What challenges face Bangladesh Bank in sustaining stability, reviving growth

Bangladesh Bank's recent policy actions have helped steady the economy after a period of acute stress, but significant challenges remain as the central bank works to sustain stability and revive growth.

Tight monetary policy, a flexible exchange rate regime, and bank restructuring helped secure economic stability after last year's political changeover.

These measures restored confidence, helping foreign reserves recover, the taka stabilise, and inflation drop to single digits.

However, the next phase—supporting investment and growth without reigniting inflationary or financial risks—has proved more complex.

One major challenge is weak private investment.

Businesses have delayed expansion plans ahead of the February national election, creating uncertainty about future policies.

According to the Planning Commission's Economic Update and Outlook (October 2025), tight monetary conditions, while effective in controlling inflation, are also dampening credit growth.

Private-sector credit growth fell to a four-year low of 6.29% in September.

The banking sector's fragile health further limits the central bank's room for manoeuvre.

Years of mismanagement have left banks burdened with high non-performing loans, which reached 36% of outstanding loans in September.

Total defaults surged to Tk6.44 lakh crore, sharply reducing banks' ability to extend fresh credit even as liquidity conditions improve.

External headwinds are adding pressure. Export earnings have declined for four consecutive months, reflecting weaker global demand, heightened competition in key markets and buyer caution over Bangladesh's political outlook.

In November, exports fell 5.54% year-on-year to $3.89 billion. Sluggish imports, with letter of credit openings down more than 12% year-on-year in October, also point to subdued investment demand.

At the same time, the central bank has had to intervene to prevent excessive appreciation of the taka as banks accumulate surplus dollars.

Political and policy uncertainty remains another constraint. Investors are closely watching post-transition changes to tax, VAT and profit repatriation rules, seeking assurance that policies will remain consistent after the election.

While Bangladesh retains long-term appeal as an investment destination, many potential investors are waiting for greater political clarity before committing capital.

Finally, rising corporate stress poses risks to financial stability.

To avert widespread defaults, Bangladesh Bank has introduced a long-term loan rescheduling facility.

While this has eased immediate pressure on large borrowers, it also reflects weakened cash flows and a reluctance among businesses to undertake new investment, underscoring the delicate balance the central bank must maintain going forward.