The Bangladesh coalition government led by Prime Minister Sheikh Hasina Wazed’s AL remains broadly stable. It also maintains a narrow lead over the opposition BNP in opinion polls despite weeks of labor unrest and political violence that have begun to take a toll on the economy. AL’s attempts to enhance its electoral advantage by rallying secular voters behind the war-crimes prosecutions of top Islamist figures will heighten domestic tensions.

This also will increase the risk of bouts of violent conflict in the run-up to elections in early 2014. Against that backdrop, the government will be disinclined to move forward with deeply unpopular subsidy cuts, a key element of a fiscal-reform strategy demanded by the IMF.

The catastrophic collapse of a textile factory complex outside the capital, Dhaka, which killed over 1,100 mostly female workers in April, has put a spotlight on safety standards in Bangladesh’s $19 billion garment export industry. This also may have implications not only for labor relations, but also for international trade practices and domestic political stability. Operational costs for businesses will increase due to pressure for higher wages and tighter safety inspections resulting in the failure of some factories.

The spotlight on Banladesh safety standards may have implications for labor relations, international trade practices and domestic political stability.

The challenge for the government now is to appear responsive to pressure for change, while ensuring that reforms instituted in the aftermath of the disaster do not undermine the economic foundation of the sector. The garment industry now accounts for upwards of 80 percent of Bangladesh’s exports and provides direct employment for some 4 million people. It also relies on both cheap labor and lax regulation to ensure profitability.

Bangladeshi officials estimate that approximately 50 percent of the country’s roughly 5,000 garment factories are unsafe. Closing them all, even temporarily, would cause tremendous shocks to the local economy and disrupt the supplies for large retailers.

The EU will demand tighter safety inspections. But barring an unlikely suspension of Bangladesh’s preferential access to European markets, which could result in perhaps hundreds of thousands of job losses, its leverage to impose change will be limited.

Even so, a combination of still-weak European demand, labor unrest in the garment-manufacturing industry, and disruptions to business operations created by domestic political agitation will contribute to an economic slowdown in 2013. The central bank has shifted its focus from inflation to growth, and with electoral considerations all but ruling out a tightening of government spending, the loosening of monetary policy should be sufficient to sustain real GDP growth near 6 percent in the current fiscal year.

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