Stock taking a year like no other

Who could have thought at the outset of 2024 that Bangladesh would cap it off with a renewal such as "36 July"? We are inspired to look to 2025 with hopes we were afraid of hoping when 2024 dawned.

The liberty to take stock of the legacies of a fallen regime and the fault lines of the ones replacing it is unique to the post August 5 period which defined with blood what the nation does not want. The discovery of what the nation wants is work in progress.  36 July unraveled pent up aspirations sweating the interim government in living up to it. 

The laws of the oligarchs replaced the rule of law in banking regulation. The size of the banking distress, equivalent to 13 Dhaka metros and 23 Padma bridges, is a ticking time bomb of contingent liability on the present and future governments

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Promises turned into disillusion in the last decade and a half setting back progress in the three decades since 1990. The institutions of checks and balances crumbled. Democratic accountability was dispatched to a museum no one could visit. Nor could one dispassionately relay the experiences of public life. We are ending 2024 free from the fear of reprisal from the state for calling a spade a spade, a freedom that must never be taken for granted.  

Bangladesh's new year began on August 5 2024, unfolding yet another pivotal chapter in the country's political history. Writing the script of a new era is a massive task facing the current and future Bangladeshi polity. It has not exactly been smooth so far.  Far from it. The current de facto political settlement is expected to map change in the architecture of governance in 2025 shaping the contours of the new chapter.  

A shambled economy 

Be that as it may, the initial conditions will find their place in the context setting opening section. The White Paper team did all it could to fact check a development narrative inherited from the previous regime and set macro, structural, social and environmental benchmarks on the state of the economy to anchor expectations on how much can happen in which policy domain over what period of time. 

The interim government inherited a rosy narrative built on a shambled economy with foggy visibility. Economic growth was never as high as reported. It averaged 4.2 percent, compared with official 7 percent, during FY09-19.  Political padding of growth estimates peaked during the 7th Plan period (2015-19). Not just the magnitude but also the direction of reported growth was increasingly  distanced from reality.  Growth slipped below 5 percent annual rate since the pandemic till present even in official (BBS) quarterly data. 

The hype on growth sleepwalked Bangladesh into structural stagnation. The economy has been doing same of the same. It is stuck in low depth and diversity of exports, investment, human capital accumulation, financial penetration, revenue mobilisation, public expenditure on health and education, the share of manufacturing in total employment, and increasing wealth inequalities. 

A deeply entrenched inflation at 10 plus percent has aggravated the livelihood crises for millions of low income families. Inflation was never as long lasting as it has been since 2021. Official foreign exchange reserves declined precipitously since mid-2022.  The net international reserves were $16 billion on August 6 2024. With it came accumulated external arrears to the tune of $2 billion on account of power and gas alone. Both inflation and reserve losses were amplified by interest and exchange rate repression alongside monetary expansion. The policy responses experimented with cures worse than the disease.  

The apparently "low" public debt as a ratio of GDP has become increasingly burdensome on both the government budget and the balance of payments. The debt GDP ratio is misleading when GDP data cannot be trusted and liquidity is short, as has been the case in Bangladesh. Equally, if not more, important is the stealing of borrowed money by the incumbent politicians with their comrades in  bureaucracy and business and laundering it abroad. Money, being fungible, essentially traveled from the accounts of the creditors to the coffers of the money launderers through de jure and de facto channels. Government used borrowed dollars to pay project contractors and vendors who overpriced contracts. They laundered abroad part, or all of the money thus appropriated. Dollars were received and paid out bringing low value for external public debt but high value for local public cronies. Meanwhile, the state incurred an increasing burden of debt servicing.

The way the financial system was robbed puts the storybook bank robbers to ignominy. A significant part of the banking system is bankrupt and illiquid. A culture of impunity protected the owners, management, regulators, and related parties who colluded to siphon off depositors' money through scams, fraud and loan default. The laws of the oligarchs replaced the rule of law in banking regulation. The size of the banking distress, equivalent to 13 Dhaka metros and 23 Padma bridges, is a ticking time bomb of contingent liability on the present and future governments.

Aberrations in the design and conduct of macroeconomic, financial, structural, and social policies reached new lows of malpractice. Policies were essentially tailored to serve coteries of power and their brokers in politics, bureaucracy and business. Business conglomerates invested in political power to amass market power. The ruling politicians invested in business to consolidate political power. The administration brokered political and economic powers to hedge against change in their political climate. An unholy convergence of interest of this troika pivoted policies and institutions towards serving the few at the expense of chaos and uncertainty in credit, foreign exchange, goods and labor markets.. 

The face of Bangladeshi capitalism

Capitalism in Bangladesh evolved to a winner-takes-all economy in which one or a few dominant players called the shots in each sector. The symbiosis of political and market power turned toxic for democracy and  competition in both politics and markets. The establishment propaganda pushed a yawningly optimistic vision to make people believe that developmental state and crony capitalism are essential to shared prosperity. Liberty depended on relenting to the ruling oligarchy and distrusting their critics in opposition and civil society. 

Market and bureaucratic power became so entwined and entrenched that potential rivals preferred to cooperate with the top in business and administration rather than compete by the book. Several business leaders and senior members of the bureaucracy saw themselves as the superior, intelligent species passing through the process of ruling regime's selection. Bad practices drove good practices out of circulation. Policies permitting the growth of monopolies and sludgy regulations enhanced the power of the incumbents.   

Rising degree of politically backed market power increased economic inequality, reinforcing the nexus between political power and financial wealth. A negative sum game came into play cracking macro-financial stability and weighing adversely on human and physical capital accumulation. Unfettered growth of a patronage system impeded investment in minds and machines. Incumbents shifted from bringing scale and diversity to cornering, if not cannibalising, rivals to preserve themselves. Firms led by cronies prioritised monopoly profits over investing in labor and capital in a crony-takes-all capitalism. 

Inertia and loss aversion proliferated with bureaucratic domination of economic management. The conduct of policies drifted towards expanding purchasable government discretion vis-à-vis businesses and non-state actors. Deep conflicts of interest of regulators dealing with security of property rights and competition in industry, technology and finance upended the conditions for an accelerated and inclusive growth process. 

The ruling political elites sought legitimacy in large infrastructure. Mega-projects with complex logistics, impressionable technological facelift, and substantial funding were undertaken in transport, energy, digital connectivity and so on.  A range of partners in corruption benefited from the bounties these projects brought. Corrupt stratagems in the sharing of the plunder game erased their net social returns. 

The reform imperatives

Bangladesh faces the challenge to mark the conclusion of the first quarter of the 21^st century with transformative political and economic reforms. We cannot afford to miss this path changing window of opportunity as the political transition runs its course. Politicians, bureaucrats, powerful elites, conglomerates, state-owned enterprises, the media and the civil society are on the cusp of creating or destroying value immensely. Critical junctures such as "36 July" do not happen all too often to dare obsolete arrangements. 

Bangladesh's national journey has more often than not exposed the vulnerability of both democracy and capitalism to dynasticism, idolatry, kleptocracy, cronyism, and gangsterism. Will the new Bangladesh revert to the mean or find unexplored frontiers with a vibrant young population larger than Ukraine and over twice the size of Sri Lanka? "36 July"  was demographic dividend paid in political currency to buy enduring change in political and economic governance. This tougher part of the change is not a done deal yet.

Economic policy warrants introspective action. Industrial policy is back but for whom and by whom need sorting. They are never neutral between labor and capital. Social policies demand renewal, but funding and delivery capacities constrain ambition. Climate change, rapid development of artificial intelligence, geopolitical reconfigurations and analytical uncertainty on their perils and promises means both upside and downside risks are salient.  

The macro imperatives are no cake walk. Monetary policy needs to remain tighter for longer with an eye on financial stability.  The exchange rate policy needs to crawl back to managed float with an eye on volatility. Financial regulations need reform to resolve zombies with an eye on systemic vulnerability. Data generation, dissemination and access need upgrading and broadening with an eye on relevance and  integrity.  Stronger revenue mobilisation and expenditure rationalisation must come with growing support to the vulnerable.

Painful tradeoffs are ubiquitous in all of the above.  But then who ever said designing and implementing smart policies is easy? The Council of Advisers and their administrative and institutional arms are mandated to make tough choices. 

What will 2025 bring?

Bangladesh's near-term economic outlook is laden with vulnerabilities extending from banking and energy to the foreign exchange and fiscal balances, not to speak of disruptive politics. There are green shoots, especially the resilience of remittances, exports, agriculture; lower global commodity prices and interest rates; and decent growth in US and Europe, our largest export markets. The risks to the domestic economy entering 2025 are acute due to deep geoeconomic and domestic political uncertainties.

No matter what 2025 has in store, rest assured there will be something extraordinary for the nation to rave or fret about at this time next year. Nation rebuilding is upon us to kickstart. Political will for reforming the regulatory framework, public services and operational efficiency blink hopes for bending the arc of history. The new regime appears open to feedback, a prerequisite for course correction in stormy seas. Keep it up!