Crisis looms as political, economic instability leads to closure of over 100 factories

In the past six months, Bangladesh has witnessed the closure of over 100 export-oriented factories due to a multitude of factors stemming from political instability and an economic downturn.

The country's private sector has seen a dramatic slowdown in lending, while new investments have stagnated, exacerbating the growing unemployment rate.

Private sector credit growth has plummeted to its lowest in 42 months.

The upward trajectory of interest rates has led to a marked decline in the establishment of new industrial units, resulting in a sharp fall in the import of capital machinery.

RMG sector has been the hardest hit, with more than 100 garment factories shuttered in the past six months.

Additionally, around ten textile mills have closed in the last few months, while 83 companies shut their doors between July and September of the previous year.

Other sectors such as cement, steel, and paper manufacturing have also witnessed numerous factory closures.

The closures have been primarily attributed to a combination of political instability following the ouster of the Awami League government, market volatility, increased interest rates, raw material shortages due to the lack of opening Letters of Credit (LCs), labour unrest, and inadequate production capacity in factories, the report stated.

Analysts believe that these developments are having a direct negative impact on employment and tax revenue, creating an economically disastrous situation for the country.

On 2 January, Keya Group decided to permanently close four of its factories, while 24 factories across two groups were shut down in mid-December.

Following the political changes on 5 August, several industries saw closures, reflecting the broader trend of economic decline.

Private sector credit growth had already been on a downward trend due to contractionary monetary policy and a sluggish economy, said a report published by the Bangladesh Bank on Thursday (2 January).

By November 2024, the growth rate of credit flow to the private sector had dropped to an annual 7.66%, down from 8.30% in October.

This figure is 2.14% lower than Bangladesh Bank's target of 9.80% for the first half of the 2024-25 fiscal year.

Previously, during the COVID-19 pandemic in May 2021, the growth rate had been as low as 7.55%.

Decline in credit flow further worsened after political unrest began in July and August.

In July 2024, credit growth had stood at 10.13%, but by August, the month of the government’s fall, it had decreased to 9.86%.

By September, it further dropped to 9.20%, the lowest in three years, and continued to slide to 8.30% in the following month.

A senior official at a private commercial bank noted that the ongoing uncertainty, coupled with high interest rates, has significantly reduced demand for new loans, particularly term loans.

He mentioned that banks are currently offering loans at interest rates ranging from 14% to 15%.

He added that the demand for term loans and commercial financing has declined markedly in recent months, which has led to a reduction in imports.

In fact, business owners are waiting to make new investments until the current financial risks subside. 

He stressed the need for political stability and uninterrupted electricity supply to improve the investment climate in Bangladesh.

Data from Bangladesh Bank and the Bangladesh Bureau of Statistics revealed that in the first five months of the 2024-25 fiscal year, imports of capital machinery had dropped by 21.90%.

During the July-November 2024 period, capital machinery worth $86 crore was imported, compared to $111 crore in the same period of the 2023-24 fiscal year. The interest rate on loans has now surpassed 15%, up from 9%.

Similarly, foreign direct investment (FDI) has also decreased. In the first five months of this fiscal year, FDI amounted to $147 crore, down from $161 crore in the corresponding period of the previous year.

This represents an 8.80% decline in foreign investment.

As a result, unemployment has risen sharply, with the number of unemployed individuals reaching 26 lakh 40 thousand in June 2024, compared to 25 lakh in June 2023.

Syed Mahbubur Rahman, former chairman of the Association of Bankers Bangladesh and managing director of Mutual Trust Bank, stated that most banks are now adopting a conservative approach to loan approvals in order to avoid increasing the risks of loan classification in the current sluggish financial environment.

As part of this strategy, banks are ensuring proper collateral before approving loans.

Furthermore, the resolution of LCs has caused imports to decrease by 0.83%, falling from $28.17 billion to $27.94 billion compared to the same period of the previous fiscal year.