Moody’s ratings don’t reflect political, economic changes: BB

The recent downgrade of Bangladesh ratings by Moody's does not appropriately reflect the positive changes in political and economic areas following the mass uprising that ousted the Awami League-led government and led to the installation of an interim government, the Bangladesh Bank (BB) said.

On November 19, international rating agency Moody's cut Bangladesh's sovereign ratings from B1 to B2 and downgraded its outlook on the country's economy from stable to negative.

As factors for the downgrade, Moody's pointed to heightened political risks and the possibilities for lower economic growth.

According to the central bank, the change of sovereign ratings by Moody's is tantamount to "looking through the rearview mirror" while the car is moving forward.

In a statement yesterday, the central bank said that the interim government has initiated fundamental reforms in key areas after the political changeover, including the economy, law and order, anti-corruption measures, democratic and election processes and public administration.

The BB added that it has implemented a comprehensive set of measures to tackle economic and financial challenges.

These include the constitution of a task force with a view to undertake and implement a comprehensive quality review of banks' assets, leading to a comprehensive banking sector reform programme.

Other task forces will focus on strengthening and refocusing the operations of BB and pursuing stolen asset recovery at home and abroad.

Simultaneously, the government established a national task force to re-strategise the economy and mobilise resources for equitable and sustainable development, it said.

"These task forces have already commenced activities, engaging in extensive consultations with relevant stakeholders."

The banking regulator added that the primary goal of this inclusive approach is to avoid any missteps in reform measures.

The government is committed to prioritising and implementing reforms to lay a solid foundation to enhance the country's long-term sustainable growth, it said.

"While these activities may not yield immediate economic benefits, they are paving a clear path toward strong economic recovery and social progress."

It said the interim government inherited significant challenges on the macroeconomic front, characterised by large imbalances in the balance of payments, rapidly declining foreign exchange reserves and sharp depreciation of the local currency against the US dollar.

The inflation rate also accelerated, causing hardships for citizens, it said, adding that notable success has been achieved in stabilising the external sector indicators.

Since August 2024, the exchange rate has remained stable at around Tk 120 per dollar, supported by an ongoing surge in remittances and export earnings.

"During the first four months of the fiscal year, the external current account has improved from a large deficit to a virtual balance, the financial account also strengthened from a net position of large outflows to a net position of sizable inflows, and the overall balance improved by more than one billion dollars."

The central bank has also refrained from selling dollars, and foreign exchange reserves have stabilised at around $19 billion (based on the BPM6 method) during this period, it said.

"It also requires special mention that the outstanding payments arrears of $2.5 billion as of mid-August -- accumulated over the last two years by the previous government -- have been reduced to about $450 million."

These positive outcomes indicate that external sector vulnerabilities have been addressed, and further improvements are expected with continued strong remittance inflows and sustained export earnings, backed by BB's prudent policies, the central bank said.

The central bank also highlighted other major initiatives.

Speaking of inflation, the BB said that controlling price hikes remains a top priority for policymakers.

Substantive policy measures are already in place on both demand and supply sides to bring down inflation in the coming months, it said.

"On the demand side, BB has tightened the monetary policy stance through abandoning the policy of fixing the interest rates and letting them be determined freely by market forces, contributing to a sharp increase in the whole interest rate structure; refraining from printing new money to finance the fiscal deficit; increasing the policy rate in three equal monthly steps from 8.5 percent to 10 percent in October; and undertaking credible measures to cut significantly the fiscal deficit and domestic borrowing requirements for budget financing."

The statement read that a number of important steps have been taken to reduce price levels and contain price pressures on the supply side as well.

"These measures include: the stocks of various fertilisers have been fully replenished by clearing all payment backlogs and by fulfilling additional demand for foreign exchange to ensure an uninterrupted supply of agricultural inputs; taxes and import duties on various essential products have been cut significantly or eliminated completely to help increase supplies at reduced landed cost; all letter of credit (LC) margins on non-luxury items have been eliminated and banks have been urged to give priority to opening of LCs for essential consumer goods; and by addressing the domestic supply chain-related distortions."

The central bank also said the economy is undergoing a major transformation and it will take more time for the positive impacts of various actions to fully materialise.

Domestic political support for financial sector reforms and strong support from international partners underpin the prospect for further momentum to economic recovery, it said.

"Against this background, we are of the view that the change of sovereign ratings by Moody's is tantamount to 'looking through the rearview mirror' while the car is moving forward," it read.

"We hope that Moody's will soon undertake a more comprehensive assessment of the Bangladesh economy after visiting Bangladesh and getting first-hand experience by consulting with the relevant stakeholders and experienced economic observers.

"Only then should it be able to make a proper and objective assessment of the policies adopted, developments already recorded and the economic outlook likely to unfold in the near future," said the statement.