Stagflation fears grow as growth momentum weakens: Economists

With GDP growth slowing to around 4% and inflation remaining in the high single digits, Bangladesh is entering what economists describe as a moderate stagflationary phase, one that is eroding real incomes, weakening employment and threatening long-term growth prospects.

Economists made the observations at a roundtable in Dhaka today (24 December), warning that while Bangladesh has avoided outright recession, persistent inflation, stagnant wages, falling employment, particularly among women, and weak investment are creating a vicious cycle that could derail the country's long-term development ambitions.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, said while textbook stagflation refers to negative growth combined with high inflation, developing economies like Bangladesh rarely experience outright negative growth. 

"It becomes evident when growth falls below trend levels while inflation remains elevated. By that definition, Bangladesh has shown stagflationary tendencies for the past three to four years," he added. 

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said, "Bangladesh risks remaining stuck in a 'low-level economic equilibrium' unless it addresses persistent inflation, weak private investment and widening inequality.

While inflation has eased from double digits to 8.29%, wage growth has remained largely stagnant. This means real incomes have declined, eroding people's purchasing power, she said.

Zahid Hussain said that although GDP growth remains positive at around 3.5-4%, inflation continues in the high single digits, driven mainly by exchange rate depreciation and persistent food inflation. 

Fahmida Khatun pointed out that inflationary pressure has persisted for nearly three years, driven initially by Covid-related supply chain disruptions and later compounded by global geopolitical tensions and domestic instability.

Under current institutional and investment conditions, Bangladesh's potential growth stands at about 6-6.5%, making sustained 8% growth a highly ambitious target, Zahid Hussain said. 

Without deep structural reforms, he said, growth is likely to remain stuck at 4-5%, making the trillion-dollar economy target difficult to achieve.

Echoing Zahid, Planning Commission member Monzur Hossain said sustaining 8% growth until 2035 is extremely ambitious for Bangladesh. Rather than chasing a number, the priority should be rebuilding the economic foundation by restoring macroeconomic stability and ensuring quality investment, employment and productivity, he said.

While presenting the keynote paper, economist Jyoti Rahman said Bangladesh stands at a critical economic crossroads as it pursues the ambitious goal of becoming a trillion-dollar economy by 2035, a target that would require sustaining around 8% real GDP growth for at least a decade.

The event was also attended by Dhaka University teacher Professor Rashed Al Mahmud Titumir. The discussion was jointly organised by Voice for Reform and BRAIN.

Economic stability

Zahid Hussain stressed that political stability is a prerequisite for macroeconomic stability, but not sufficient on its own. 

He identified three key pillars of macro stability: controlling inflation, maintaining external balance, and restoring health in the financial sector.

Structural supply-side factors are a key reason behind persistent food inflation, particularly extortion along supply chains and the market power exercised by syndicates in essential commodities such as rice, onion, edible oil and sugar.

"Extortion acts like a tax and becomes embedded in prices," he said, adding that both extortion and market manipulation create self-fulfilling inflationary expectations.

Zahid stressed that economic outcomes are ultimately shaped by the political environment, arguing that macroeconomic variables "grow on the soil of politics."

Even under a stable political scenario, he cautioned, economic challenges will not resolve themselves automatically.

Fahmida Khatun warned that sluggish private investment is constraining growth prospects. Private investment stood at around 23-24% of GDP in FY24, but declined further to 22.5% in FY25 – far below the level required to sustain high growth.

"For Bangladesh, the minimum investment rate should be close to 30%. To move into upper-middle-income status, it needs to rise to around 35%," she said.

Zahid Hussain acknowledged visible improvement in Bangladesh's external balance over recent months, driven largely by a surge in remittances, reduced illicit financial outflows and changes in Bangladesh Bank's exchange rate management.

He said Bangladesh Bank's current "soft peg" approach, keeping the exchange rate within a narrow band, has reduced volatility without heavy-handed interventions.

'Financial sector remains under stress'

Despite recent regulatory and structural initiatives, including bank mergers, Zahid Hussain said the financial sector remains under stress, particularly due to high non-performing loans.

"There are no clear signs of recovery yet, although the situation may have stopped deteriorating further," he said.

Zahid emphasised that policy support is not a substitute for structural reform, likening short-term incentives to painkillers that mask deeper institutional weaknesses.

Citing resistance to the separation of tax policy and tax administration at the National Board of Revenue, as well as opposition to leasing container terminals at Chattogram Port, he said such pushback is inevitable.

The July 2024 uprising, though politically significant, delivered another shock to the economy, Fahmida Khatun said.

"Any form of instability – political, natural or external – has negative economic consequences," she said.

Unemployment and poverty

Fahmida Khatun highlighted a worrying contraction in employment, citing findings from the Labour Force Survey 2024. According to the survey, total employment declined by 1.74 million, of which 1.64 million – nearly 94% – were women.

"This clearly undermines the idea of inclusive development," she said, stressing that decent and productive employment is a prerequisite for reducing inequality.

Citing surveys by the World Bank and PPRC, the CPD executive director said both poverty and inequality have increased in recent years.

"The paradox is that the more educated someone is, the less likely they are to find a job," she said, attributing the problem to a severe skills mismatch between university curricula and labour market demand.

Reform agendas

With elections ahead, she urged political parties to clearly outline reform agendas in their election manifestos. "Political stability is a must, but it is not enough," Fahmida Khatun said. "Without genuine political will, achieving a trillion-dollar economy will remain out of reach."

"Every structural reform creates winners and losers. Those benefiting from the status quo have the power to resist," Zahid Hussain said, stressing the need to manage the political economy of reform.