Originally posted in The Daily Star on 1 January 2025
The economy of Bangladesh faced sustained stress throughout 2024, with macroeconomic stability continuing to deteriorate—a trend from the past few years—due to a series of challenges. The first half of 2024 unfolded under the autocratic regime of the Sheikh Hasina-led Awami League government, which systematically undermined the economy through rampant misappropriation of public resources. The interim government, which assumed power three days after the fall of the Awami League regime, inherited a fragile economy plagued by high inflation, declining foreign exchange reserves, stagnant private investment, mounting debt, inefficiencies in public project implementation, and a weak financial sector.
After nearly five months of the interim government’s leadership, public expectations for an economic turnaround remain high, particularly regarding issues directly impacting livelihoods. While some positive changes are becoming evident, most economic challenges persist, complicating the path to recovery. Addressing these issues effectively in 2025 will require prioritising urgent actions.
Firstly, to tackle inflation, the new Bangladesh Bank governor adopted a contractionary monetary policy, raising the policy rate to 10 percent. Despite this measure, point-to-point inflation climbed to 11.38 percent in November 2024, with food inflation soaring to 13.8 percent during the same period.
Although monetary policy measures typically take 6-12 months to show results, complementary fiscal policies and enhanced market management are critical. In Bangladesh’s current context, inflation must be addressed through monetary, fiscal and market management measures. Due to an increase in the policy rates in recent months, lending rates have increased. This hurts businesses as the cost of funds has increased. Additionally, private investment has been stagnant for about a decade. Small and medium enterprises face a liquidity crisis as they cannot afford costly bank loans. This situation is not conducive to employment generation—a cause for which the students staged a movement back in July. While the interim government has reduced or withdrawn duties on essential items like rice, edible oil, sugar, onions, potatoes and eggs, poor market management has prevented consumers from reaping the benefits.
The government should take multiple measures to enhance the supply of products in the market. These could include enough government procurement from farmers at a fair price, facilitating farmers’ connection with the markets, providing them with financial and technical support to enhance their resilience to price shocks, eliminating rent-seeking and extortions during the transportation of products through improved law and order situation, enhancing supply chain efficiency through better logistics and transportation infrastructure, allowing more importers to enter the market, and extending trade partnerships for importing essential items.
Secondly, the current national budget requires revision to reflect the current economic challenges. Politically motivated and low-priority projects under the Annual Development Programme (ADP) should be postponed to address financial constraints. In view of high inflation, the government should enhance support for poor and low-income households by expanding the open market sale (OMS) of commodities at an affordable price. Support for those affected by severe floods in August and September this year has been inadequate compared to their needs. They should be provided with financial support to recover their losses, at least partially.
The budget for FY2025-26 will be challenging. In view of the high inflationary trend and limited fiscal space, the next budget has to be contractionary. However, development expenditures cannot be controlled too much since the government has to consider the need for employment generation. The upcoming budget will be an opportunity to make a balanced allocation across all sectors. Health, education, and science and technology sectors should receive more allocations.
Third, the banking sector has been mired in mismanagement and corruption over the past decade and a half. The Awami League government issued bank licences based on political considerations, enabling embezzlement by directors under lax regulatory oversight. The new governor dissolved and reconstituted the boards of 11 private banks, temporarily halting fund mismanagement. However, these banks now face acute liquidity crises. The Bangladesh Bank has provided liquidity support of Tk 22,500 crore to bail out six weak banks. While this measure has been unavoidable in order to meet depositors’ needs, it risks further inflationary pressure. The central bank has to take harsh steps to resolve the structural problems of the banking sector. Though the task is arduous and time-consuming, the country eagerly awaits the recommendations of the three task forces and their implementation to restore discipline and good governance in the sector.
Fourth, the free fall of the forex reserves has stopped in recent months. As of December 24, 2024, the country’s gross international reserves stood at $20.18 billion, following the BPM6 method. As part of a $4.7 billion loan from the International Monetary Fund (IMF), the Bangladesh Bank has to maintain a certain level of forex reserves following the BPM6 method, an internationally accepted standard to calculate forex reserves. After repeated failure since the loan approval in January 2023, the Bangladesh Bank was able to meet the IMF target in the June and September quarters of 2024. It is expected to meet the target in December 2024 as well. The remittance flow has increased substantially in recent months. Maintaining this trend in the coming months will require a continued focus on boosting remittance flows and ensuring exchange rate stability. Transparency in currency market operations is essential to sustain investor confidence.
Fifth, Bangladesh’s graduation from the Least Developed Country (LDC) status to a Developing Country status in 2026 offers opportunities and challenges. While the transition will enhance the country’s global image and attract investments, it also entails the loss of duty-free, quota-free (DFQF) market access, concessional loans, and other benefits. Therefore, Bangladesh must prepare for a smooth transition from the LDC status to absorb the initial shock of losing various flexibilities, including the Generalised System of Preferences (GSP). It must prepare for the GSP-plus facility by achieving various stringent compliances. The government and the private sector should work together to formulate a pathway to overcome the challenges of LDC graduation.
The economic crisis left by the Awami League government is profound, and resolving it will require sustained efforts. A multi-pronged approach involving coordinated efforts across ministries and agencies is essential.
The current law-and-order situation remains precarious, adversely affecting production in industrial zones. Both domestic and foreign investors are waiting and closely monitoring political developments. It is unlikely that significant new investments will occur before the national elections. Therefore, it is imperative for the interim government to present a clear roadmap for the elections, enabling economic stakeholders and partners to plan their investment strategies accordingly.
Equally importantly, the interim government must assert its authority in managing day-to-day governance. This critical responsibility appears to have received low priority amid the focus on drafting medium- to long-term reform agendas. A balanced approach that prioritises immediate governance alongside future reforms is essential for stabilising the economic environment.
Flawed political, social, and economic systems have hindered the realisation of Bangladesh’s full potential. While comprehensive reforms across all sectors are crucial, and while the interim government can initiate this process by consulting experts and stakeholders, the responsibility for implementation lies with future elected representatives. The nation watches closely as the interim government navigates these challenges, striving to address present needs while laying the groundwork for a sustainable future.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD) and non-resident senior fellow at the Atlantic Council. Views expressed in this article are the author’s own.