Bangladesh has undergone a significant political shift, following large-scale protests that resulted in the resignation of the then Prime Minister and the dissolution of parliament. As an interim government has been formed under the leadership of Nobel Laureate Dr. Muhammad Yunus, the nation faces both significant challenges and potential opportunities.

Key leadership roles have been extensively shaken up since the interim administration took over. Dr. Salehuddin Ahmed, the new Finance Advisor, has vowed for financial sector reforms, transparent reporting, and strict inflation control by addressing market inefficiencies like extortion and syndication. With Dr. Ahsan H. Mansur as the new Bangladesh Bank Governor, there’s a clear shift toward a more proactive monetary policy. The sharp rally in the Dhaka Stock Exchange following the regime change reflects early investor optimism for meaningful economic reforms, renewed investor confidence, and a broader recovery of economic stability.

Highlights of the Changes to Our Macroeconomic Outlook from July Considering the New Reality:

• We expect a 150-200bps drop in inflation by Dec-24E due to further tightening and a higher base effect from August. Inflation spiked to a 12-year high of 11.7% in July, primarily due to improved transparency in economic reporting and supply chain disruptions. The magnitude of expected easing in inflation is unchanged from our earlier forecast, but the decline will be from a higher level. However, early tightening measures could result in a sharper reduction in inflation.
• Our Interest Rate (1-year T-bill) target is unchanged at 12.5%-13.5% for Dec-24E as the central bank is expected to maintain a tightening stance. However, we expect a sharper hike in the policy rate, a 100-150bps hike by Dec-24E, revised from our earlier expectation of 25-50bps, considering the newly appointed governor’s immediate priority of taming inflation over economic growth.
• Our view on the exchange rate is unchanged at the BDT stabilizing by 120-125 by Dec-24E due to the continued monetary tightening and a shrinking current account deficit. Reduced imports and stable remittances will mitigate the adverse effects of any slowdown in export growth.
• We have lowered our GDP growth expectation to 3.5%-4.0% for FY25E, reflecting anticipated sharper monetary tightening, reduced development expenditure under the interim government, and disruption to industrial activity and trade during the curfews, blockades, and internet blackout in July.