced political uncertainty, structural weaknesses and reform-related risks persist.

Amid slowing trade and persistently high inflation, Oxford Economics has revised down Bangladesh’s GDP growth forecast for the 2025–26 fiscal year from 4.7 per cent to 4.5 per cent. Growth is projected to rise to 5.7 per cent in 2026–27.

Inflation remains a significant challenge. After temporarily easing, it rose again to 8.6 per cent year-on-year in January, up from 8.2 per cent in October. To curb inflation and bolster reserves, the central bank has kept the policy interest rate unchanged at 10 per cent. With wage growth at around 8 per cent, purchasing power has weakened and consumer demand remains constrained.

The export sector, particularly ready-made garments, faces renewed pressure. Although exports rebounded in the third quarter of last year, they declined in the fourth quarter, driven by lower advance orders from the United States and weaker demand in Europe, including Germany. The United States and Germany together account for roughly one-fifth of Bangladesh’s total merchandise exports. A contraction in services exports has added to the strain.

Thanks to tight monetary policy and IMF support, foreign exchange reserves rose to $22 billion by mid-last year, up from around $17 billion in 2024. However, current reserves cover only four months of import payments.

Investment growth is likely to remain weak due to fiscal tightening and high borrowing costs. Bangladesh Bank has indicated that it intends to keep the policy rate at 10 per cent until inflation falls to 7 per cent. With inflation at 8.6 per cent in January, a near-term return to normal conditions appears unlikely. Source: daily Sun

BP/TD