What challenges await the Bangladesh economy?

Almost a year has passed since the interim government of Bangladesh took over, and a new financial year has started. When the changeover took place last year, the country's economy was quite vulnerable on various fronts. 

All the facts had revealed the weaknesses of the economy, and it was clear that the economy was in a crisis. 

Over the last 12 months, some improvements have taken place. For example, both the foreign exchange reserves and the exchange rate have become stable, some of the problems of the banking sector have been sorted out, and remittance flows have improved. 

Yet, economic challenges persist. Even though the inflation rates have recorded some marginal improvements, they are still high. For example, rice prices have not come down yet. As a result, people are still feeling the burden of high inflation, and the needed relief is not in sight. 

Millions of people, nearly 3 million to be exact, are out of work. Investments, both domestic and external, have not gone up, and economic growth is sluggish at about 3.5% per annum. It is feared that more than 3 million new people may fall into the poverty trap. The new budget of Bangladesh has been termed as 'traditional' and has not inspired people to look forward with enthusiasm. 

In this context, a pertinent question arises: What challenges will the country's economy face as it moves forward? 

There may be three types of challenges - political, social, and economic. The future economic challenges of Bangladesh should not be seen in isolation; they are rather linked to the political and social panorama of the country. 

The current political uncertainty of Bangladesh is a major challenge with huge economic implications. Such uncertainties encompass issues like constitutional reforms, changes in administrative structures, political consensus and agreements, and above all, elections and election dates. 

These political uncertainties are affecting economic stability and growth in three major ways. First, because of such uncertainties, economic investments, neither domestic nor foreign, are forthcoming. The sluggishness in investments is adversely affecting economic activities in the country, contributing to the economy's joblessness, and impeding its growth prospects.  

Second, due to political uncertainties in Bangladesh, its trading partners are unsure of the future and, as such, are hesitant to enter into long-term trading deals with this country. For example, new orders for readymade garments have not been accelerating as desired. 

Third, political uncertainties have raised many questions in various quarters about the efficiency and effectiveness of the interim government. Such a public outlook is not beneficial for a smooth transition of a vulnerable economy and building a robust base for it. 

On the social front, the Bangladesh economy is subject to a series of challenges. The deterioration of law and order in society, coupled with the insecurities faced by businesses and the widespread corruption and graft, is causing businesses to feel nervous and insecure. 

In such circumstances, production, commerce, and service delivery cannot flourish. Along with it, the mob culture has become the norm, rather than the exception, in Bangladeshi society. As a result, conflicts and violence have entered the business arena of the country as well. 

The business community has become victims of rampant demands for money from gangs and political groups, and these act as impediments to business expansion. Road blockades, strikes, and movements using any incident are quite common nowadays. These create disruptions in transport and communications, and the day-to-day economic activities of the country. 

The current social unrest and social instability in our society will remain a challenge for the future of Bangladesh's economy. Multiple economic challenges will engulf the ensuing days of Bangladesh. Some of them are domestic, some are external. 

On the domestic front, economic uncertainties would continue to be a major problem. Along with sluggish economic growth, inadequate investments and joblessness would continue to weaken the economy. Agricultural and industrial productions, including manufacturing, have not yet reached their optimal levels, and power and energy crises and social unrest might disrupt them. 

The perils of inflation are expected to continue, with no relief in sight for the people despite top policymakers believing it is at a tolerable level and hoping for a decline by next month.

Increasing poverty with heightened probabilities of vulnerabilities may soon pose a real problem. Impoverishments are manifesting in such facts that 88% of people in low-income groups cannot afford rice in both meals of the day. For one of the meals of the day, they are forced to have a loaf of bread or biscuits. 

About 60% of those with a monthly income between Tk10,000 and Tk15,000 skip breakfast to cut spending. If such trends continue, lack of nutrition, particularly among children, will be a real human development challenge. 

Meanwhile, inequalities are on the rise, and disparities are no longer limited to either income or wealth. They are prominently present in opportunities, such as education and health services, or ICT. Inequalities in opportunities will become the major driving force in determining the overall disparities in Bangladeshi society. 

There have been some improvements in the country's banking sector in terms of rules and regulations and the stoppage of money laundering. However, improving banking disciplines in different aspects of banking operations has not been achieved as yet. This sector remains plagued by non-performing loans, inadequate credit to economic sectors, inefficiency, ineffectiveness, and weak management. 

Foreign exchange reserves seem to be at a good enough level, but the issue is whether this improvement is because of a higher inflow of external credit into the economy or because of structural improvements in the external sector. Public debts would remain a challenge in the coming days. 

During the first half of the current fiscal year, public debt has gone up by 3%. During the last three years, the stock of external debt has almost doubled from Tk5 lakh crore to Tk9 lakh crore. The foreign debt of the private sector has risen by $454 million during the first three months of the current calendar year. 

All these external debt payments will put pressure on the exchequer as grace periods for repayment are expiring. It is feared that the loan burden of the government may reach Tk29 lakh crore by the 2028 fiscal year. 

Power and energy continue to be a major concern. On one hand, the high generation cost of electricity is a major issue; on the other hand, subsidies in the power sector remain a problem. 

High generation costs are attributable to various interrelated factors like faulty demand projections and overcapacity. Power plant contracts, not conducted through competitive bidding, resulted in increased production costs and fuel mix with high import dependency and high import costs. 

Low levels of coordination hinder resource optimisation, and devaluations of exchange rates have also pushed up the high generation cost in the power sector. Second, it is the wealthy who are the major beneficiaries of the huge subsidies given to the power sector. About 54% of Bangladesh's power subsidies benefit the wealthiest 40% of the society. 

Sluggish revenue collection would be a major development challenge in the coming days. In the financial year of 2025, the revenue collection in the country saw a shortfall of Tk1 lakh crore. The deficit is attributed to the slowdown in economic activity, reduction of the Annual Development Plan (ADP), and protests and shutdown programmes of the National Board of Revenue (NBR) officials at the end of the last fiscal year. 

Some experts are of the opinion that setting excessive targets is one of the reasons for the large revenue gap. Given that some of these trends will continue in the coming days, revenue mobilisation will be a challenge. Furthermore, the revenue generation in Bangladesh still depends heavily on indirect taxes, such as value-added taxes, rather than direct taxes such as income taxes. 

The conditionalities of the International Monetary Fund (IMF) for enhancing public revenues through direct taxes will put further pressure on the government to generate more revenue. 

On the external front, the Bangladesh economy will face challenges in three areas. First, the global economy is expected to slow down this year, which may continue next year. The global economic sluggishness will have adverse impacts on the Bangladeshi economy as well. 

Furthermore, the heavy tariffs imposed by the Trump administration across the world will have adverse impacts on Bangladeshi exports as well. Thus, handling these tariffs will be a challenge for Bangladesh.  

In the coming days, Bangladesh is expected to graduate from the Least Developed Country (LDC) status to the developing country status. But with this graduation, some of the trade and other benefits that Bangladesh now enjoys as an LDC will no longer be available. For example, Bangladesh will no longer benefit from low or no tariffs on its exports to the developed world. 

It will no longer be eligible for grants; rather, it will have to borrow in the international financial markets at the market rates of interest. How to cope with these transitions will be a challenge for the Bangladesh economy. 

Finally, wars and conflicts around the world will have ripple effects on our economy.

In the coming days, the internal complexities of Bangladesh's economy are expected to continue, deepened by the political and social complexities of the country. They will be compounded by the crises in the global arena. 

A major challenge for the Bangladeshi economy will be to steer through all these troubled waters. 

Selim Jahan is a former director of the Human Development Report Office of UNDP.