An anatomy of the current economic situation in Bangladesh
The economy of Bangladesh is at such a critical juncture, struggling with both long-standing structural problems and newly emerging issues. Though exports and remittances have shown improvement in recent times, continuing macroeconomic instability, high inflation, and political unrest continue to shake the prospects for sustainable growth and recovery. These imperative challenges now require well-coordinated strategies and overall reform initiatives that will stabilise the economy on the pathway of resilient and sustainable growth.
Macroeconomic instability and persistent inflation
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Despite the expected recovery, the incidence of macroeconomic instability remains high, denting confidence. Inflation is still at a high level, shredding real incomes and further increasing financial vulnerability among the population. For more than two years, monetary policy has periodically resorted to raising interest rates to combat inflation. Though since May 2022 until now, Bangladesh Bank has hiked the repo rate by 11 times, the impact remains marginal. In the context of persistently high inflation for more than two years and the resulting erosion of real incomes, the effectiveness of controlling inflation through demand contraction via higher interest rates has come under scrutiny. Such a rise in interest rates without much success in lowering inflation may take a toll on private investment and thus weaken the prospects of economic recovery. On the other hand, the recent move by Bangladesh Bank to infuse Tk 22,500 crore in liquidity support to six crisis-hit banks through money printing is also unlikely to ease inflationary pressures. The most important issue in inflation control is the need for coordination among monetary policy, fiscal policy, and the management of the domestic market, which is lacking. While taxes and duties on essential imports need to be lowered on time, equally important is the effective regulation of anti-competitive practices in the market and addressing bottlenecks in the value chain.
The political economy of law and order
The economic uncertainty is being exacerbated by a deteriorating law and order situation. The increase in political conflicts and social unrest surely points to an unstable environment that scares away investment and dampens economic activities. Resultant insecurity disrupts supply chains, and labour productivity, and increases the cost of doing business. Despite repeated emphasis by top policymakers on restoring law and order, significant progress remains elusive.
Labour unrest in different sectors including the garment sector is very critical. Especially for the RMG, the unsettled disputes regarding wages, benefits and working conditions may impact the reputation of the sector and its export competitiveness. Preferential market access threatened by graduation from LDC status in 2026 might further squeeze the profit margins of exporters already suffering from operational disruptions.
However, export and remittance inflows have been doing reasonably well in recent months. But to sustain this growth, the political and economic environment should remain stable. The ongoing political conflicts and social unrest are so critical that gains would easily be lost because of uncertainty that keeps buyers and investors away from the Bangladeshi market.
The uncertain path of reform initiatives
While the interim government has expressed a strong commitment to initiating reforms in critical economic and political domains, the success of these efforts hinges on building an effective consensus among key stakeholders, including competing political forces and the bureaucracy. For instance, addressing high levels of non-performing loans and weak governance is essential to restructuring the banking sector and restoring financial stability. Similarly, reforms in taxation are crucial to increasing revenue generation and reducing reliance on foreign borrowing.
However, without consensus among stakeholders, the reform agenda risks becoming fragmented and contested, with limited progress in core areas like taxation, the banking sector, public expenditure, and institutional governance. Moreover, entrenched interest groups wielding significant power may resist these changes, further undermining the reform process. This lack of cohesion and resistance may hamper economic recovery, deepen public disillusionment with governance, and erode trust in the system.
A path to economic recovery and sustained growth
Given the current economic and political landscape, the following measures are essential to place Bangladesh on a sustainable growth path:
First, coherence in monetary policy, fiscal measures, and market regulation should be enhanced. An empowered coordination body can ensure that the policies for inflation control cover both demand and supply-side factors. Second, reforms of critical economic, political, administrative, and judicial domains are very important to nurture good governance and restore the people's confidence. Openness and participation in policymaking processes can build consensus and reduce resistance. The interim government should present the roadmaps for the reforms in these critical domains and invite stakeholders to share their opinions.
Third, there is a need to stem the deterioration in the law-and-order situation by building a dialogue between political and social groups. Also, there should be a clear roadmap to the elections (both national and local) so that a conflict-less environment can be created in which economic activities can thrive. Fourth, policymakers should help the negotiation between labour groups and employers to end disputes and adhere to international labour standards, incentives for innovation, and diversification of the sectors so that they can meet challenges after LDC graduation.
Fifth, there is a need to decrease the dependence on RMG and remittances by helping other potential export sectors grow. This will require addressing the sector-specific problems as well as reducing the high cost of doing business. Finally, vulnerable groups must be cushioned against inflationary pressures through targeted subsidies and social safety nets. This would help maintain domestic consumption and prevent sharp increases in the level of poverty.
Bangladesh stands at its crossroads, where the pace of its economic future may well depend upon how boldly and effectively current challenges will be met by policymakers. Economic instability currently interplays in a political battle with particularly weak governance. Instead of quick fixes, a multisectoral approach that underpins reforms, stability, and inclusivity is needed to usher in sustainable development. The time to begin churning this process is now because the costs of inaction are too high for a country whose task of securing its economic future remains at the top of the agenda.
Dr Selim Raihan is professor at the Department of Economics in the University of Dhaka and executive director of South Asian Network on Economic Modeling (SANEM). He can be reached at selim.raihan@econdu.ac.bd.
Views expressed in this article are the author's own.
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