Threshold of transition

The interim government of Bangladesh, headed by Nobel laureate Muhammad Yunus, was sworn on August 8, 2024 after the elected Prime Minister Sheikh Hasina fled to India on August 5, as thousands of citizens had hit the streets demanding her resignation. Since its formation, the Interim Government has faced with three major challenges: (i) stabilising the economy amid severe political unrest, (ii) careful navigation to avoid potential hindrances as Bangladesh is poised to graduate from a Least Developed Country (LDC) to a Developing Country in 2026, and (iii) developing good relations with its two neighbours, Myanmar and India.

Economic recovery

After six months of political turmoil since July 2024, it appears that Bangladesh has successfully stabilised its economy. Though in the first quarter (July-September) of the 2024-25 fiscal year (July –June), the GDP growth rate dropped to 1.81 per cent, the lowest in nearly four years, GDP grew at a moderate rate in next two months. Overall inflation decreased to 10.89 per cent in December, compared to 11.38 per cent in November, and food inflation decreased to 12.92 per cent in December from 13.8 per cent in November.

Referring to data from the Export Promotion Bureau (EPB), The Daily Star reports that Bangladesh’s exports has hit USD 50 billion in 2024, buoyed by a sharp December spike. Of the total USD 50 billion, exporters earned USD 4.62 billion in December alone, an 18 per cent increase compared to the same month in the previous year. In the first six months of the current fiscal year (July 2024-June 2025), exports rose by 12.84 per cent to USD 24.53 billion. During the July-December period, garment shipments, the top export earner, increased by 13.28 per cent to USD 19.88 billion. Leather and leather goods exports grew 10.44 per cent to USD 577.29 million in the last six months. Cotton and cotton product exports increased 16.32 per cent to USD 319.06 million. According to EPB data, home textile exports increased 7.85 per cent to USD 410.81 million in July-December, while non-leather footwear exports surged 39.10 per cent to USD 273.89 million. Frozen and live fish exports grew 13.01 per cent to USD 245.71 million and agricultural product shipments increased 9.31 per cent to USD 595.51 million. Plastic goods shipments went up 29.72 per cent to USD 157.94 million in July-December, 2024.

However, some traditional export items, such as jute and jute goods, saw a decline in merchandise shipment during the July-December period. Jute and jute goods exports fell 8.11 per cent to USD 417.39 million. Exports of jute and jute goods have been declining over the past few years, mostly because of the anti-dumping duties imposed on the shipments to India—the single largest export destination for Bangladeshi jute and jute goods.

Bangladesh’s foreign exchange reserves reached over USD 21 billion by the end of December 2024, the latest central bank data showed. The country has recorded high remittance of USD 26.9 billion in 2024. The Bangladesh Bank reported that the country’s foreign exchange reserves stood at USD 21.359 billion on December 31, according to the International Monetary Fund (IMF) calculation method. In comparison, the reserves were 18.61 billion dollars at the end of November. The country’s remittances, one of the key sources of foreign exchange, totalled 13.78 billion dollars in the July-December period, official data showed. With the existing reserves, however, central bank officials said Bangladesh is in a position to pay nearly four months’ import bills. For a growing economy like Bangladesh, forex reserves equivalent to six months’ import bills are considered adequate. In a bid to boost shrinking forex reserves, the central bank has taken various measures including incentives to woo more remittances from millions of Bangladeshi people living and working abroad, reports Xinhua.

Graduating to a developing country

When a country moves toward middle-income status—though it is a significant milestone in its development journey—one of the primary concerns is the potential loss of preferential trade access to global market. Bangladesh is facing that challenge as 2026 is very close. The UN Committee on Development Policy, the body which assesses the graduation process, has confirmed Bangladesh will graduate in November 2026. It examined the country’s economic performance across three criteria: gross national income (GNI) per capita, human assets index (HAI), and economic and environmental vulnerability index (EVI). Bangladesh has outperformed all previously graduated LDCs in the three criteria in all reviews.

Within five decades, following its breakaway from Pakistan, Bangladesh has made spectacular economic and social progress. Once one of the world’s poorest countries, with the US administration calling it a ‘basket case’ when it became independent, it evolved itself into a rising star of South Asia (refer to Table 1). The government aims to end absolute poverty and graduate to higher middle-income status by 2031. The country has also become a symbol of humanitarianism in the framework of the Rohingya Crisis (since 2017). According to the latest data, Bangladesh has surpassed India in all the major socioeconomic parameters like GNI per capita 2023, Human Development Index, World Economic Inequality Index and Global Hunger Index.

Bangladesh was included in the LDC group in 1975 by the United Nations. Since becoming an LDC, Bangladesh has enjoyed zero-duty benefits on exports to different countries, including developed and developing nations. It receives preferential treatment in 38 countries. It also qualifies for trade preference on shipments to its largest destination, the European Union, under its generous “Everything but Arms (EBA)” scheme.

Except for the US, all other developing and developed countries have granted Bangladesh zero-duty benefits under the declaration of the Hong Kong Ministerial of the World Trade Organisation (WTO), where global leaders agreed to implement the Doha Development Agenda by approving duty exemptions for all goods originating in LDCs. Bangladeshi garment exporters have always had to face a 15.62 per cent duty on apparel exports to the US markets. The USA also suspended Bangladesh from the generalised system of preference (GSP) in June 2013 for its failure to meet statutory eligibility requirements related to worker rights, reports The Daily Star.

Bangladesh, moving up from the LDC category in 2026, is expected to see a major shift in trade dynamics, especially with the European Union (EU). Like any other LDC, Bangladesh has benefited from concessions that include duty free and quota-free (DFQF) access to the EU market which constituted 45 per cent of its export destination. The Asian Development Bank (ADB) warns that Bangladesh’s exports may drop by 5.5 per cent to 14 per cent after losing its Least Developed Country (LDC) status, particularly due to reduced revenue from the European Union (EU). Currently, over 70 per cent of Bangladesh’s exports benefit from LDC-specific trade preferences, raising significant concerns for the export sector, especially the readymade garments (RMG) industry. After the transition, Bangladesh could be faced with an average tariff of about 11 per cent in the EU market. This will have a negative impact on Bangladesh’s competitiveness with respect to Vietnam and other LDCs.

In addition to the garments segment, the pharmaceutical sector will be impacted post 2026. At present, 98 per cent of the country’s medicine demands are produced locally, while its pharmaceutical companies export to 151 countries. Thanks to the availability of cheap medicine, the life expectancy at birth is now over 74 years, ahead of world averages. At the time of independence in 1971, it was less than 50 years. LDC graduation may lead to discontinued production or higher prices of patented medicines, reduced exports, diminished investment, and potential rises in drug prices, impacting low- and middle-income households.

Graduation will also mean the loss of concessional loans and grants from development partners. With institutions like the World Bank already transitioning to market-based loan terms, borrowing costs will rise significantly. Bangladesh will no longer be eligible for Official Development Assistance (ODA) earmarked for LDCs, including grants and technical assistance, which could strain public finances.

Although it is reported that the EU will grant a three-year grace period to graduating LDCs—meaning Bangladesh will be allowed duty-free access up to 2029 and the 13th WTO Ministerial Conference in Abu Dhabi has decided that graduating LDCs would be given the facilities for three more years— Bangladesh will find it difficult to compete in global market if its export basket is not diversified and its production costs drastically reduced by introducing innovative process and continuous upgradation of infrastructure.

Improving relations with the neighbours

Bangladesh shares land borders with India (94 per cent) and Myanmar (6 per cent). Its 4,246 km land border with India is one of the largest borders of the world. With Myanmar, it shares a 207 km land boundary and 68.20 km Naaf river boundary.

Myanmar’s Rakhine state shares border with Bangladesh. In August 2017, violence broke out in Myanmar’s Rakhine State, forcing nearly one million Rohingyas to flee their homes and seek refuge in Bangladesh. The non-state armed insurgency group, the Arakan Army, now controls 15 out of 18 towns of Rakhine State. The Bangladesh border areas are under their control now.

Civil war in Myanmar—especially in the Rakhine state—has made the Rohingya crisis more complicated for Bangladesh. Additional refugees have crossed to Bangladesh during the last couple of weeks.

Political analyst and Myanmar watcher Subir Bhaumik thinks that the United League of Arakan (ULA) and its military wing, the Arakan Army, are very close to achieving what seemed impossible even three months ago – independence. Only the renovated port of Sittwe done up as part of the India-funded Kaladan Multimodal Transport project, the China-funded deep-sea port of Kyaukphyu, and the town of Munaung are in the hands of the Burmese military junta. The Arakan Army also overran Maungdaw and took control of the entire border with Bangladesh. If they manage to overrun the entire Rakhine province and declare independence, this will be the first successful secessionist campaign in Asia after the birth of Bangladesh in 1971.

Bangladesh cannot ignore its big neighbour India with which it has a very strong geographic, political and cultural ties. India is Bangladesh’s second largest trade partner after China. In addition to formal trade, informal trade between these neighbours, done through local currencies, exceeds a few billion US dollars. But the trade between India and Bangladesh has plummeted to the historical low after August 5, when Sheikh Hasina fled to India. In August itself, India’s export to Bangladesh declined by 28 per cent.

In 2023-24, African nations have surpassed India to become the largest source of cotton for Bangladesh as local spinners and millers look to cut down their dependence on a single source for their vital raw material. Last year, Bangladesh, the largest importer of cotton in the world, met 37.06 per cent of its requirement for the white fibre from East and West African countries. India accounted for 26.12 per cent of the total cotton imports, down from more than 60 per cent two years ago, according to data from the Bangladesh Textile Mills Association (BTMA).

The bilateral relation between India and Bangladesh is still very tense. Presence of the dethroned Prime Minister Hasina in India since her removal and using Indian soil for her political activities have deepened anti-Indian sentiments in Bangladesh. The Interim government of Bangladesh has issued arrest warrants against her and senior officials in her administration. They have also revoked her passport and requested the Indian government to extradite her for trial.

Although India’s Ministry of External Affairs officially said that Sheikh Hasina was granted temporary entry for security reasons on August 5, it has not disclosed her precise legal status. Reports suggested that Sheikh Hasina was issued a “travel document” (TD) by the Indian government. This type of TD allows holders to travel internationally and function within the issuing country without the need for a separate visa.

It is reported that since the appointment of Muhammad Yunus as Bangladesh’s interim leader in August, Dhaka and Islamabad appear to be on the path to rapprochement. Pakistani Prime Minister Shehbaz Sharif and Yunus agreed to deepen bilateral cooperation in all areas of mutual interest after the two leaders met on the sidelines of the D8 conference in Cairo in December. The re-establishment of direct sea links, strained since the 1971 independence war, has marked a historic thawing of relations. Bangladesh’s interim government also removed previous restrictions that mandated physical inspections of cargo from Pakistan. Media reports also claim that Pakistan will begin training the Bangladesh Army in February 2025, strengthening military ties between the two nations, reports DW. As Pakistan bolsters ties with Bangladesh, there are concerns about potential security threats in the region, especially to India.

Observations

After a prolonged war of nine months with the Urdu speaking Pakistani colonists, Bangladesh attained its independence, in 1971, by sacrificing nearly three million of its Bengali speaking co-citizens. During the last five decades, since its inception, this densely populated tiny republic, situated on the shore of Bay of Bengal and sandwiched between eastern and north eastern states of India, has successfully tackled many political storms and deadly hurricanes. The current crisis is just another challenge for the people of Bangladesh. It is expected to emerge as a more democratic, secular and stronger republic than before. A stable and vibrant Bangladesh is a prerequisite for a stable south Asia.

As a bigger and stronger neighbour, India should take the lead to normalise relation with Bangladesh on the basis of five basic principles of Panchsheel: (i) mutual respect for sovereignty and territorial integrity, (ii) mutual non-aggression, (iii) non-interference in each other’s internal affairs, (iv) equality and mutual benefit, and (v) peaceful co-existence.

Restoration of the land and river connectivity between India and Bangladesh, as existed till early 20th century, is essential for the development of land locked states of India’s north-eastern region. To those Indian states, Bangladesh can act as a gateway to the sea and mainland India.

Bangladesh, Pakistan and Myanmar are part of China’s Bridge and Road Initiative (BRI). Long animosity with India will push Bangladesh to Pakistan-Bangladesh-Myanmar (Arakan)-China axis. In addition to China, Japan and Russia have also invested in critical infrastructure projects in Bangladesh. The Russian built 2.4 GW Roopur Nuclear Power Plant on the bank of river Padma is expected to become operational in 2025. For sourcing apparels at a reasonable price, the EU maintains a good relation with Bangladesh and this is likely to continue till 2029. Under such a situation, it is very unlikely that Bangladesh will be in the grip of Islamic fundamentalists.

Bangladesh is at the crossroads now. The future of Bangladesh depends on how smoothly the interim government under Yunus transfers power to a democratically elected government. Recent developments in Sri Lanka is a case in point. Despite the traumatic legacy of the economic crisis, Sri Lanka’s polls have since proved to be free of violence during or in the aftermath of the elections.

Views expressed are personal