Amidst ongoing geopolitical tensions, such as the Israel-Hamas conflict and the war in Ukraine, which have already created widespread uncertainty and strained the global economy, Bangladesh is now facing its own set of crises. Known as a global powerhouse in apparel manufacturing, the country is grappling with significant social unrest, driven by disputes over veteran student reservations. This unrest threatens to destabilise its economy further. The recent resignation of Prime Minister Sheikh Hasina and the imposition of interim military rule in the country could potentially roll back years of economic progress, reminiscent of the past military regimes that led to economic stagnation and decline. These developments raise serious concerns about the future of Bangladesh's economic stability under mounting internal and external pressures.

Economic snapshot of Bangladesh

In recent years, Bangladesh has achieved significant economic milestones. In 2022, its GDP growth surpassed that of India, making it one of the largest foreign exchange earners due to rising exports. The textile and readymade garment (RMG) industry has been central to this growth, demonstrating resilience even during the pandemic. However, in 2023 and 2024, the country faced a social crisis that threatened its economic stability.

Figure 1: Bangladesh’s GDP growth (in %)

Source: International Monetary Fund (IMF)

According to the International Monetary Fund (IMF), Bangladesh's GDP is projected to grow at a CAGR of 6 per cent from 2024 to 2027, potentially reaching $560 billion by 2027. The textile industry, employing around 4 million workers, is a major driver of this growth. As the second-largest garment exporter globally, Bangladesh produces apparel for top brands like H&M, Tommy Hilfiger, Calvin Klein, Giorgio Armani, Ralph Lauren, and Hugo Boss. However, recent violent student protests, internet shutdowns, and curfews have created uncertainty among garment brands, disrupting their ability to track production lines and processes in the country. This has cast doubt on Bangladesh's reliability as a manufacturing hub, causing significant daily losses for manufacturers.

With the military's return to power, there is a growing risk that brands may withdraw their manufacturing operations, leading to mass unemployment and a decline in foreign investment. The country, already seeking assistance from the IMF due to depleted forex reserves, could face further financial strain if the IMF halts its next instalment. The forecast economic growth could reverse under military rule, plunging the country into a deeper economic crisis.

Crisis in the making

A number of apparel brands rely heavily on Bangladesh for their garment supplies. However, due to the recent unrest in the country, garment exports have been delayed by two days, leading to massive demurrage charges, which represent a loss for the exporters. The internet blackout has also impacted the tracing of garment production. This is not the first time that the Bangladesh textile industry has been affected by such issues. Last year, protests by garment workers also disrupted the manufacturing and delivery schedules of garment exports. In addition to the domestic social unrest, the Red Sea crisis, compounded by the ripple effect of the cost-of-living crisis in the European Union (EU), has led to a reduction in apparel exports and an overall decline in exports by 19 per cent. With the current uncertainty, there is a high likelihood that exports may fall further from current levels.

Figure 2: Overall exports and apparel exports of Bangladesh (in $ bn)

Source: ITC Trademap

The ongoing curfew and lockdown have resulted in losses worth millions for the apparel industry. According to industry reports, the country faced huge losses due to the curfew and the internet shutdown. If the situation persists, there will be additional indirect losses. Although the internet connection had been restored and manufacturing had picked up pace, the recurrence of the protests from Sunday, August 4 onwards resulted in the closing down of factories again. This situation may lead to further direct losses for producers. There are numerous examples in Africa, Afghanistan, and Pakistan where military rule has caused significant economic losses and imposed unwanted regulations, which restrict economic growth and expansion.

Economic freedom in the country

The Index of Economic Freedom measures the ease with which businesses can operate in a region, considering factors such as laws, infrastructure, and the bureaucratic process. For 2023, Bangladesh's index of economic freedom was 54. The key challenges identified include widespread corruption, expensive energy resources—a crisis the country is currently facing—poor infrastructure, uncertain labour laws, and limited access to financing for industries.

Figure 3: Index of economic freedom

Source: The Heritage Foundation

The index of economic freedom for Bangladesh has declined by nearly 7 per cent, from 52.7 in 2022 to 54 in 2023. Significant bureaucratic hurdles remain in the country. Bangladesh has numerous stakeholders who can influence policymaking, particularly in the textile industry. According to the Planning Commission of Bangladesh, various stakeholders, including bureaucrats, banks, and sector-specific bodies, can play a decisive role in shaping policies for the garment industry.

While there are policies in place that encourage the development of the sector, concerns about corruption have led to increasing complexities, contributing to the country's lower score on the index. Another factor in the low score is the dominance of political interests over those of other stakeholders in Bangladesh. A recent example is the labour protests in October 2023, which resulted in the minimum wage being increased from $64 to $114 in December 2023, despite persistent demands for an increase to $208. This illustrates that, even when demands are economically reasonable, political will ultimately drives decision-making.

With socio-economic factors playing a significant role in policy formulation, the recent factory labour protests and the gradual phasing out of cash incentives for garment factories are already signalling growing dissent and uncertainty in the industry. As a result, maintaining the pace of order fulfilment without incurring demurrage charges could become increasingly challenging for the country. Additionally, ongoing regional social instability and economic uncertainty are likely to harm the nation’s foreign direct investment (FDI) prospects in the long term.

With the resignation and departure of Sheikh Hasina, the country is facing heightened political uncertainty, which could further jeopardise Bangladesh’s economic growth. The country is in negotiations with the EU, US, and others to ensure trade stability following its upgrade to developing nation status. However, with the military now forming an interim government, the future of Bangladesh’s economic growth is highly uncertain.

Significant economic losses

Bangladesh is facing immense economic challenges as social unrest continues to escalate, putting trust in the nation's stability at serious risk. The country had the potential to become the world's top garment exporter, especially with garment manufacturers adopting a "China plus one" strategy. However, ongoing instability, including the return of the army to the administration and uncertainty about when the situation will stabilise, may deter leading apparel brands from relocating their production bases to Bangladesh. Instead, they may choose to move from China to other Asian garment-producing nations like India, Vietnam, Indonesia, or Cambodia. This shift could be highly detrimental to Bangladesh, where apparel exports account for 85 per cent of export earnings and 18 per cent of GDP. The looming threat of losing apparel manufacturing and exports poses a severe risk to the country's economy and could necessitate a significant restart of the industry.

Fibre2Fashion News Desk (KL)