The quiet strain behind economic headlines

Bangladesh's economy seems to be stabilising at first blush. Reserve levels have climbed, imports have slowed, and officials are finding some signs of resilience in the aftermath of a tumultuous period. For a country accustomed to absorbing shocks, this narrative of cautious recovery sounds reassuring.

However, underneath it, there is slowing growth, stubbornly high inflation, fragile investor confidence, and deep cracks in the financial sector. In reality, the recovery is a pause in deterioration rather than a return to strength. The economy is not collapsing, but it is far from healthy. It is moving forward, unevenly and uncertainly, when a far more decisive momentum is needed.

Bangladesh's growth story once stood out in South Asia. Over more than a decade, steady expansion, rising exports, and falling poverty reinforced the idea of a resilient development model. That momentum has clearly broken. Growth in the last fiscal year slipped below four percent, far from the six percent norm that once underpinned employment creation and fiscal space.

This slowdown did not start with the current political troubles. Growth was already losing momentum prior to the upheavals of 2024. Private investment had already stagnated, productivity gains were weakening, and the economy was becoming increasingly dependent on a narrow export base. The recent shock merely exposed vulnerabilities that had been accumulating quietly for years. The result is an economy caught in a low-growth equilibrium. Consumption is constrained by high prices. Investment is held back by uncertainty and financial stress. Exports face headwinds from global demand, tariffs, and intensifying competition. Growth has not collapsed, but neither has it found a new engine.

Inflation remains the most visible pressure point. While headline figures have eased marginally at times, the lived experience tells a harsher story. Non-food inflation is high and persistent. Rents, transport costs, healthcare, and education expenses continue to rise, squeezing urban households in particular.

Meanwhile, wages have not kept up. For many workers, particularly in informal and service jobs, real incomes have fallen, turning inflation into a silent tax on the majority of households. This explains why the modest improvements in macro indicators have not translated into public relief.

The policy response has been conflicted. Tight monetary conditions were necessary, but their delayed application blunted their effectiveness. Meanwhile, liquidity provision to troubled banks has been diluting disinflationary pressure, keeping costs elevated. The result is an uncongenial equilibrium of high interest rates and high inflation, which suppresses investment but does not definitively restore price stability. Also, non-performing loans have risen to levels unmatched in the region. In banks and non-bank financial institutions alike, asset quality has deteriorated sharply, capital buffers have eroded, and confidence has weakened.

All these create a structural constraint on growth. When banks are burdened with bad loans, credit for productive firms dries up. Small and medium enterprises, which generate most employment, are the first to be squeezed out. High interest rates matter, but access to finance matters even more, and for many firms, that access has narrowed dramatically.

The proposed responses have been mixed. Bank mergers and liquidity injections may protect depositors in the short term, but they do little to address the deeper governance failures that produced the crisis. Without transparency, credible enforcement, and a clear break from the culture of repeated rescheduling and implicit bailouts, the system risks recycling the same problems under new institutional labels.

There is also the unquantifiable yet decisive factor: political uncertainty and the resulting deterioration in the everyday governance environment. Investment does not only respond to interest rates, exchange rates, or tax policies; it also responds to predictability which, in recent years, has become rare.

Frequent disruptions on the streets, rising informal "costs" in supply chains, or a weakening of ordinary law and order, push businesses to postpone expansion, delay hiring, hold cash, and reduce exposure. Uncertainty turns into an investment freeze and, despite the relative improvement in some macro indicators, the private sector appears reluctant to move fast.

Furthermore, the perception that rule enforcement is uneven and sometimes replaced by informal power has real economic consequences. It raises transaction costs, weakens contract enforcement, increases risk premiums, and undermines the credibility of regulatory decisions. In other words, it makes long-term planning feel unsafe.

This is why the general election scheduled for February 2026 is not just a political milestone; it is an economic inflection point. A credible transition can restore a baseline of legitimacy, helping public institutions function more predictably, rebuild confidence, improve the law-and-order situation, and reduce the uncertainty that has pushed investors into a defensive posture.

Besides, it can create space for reforms that are economically necessary but politically difficult. Banking sector clean-up, stronger enforcement against loan default, rationalisation of tax policy, and the rebuilding of regulatory independence require political backing. Without that backing, reforms remain half-hearted, which rarely convince markets.

If the election produces a peaceful and widely accepted outcome, it could unlock deferred investment decisions. Domestic businesses may restart stalled expansion plans. Foreign investors may revisit a market they have been watching from the sidelines. Credit conditions could improve, not only through policy signals but also through renewed confidence in institutions.

However, if the election deepens uncertainty or fails to restore public order and institutional credibility, the economy risks staying stuck in stagnation. In that scenario, even improving reserves would reflect compression rather than strength, and even lower inflation prints would not bring genuine relief.

Exports, long the backbone of the economy, are showing signs of fatigue. Earnings have declined year-over-year for three consecutive months from September to November 2025. Within the garment sector, both woven and knitwear segments are under pressure, reflecting weaker global demand, tariff shocks, and intensifying competition.

The challenge is not simply cyclical. It is structural. Heavy dependence on one sector makes the economy particularly vulnerable to external changes over which it has little influence. Meanwhile, export diversification attempts have consistently disappointed amid policy uncertainty, infrastructural shortfall, and limited technological upgrades.

With the country on course to graduate from LDC status in 2026, these weaknesses matter more. Preferential market access will gradually erode, while compliance standards will tighten. Without productivity gains and diversification, competitiveness will be harder to sustain.

Nevertheless, recovery is possible. Reserves have improved. Remittances remain resilient. Certain infrastructure investments could generate momentum. A clearer political settlement after February 2026 could revive confidence and restore the basic predictability that markets need.

But none of this is guaranteed. Persistent inflation, a weakened financial system, limited fiscal space, and worldwide uncertainty, including the recent US invasion of Venezuela that might impact global oil prices, form a tight constraint. Graduation from LDC status will raise the stakes further, exposing unresolved weaknesses rather than masking them. The central question is whether Bangladesh can break out of stagnation and rebuild a growth model that is more diversified, more transparent, and more inclusive, under a governance environment where rules matter and public authority is credible. Whether 2026 becomes a turning point will depend heavily on whether the political transition restores order, reduces uncertainty, and persuades investors that the future is brighter.

Dr Selim Raihan is professor of economics at Dhaka University and executive director at the South Asian Network on Economic Modeling (SANEM). He can be reached at [email protected].

Views expressed in this article are the author's own. 

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