Lengthy unrest to hurt Bangladesh growth: Moody’s

New Delhi: Crisis-hit Bangladesh may see a fall in remittances in the short term, while prolonged unrest may hurt consumption and economic growth, Moody's Ratings said.

The ratings agency said it expects Bangladesh's GDP growth in the year ending June 2025 to moderate at 5.5-6%, amid persisting inflationary pressures and a fall in real wages.

"Prolonged social unrest could continue to weigh on domestic consumption, which accounted for about 66% of GDP in the past five years...However, a modest recovery in merchandise exports would balance this risk in the second half of 2024," Moody's said in a report that follows the ouster of the Sheikh Hasina government.

Maintaining political stability and continued commitment to structural reform will decide the impact on the country's credit rarting, Moody's said.

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"Prolonged political or social unrest that derails progress on structural reforms and dampens growth or a deviation in the interim government's commitment to structural reform would be credit-negative," it added.

Financial strain amid political uncertainty

The exit of Hasina has raised concerns about further instability in a country of approximately 170 million people already grappling with high unemployment, corruption and ongoing violence, especially against minorities. Bangladesh's headline inflation was 9.7% in June, while youth unemployment was 15.7% in 2023.

The newly established interim government of Bangladesh led by Noble Prize winner Muhammad Yunus on Sunday said it is addressing the issue of violence.

"We expect short-term disruption in remittance and financial flows as risk-averse individuals, investors and companies pause in repatriating or investing their capital in Bangladesh amid the heightened political uncertainty, weakening the government's external position," Moody's Ratings said in its report.

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A reduction in remittances will reduce banks' foreign currency liquidity, which accounts for a significant portion of its liquid assets, it added.

Moody's Ratings said a prolonged shutdown of businesses would weigh on their ability to repay loans, increasing the risk of non-performing loans (NPLs).

"A loss of confidence among retail depositors, prompting them to withdraw their deposits as a safeguard against potential bank failures or economic downturns, could also strain banks’ liquidity," it said.

"A reversal of bank reforms on tightening loan classifications to accelerate NPL recognition from 2024 or reduced reform momentum to strengthen the banking sector would be credit negative for Bangladesh's banking system," it added.