Originally posted in The Business Standard on 26 January 2026
Governance gaps and political uncertainty are keeping both local and foreign investors on the sidelines—leaving growth prospects uncertain
Bangladesh’s economy today must be judged through multiple lenses: short-term firefighting, medium-term adjustment, and long-term structural transformation. An unelected, temporary administration operating for barely a year and a half cannot undo deep-rooted economic distortions overnight.
The more relevant question is not what was fixed, but how much damage was contained, and what path now lies ahead for the next elected government.
The economy that the interim government inherited
When the July 2024 uprising reshaped Bangladesh’s political landscape, the economy was already under visible strain. For several months prior, economists had been warning that the country’s long-standing macroeconomic stability was eroding. Historically, Bangladesh’s strength lay in maintaining stability even during periods of modest growth—low inflation, manageable external balances, and adequate foreign exchange reserves underpinned economic resilience.
That stability began to unravel as Bangladesh entered fiscal year (FY) 2023–24. Inflation surged to double digits, driven by a series of compounded shocks: the lingering effects of Covid-19, global supply chain disruptions, and the Ukraine war’s impact on energy and commodity prices. Once inflation takes hold in Bangladesh, especially imported inflation, it quickly spreads through the entire economy.
Rising global prices translate directly into higher domestic costs through fuel, transport, housing, and industrial inputs, reinforced by market distortions and opportunistic price-setting.
At the same time, the country’s development strategy, which relied heavily on large-scale physical infrastructure projects, such as metro rail, expressways, power plants, and other mega projects, came at a fiscal cost.
These projects were largely financed through foreign borrowing, steadily pushing up the external debt-to-GDP ratio. While total public debt remained within IMF-defined sustainability thresholds—around 36–38% of GDP, well below the 55% warning level—the composition of debt became increasingly problematic.
Reserves and debt
Infrastructure has often been built without sufficient attention to operational capacity. Facilities like ports highlight a broader weakness: the shortage of skilled human resources needed to manage, maintain, and optimise new assets. This skills gap undermines the return on public investment.
The most acute pressure emerged in the external sector. Foreign exchange reserves, which had once reached nearly $48 billion, declined sharply following the change in the exchange rate regime in July 2024. By August, reserves had fallen below $20 billion, with some estimates placing them closer to $16–17 billion. Policymakers faced a serious dilemma: should scarce reserves be used to finance essential imports or to service external debt?
This moment marked a turning point. Macroeconomic instability was no longer an abstract concern—it began affecting households, businesses, and investor confidence in tangible ways.
Households under pressure
At the household level, inflation delivered a direct and painful blow. Low- and middle-income families, especially those on fixed incomes, saw their purchasing power erode rapidly. While headline inflation has since moderated to around 8.5% as of December 2025, wage growth has lagged behind at roughly 8% or slightly above.
This gap, though seemingly small, translates into significant welfare losses over time.
Families have been forced to cut back on food consumption and discretionary spending. Yet expenditures on education and healthcare—non-negotiable for most households—remain inflexible. The result is a quiet squeeze in living standards that official growth numbers often fail to capture.
The private sector: High costs, low confidence
When the July 2024 uprising reshaped Bangladesh’s political landscape, the economy was already under visible strain. For several months prior, economists had been warning that the country’s long-standing macroeconomic stability was eroding.
For businesses, the environment has become increasingly hostile. Bangladesh already suffers from a high cost of doing business, and despite impressive investments in physical infrastructure, many expected efficiency gains have not fully materialised.
Logistics remain cumbersome, port operations are inefficient, and bureaucratic delays are persistent. Corruption and informal payments continue to distort incentives.
More critically, infrastructure has often been built without sufficient attention to operational capacity. Facilities like ports highlight a broader weakness: the shortage of skilled human resources needed to manage, maintain, and optimise new assets. This skills gap undermines the return on public investment.
Inflation has also driven up electricity and fuel prices, while tighter monetary policy—necessary to contain price pressure—has pushed interest rates higher. For firms, rising borrowing costs have been the final blow. Together, these factors have significantly increased production costs and reduced profitability.
Unsurprisingly, private investment has declined. From an already stagnant level of around 24% of GDP, private investment fell further to approximately 22.5% in FY2025. Credit growth to the private sector has dropped to as low as 6.58% as of November 2025, reflecting weak demand rather than supply constraints. Businesses simply do not see current conditions as conducive to investment.
Foreign direct investment, historically below 1% of GDP, has slipped even further. Structural weaknesses, such as bureaucratic complexity, governance failures, and skills shortages, combined with high interest rates and political uncertainty, have reinforced investor hesitation.
The limits of an interim government
The interim government’s role must be understood within its constraints. As a temporary, stop-gap administration, it lacks both the mandate and the political capital to implement deep, transformative reforms. Investors, domestic and foreign alike, are aware that major policy decisions taken now may not be sustained by the next elected government. Consequently, investment activity remains largely on hold.
Foreign investors, in particular, are in a “wait and see” mode. This is unfortunate, because Bangladesh has the potential to be an attractive destination: a domestic market of roughly 180 million people, competitive labour costs, and significant scope for productivity gains.
Unlike advanced economies focused on marginal technological improvements, Bangladesh’s relatively low base means that improvements in roads, skills, healthcare, and governance can yield outsized returns.
Stabilisation efforts and early signs of recovery
Despite its limitations, the interim government has managed to halt the economic free fall. One of its most important steps was adopting a contractionary monetary policy, allowing interest rates to rise, breaking away from rigid, distortionary caps. While painful in the short term, this move was necessary to curb inflationary pressures.
Encouragingly, foreign exchange reserves have begun to recover, supported by strong remittance inflows—now increasingly channelled through formal systems—and resilient export performance. Imports have also picked up, an essential development for export-oriented industries. The exchange rate has stabilised under a more market-based system, with the central bank intervening selectively to prevent excessive volatility.
Banking sector reforms have also commenced. Health checks of weak banks through asset quality reviews and greater transparency around non-performing loans have exposed long-hidden vulnerabilities. These reforms are overdue and politically difficult, and their benefits will take years to materialise—but the process has at least begun.
Yet stabilisation alone is not enough. Monetary policy cannot solve inflation in Bangladesh without complementary fiscal discipline and strong governance. Supply-side distortions—extortion, excessive middlemen, weak market monitoring, and ineffective consumer protection—continue to push prices upward. Institutions such as the Consumer Rights Commission and the Food Safety Authority remain under-resourced and ineffective.
Taxation is another looming crisis. Bangladesh’s tax-to-GDP ratio has fallen alarmingly, from 7.4% in FY 2024 to just 6.8% in FY2025, despite rising GDP and per capita income. This is fiscally unsustainable. Resistance from vested interests has delayed tax administration reforms, but without them, the state cannot fund essential public services or reduce reliance on borrowing.
The next government’s moment of truth
The next elected government will inherit an economy stabilised, but fragile. Its challenges will extend beyond growth numbers to fundamental issues of economic security, social protection, and public safety. Public investment priorities must shift from mega projects to social infrastructure, such as quality education, healthcare, and skills development.
With Bangladesh’s graduation from Least Developed Country (LDC) status expected in November 2026, the stakes are higher than ever. Graduation will reduce access to concessional finance, preferential market access and other flexibilities, but it will also enhance Bangladesh’s global standing and creditworthiness. Whether this transition becomes a burden or an opportunity will depend on preparation, policy coherence, and institutional strength.
Ultimately, Bangladesh’s economic future hinges not on isolated policy tweaks but on deep governance reform. Strong institutions, accountable leadership, effective bureaucracy, and credible law and order are prerequisites for sustainable investment and long-term growth. Vietnam’s experience, which has transformed itself into an investment magnet through consistent, investor-friendly policies and institutional discipline, offers valuable lessons to Bangladesh.
Without political stability, policy continuity, and a genuine commitment to reform, piecemeal measures will fail. The next government must act decisively and holistically. The window for incrementalism has closed; the moment now demands clarity of vision, clean leadership, and the courage to reform.
