For about a fortnight since late July, the website of the Bangladesh Central Bank was down. So was it’s dealing with the rest of the world. The website was revived and the new Governor of the Bank assumed office in close succession in the middle of August.
What will not be back quickly is the confidence in the economy and the direction it would take from here.
Bangladesh has a problem and that is the absence of key regulatory institutions. Just because some of the signboards of these regulators dotted the Dhaka business districts, was not enough. What was always missing was their effective presence to mediate between the state and the business, as the country took off on a fast growth path. The effective seizure of these institutions now, is likely to impact the reconstruction of the economy even more.
Why had the absence persisted for long. As a least developed country, Bangladesh had got no time to develop its regulatory structure. Those were to be developed even as the country maintained a most impressive rate of growth for close to two decades. This was natural. The country could have either set up such a system and then waited for growth to accelerate or caught the growth momentum and then built up whatever was necessary to sustain the growth.
The World Bank, which has been shepherding the economic trajectory of Bangladesh for a long time has itself noted in a report in April 2024, that Bangladesh needs to “establish a policy environment that attracts private investment”. This meant “strengthening public institutions” to diversify exports beyond the ready made garments sector and resolve financial sector vulnerabilities.
These absences do not show up when a country is growing fast but those become noticeable once growth slackens. Or as in the case of Bangladesh, activists pull them down.
Why are regulatory institutions important?
Regulatory institutions like the Central Bank for banking business, or for the capital markets channel resources and ensure market forces prevail. So organisations like the competition regulator, are the life blood of modern economies. Standing detached from the usual government bodies like Parliament, the ministries and the courts, they offer continuity in policies for business to invest in. For the larger population they are like the plumbing, unseen, but offering the right distribution of facilities for the citizens to tap into.
Most important, regulators depoliticise the business environment. They create freedom for citizens of a country to run any business. For instance Indian economic history shows regulators emerged in tandem with the dismantling of several acts which were meant to control the operation of business like Industries (Development and Regulation) Act or the Monopolies and Restrictive Trade Practices Act.
Instead, the regulators set a merit based criteria for anybody to enter a business, eschewing a discretionary approach to assess the suitability of a company or an individual to run a business. This meant giving market freedom to participants to both enter and exit at low cost. It is not surprising that the growth rate of the sectors where they were firmly established, took off soon. The cumulative effect of the presence of regulators is to lower the cost of capital, most important in a capital scarce country like Bangladesh.
Dhaka’s challenge
Bangladesh has thrived despite their absence because of a combination of fortuitous circumstances. The country had so long gotten away because of the light touch regulatory approach adopted by the World Bank, which sat well with the customer companies from the USA and Europe sourcing from Bangladesh factories.
In the absence of regulators or just their token presence, Bangladesh, till now had offered a fine deal for companies abroad. It offered cheap labour, and the support of the state to keep the costs low. So, issues like labour standards or environment safeguards from the production process at garment factories, health safeguards and costs of electricity could be kept low by administrative orders issued by the government at Dhaka.
The port of Chittagong which handles about 95 percent of the sea borne International trade is its own regulatory authority. Similarly, for the new port of Mongla, the Bangladesh government had inserted a mild environment safeguard clause. The punishment for “harming the environment” is a one-year imprisonment or a fine of five hundred thousand Taka. The punishment for dodging toll, fees and other charges of the port is also a one-year jail term or a fine of a hundred thousand Taka.
What makes it likely that these would change? After all with the removal of supposedly autocratic Sheikh Hasina led government, the International agencies will be possibly more keen to work with Dhaka. Also in the current tense environment of Dhaka, these absences may seem trivial.
There are difficulties here. The protestors have created two challenges. First, they have shown the leadership of any institutions can be changed without following a due process. In the absence of technological or financial leadership Bangladesh had only one calling card. That was the deep entrenchment of its business inside the government leadership. This has got eroded badly.
Second, the shutdown of business including of banks has also eroded the prospect of retaining Taka as a viable currency. This will take time to play out but as inflation already in double digits spirals, it will extract a huge cost.
International business, was in any case dealing with Dhaka only in hard currency. The gradual destruction of Taka even as a token presence means the safety valve that the country had for dealing with neighbour India for import of essential commodities is also in question.
These have huge implications. Taken together, these developments mean the cost of doing business with Dhaka will soar.
As an S&P report this August notes ““Continued disruptions to social stability could weigh more heavily on credit metrics, dampening economic growth and government revenue. In this scenario, exports would be materially lower than our expectations, with a more prolonged impact on Bangladesh’s external balance sheet. Materially lower exports could weaken the generation of foreign exchange (forex), further diminishing the central bank’s usable reserves”.
The interim government at Dhaka will find it impossible to continue with the business as usual scenario at the garment factories or the new sectors like low cost electronic assemblies, the country was keen to develop, unless they offer more sops to business abroad. In the absence of regulatory safeguards these could quickly degenerate to make Bangladesh seem like the a banana republic, where rules can be created, bent or scrapped at will.
At a Glance
- 2024 Projected Real GDP (% Change) : 5.7
- 2024 Projected Consumer Prices (% Change): 9.3
- Country Population: 172.019 million
- Date of Membership: August 17, 1972
- Article IV/Country Report: December 14, 2023
- Outstanding Purchases and Loans (SDR): 1819.79 million (June 30, 2024)
- Special Drawing Rights (SDR): 1891.29 million
- Quota (SDR): 1066.6 million
Number of Arrangements since membership: 14
