Macroeconomic stability returns, recovery yet to gain pace

Highlights:

• Bangladesh inherited deep economic problems from the previous government
• BNP government stabilised reserves, remittances and the foreign exchange market
• Inflation, weak exports and rising import costs remain major concerns
• Banks still face liquidity, governance and non-performing loan problems
• Energy shortages, high costs and insecurity are hurting businesses
• Stabilisation has begun, but sustained growth remains the bigger challenge

Six months ago, the BNP government began its tightrope journey amid high public expectations but on a fragile economic foundation that had been exposed long before it took office.

Bangladesh's economy was already in deep distress when the Sheikh Hasina regime was toppled in a mass uprising on 5 August 2024. Banks were struggling with depleted liquidity, non-performing loans had piled up, exposing deep weaknesses in the financial sector, inflation was soaring, the foreign exchange market was volatile, and foreign exchange reserves had fallen to uncomfortable levels.

The interim government that took over promised to restore macroeconomic stability, recover money siphoned abroad and undertake long-awaited reforms in banking, revenue, trade and other key areas to revive the economy and encourage investment. It formed several commissions, taskforces and committees, producing a substantial body of recommendations and reports. But implementation remained limited during its one-and-a-half-year tenure.

Meanwhile, a climate of uncertainty persisted. Mob violence and attacks on factories and businesses associated with the ousted political regime damaged investor confidence and added to concerns over law and order. The private sector largely held back, hoping an elected government would bring greater political stability and a more predictable business environment.

That election eventually came, and the BNP, led by Tarique Rahman, returned to power after nearly 20 years. The new government took office on 17 February, beginning its journey against an increasingly difficult external backdrop. Global oil markets were roiled by the US-Israel war on Iran, while Bangladesh's own energy crisis was deepening.

As the conflict dragged on, uncertainty over energy supplies and higher import costs added to fiscal pressures and pushed up the cost of doing business.

With 180 days of the BNP government now elapsed, what does Bangladesh's macroeconomic picture look like?

There are some clear signs of improvement. Remittances have remained strong, the foreign exchange market has become more stable and foreign exchange reserves have regained a safer position. These developments have eased some of the immediate pressure on the balance of payments and external sector.

But the broader picture remains fragile. Export growth has weakened, rising import costs have widened the trade deficit, inflation remains elevated, banks continue to face liquidity and governance problems, revenue collection is growing slowly, foreign assistance is losing momentum, and debt-servicing obligations are rising. In other words, some of the economy's most visible external vulnerabilities have eased, but the underlying engines of growth remain weak.

Economists caution that six months is too short a period to judge the economic performance of a new government, particularly one that inherited years of accumulated structural problems.

Yet for businesses, the distinction between inherited problems and new challenges offers little relief. Their immediate concerns are mounting: a deepening energy crisis, high borrowing and operating costs, slower export orders and weak law and order are all weighing on investment decisions.

Business leaders have conveyed these concerns to Prime Minister Tarique Rahman on several occasions. The prime minister has heard them and promised to address the problems one by one. Some regulatory easing and policy initiatives have signalled an intention to make doing business easier.

But the more fundamental problems remain unresolved.

The government has therefore achieved something important in its first six months: the economy is no longer under the same degree of immediate external stress it faced after the political upheaval of 2024. Yet stabilisation is not the same as recovery. For businesses and investors, the real test will be whether the government can turn greater macroeconomic stability into lower inflation, reliable energy, easier access to finance, stronger exports and, ultimately, a revival of private investment to create much-needed jobs.

Six months into the new administration, Bangladesh appears to have moved from crisis management towards stabilisation. The harder task – putting the economy firmly back on a path of sustained growth – has yet to begin.

Sketch: TBS

Some success in trade deals, but key indicators unchanged

- Zahid Hussain, Former Lead Economist, World Bank Dhaka Office

It would be unfair to judge the government solely by economic outcomes, as policy measures take time to produce results. But outcomes cannot be ignored either.

Government data on inflation, GDP growth, exports, investment, private-sector credit growth and ADP implementation show little improvement from the previous situation.

The BBS has not published employment data since 2024, but there is little evidence that job creation has improved. ADP implementation has declined over the past six months, private-sector credit growth has slowed and non-performing loans have increased.

The government cannot be held responsible for all these developments. It has taken some measures, but they have yet to produce better outcomes.

However, the government can be held directly responsible for high inflation. How much has it done to control inflation, including measures promised in its election manifesto? What steps has it taken to strengthen institutions?

Monetary policy has shifted from contractionary to expansionary. Quantitatively expansionary measures were introduced even before interest rates were cut. 

Non-performing institutions have again been given access to loans, while a Tk60,000 crore stimulus package has been introduced and interest rates reduced.

If these measures had followed successful efforts to contain inflation, it would have been clear that the economy was ready to shift its focus to growth.

The government could also have given Bangladesh Bank greater autonomy, but did not. The latest appointment of the governor instead highlighted how its autonomy has been undermined. As a result, many government decisions have not been forward-looking.

The government has presented a large budget with commitments to structural reforms, but implementation remains limited. Apart from introducing e-invoicing for VAT administration, few effective measures have been taken.

The budget also includes several deregulation commitments. The government is merging the PPP Authority with Bida, but this is hardly a major reform. Making the one-stop services of Bida, Beza, Bepza, the PPP Authority and the Hi-Tech Park Authority fully functional is more important. Operationalising the National Single Window is also crucial.

A cabinet task force has been formed to implement deregulation. However, some budget commitments will require amendments to existing laws.

The government has made some positive moves on trade. Signing a Cepa with South Korea is one of its notable achievements. Once ratified, it could help improve Bangladesh's poor record on free trade agreements. 

Bangladesh has also made progress in its trade ties with China. The government also deserves credit for resisting pressure to scrap the trade agreement with the US. If it was withdrawn unilaterally, garment exports could have come under significant pressure.

Overall, the past six months have brought little economic relief to people's lives. The government has introduced and expanded some social protection programmes, but their impact remains limited and marginal at the macroeconomic level.

More efforts needed for Investment, employment and energy

- Fahmida Khatun, Executive Director, CPD

An assessment of the first six months of the government is a mixed picture. The government has taken several steps to strengthen macroeconomic stability, address weaknesses in the financial sector, and support vulnerable families and the private sector. Given the difficult economic conditions it inherited, these initiatives provide a foundation for further progress.

The most visible improvement has been in the external sector. Foreign exchange reserves have strengthened, while the exchange rate has remained relatively stable despite occasional volatility. These developments can help reduce uncertainty for importers, exporters and investors.

Several reforms and initiatives have also been undertaken in the banking sector. These include stricter loan-classification and provisioning requirements, asset-quality reviews of weak banks, restructuring the boards of troubled institutions, strengthening risk-based supervision, and developing a framework for bank resolution and consolidation. Efforts to trace and recover stolen assets are ongoing. The government has announced a Tk 60,000 crore fund to revive viable closed factories, which is expected to help restore production and protect employment. Of course, the success will depend on whether it is managed with transparency, sound due diligence and effective monitoring.

The government has also recognised the need to modernise revenue administration, including through the proposed transformation of the National Board of Revenue into two separate divisions. If implemented properly, with clear responsibilities and strong coordination, this reform could improve efficiency, accountability and taxpayer services.

The government also deserves credit for formulating the budget for FY2027 within three months of taking office. The budget has put forward several tax opportunities for encouraging investment. Now, it is to be seen how the ambition is materialised.

On the other hand, the economy continues to face several important challenges. Inflation and the rising cost of living remain major concerns for households. Although inflation declined slightly in July, the price level remains high. Also, the purchasing power of low-income families has not increased. Higher energy prices, supply disruptions and weaknesses in market management continue to contribute to price pressures. Monetary policy therefore needs to be supported by measures to improve food and energy supplies, strengthen market monitoring and reduce unnecessary costs across supply chains.

It is also important to maintain coordination between fiscal and monetary policies. Public expenditure should increasingly be directed towards productive investment, employment generation and essential infrastructure. Without strict fiscal discipline, productivity and employment generation will not be possible. Reducing waste and improving the quality of spending should be a major government task to boost economic activity.

The energy crisis is now one of the most pressing economic concerns. Although its roots lie in longstanding structural weaknesses, timely action is needed to ensure reliable supplies of gas and electricity for industry, agriculture and essential services. The government should also implement supply management immediately. The government should invest in domestic gas exploration, renewable energy, energy efficiency and transmission infrastructure. A credible medium-term energy-security plan would provide greater confidence to businesses and investors.

Revenue mobilisation also requires sustained attention. The proposed institutional reforms should be accompanied by wider use of technology, improved tax administration, expansion of the tax base and greater efforts to reduce tax avoidance. Higher revenue collection will be essential for financing development priorities without creating excessive pressure on borrowing.

Restoring investment will require a combination of political stability, policy predictability and improvements in the business environment. Investors remain concerned about energy availability, financing costs, taxation and regulatory uncertainty. The government will have to provide a concrete roadmap to build confidence among investors - both domestic and foreign,

In the coming six months, the government will be judged by its success in delivering on the major problematic areas. Some of these include containing inflation, addressing the energy shortage, advancing banking and revenue reforms, improving the quality of public expenditure, and creating a more supportive environment for investment and employment. The initiatives already undertaken offer a useful starting point. Their effectiveness will depend on consistent implementation, institutional coordination and regular assessment of outcomes.

Capital machinery imports yet to recover

- MA Razzaque, Chairman, RAPID

Some stability has returned to the economy during the BNP government's first six months. Remittance inflows have increased, helping rebuild foreign exchange reserves. Imports have also picked up, which is a positive sign.

However, capital machinery imports have yet to recover. Inflation also remains high, and despite some reduction in lending rates, private investment remains sluggish. 

Therefore, the government's major challenges are to bring down inflation and attract private investment.

GDP growth is also under considerable pressure. The government's 6.5% growth target for the current fiscal year is unlikely to be achieved. Manufacturing's contribution to GDP has turned negative, and without a recovery in the sector, the economy will struggle to achieve the desired growth.

There has also been little progress in job creation over the past six months. It remains unclear whether the measures announced in the budget will be sufficient to spur investment. Perhaps the government itself does not have a clear answer.

The government's macroeconomic policy stance also lacks clarity. On the one hand, it is providing liquidity support to banks, lowering lending rates and offering stimulus packages. On the other hand, it has adopted a contractionary monetary policy.

The government has taken several initiatives to attract domestic and foreign investment, but these have yet to translate into stronger investment flows.

It is also preparing a five-year reform and development framework that may outline sector-specific priorities. But Bangladesh has always been good at producing policy documents; the problem is that implementation rarely matches the plans.

Economy stabilises, but business woes persist

- Azam J Chowdhury, Chairman, East Coast Group

The country's macroeconomic stability has improved during the first six months of the current government. The decline in foreign exchange reserves has been halted, while exports and remittances have increased.

According to the IMF's methodology, forex reserves have remained stable at around $20-22 billion. Higher export earnings and remittance inflows have helped generate a current account surplus. Some stability has also returned to the banking sector.

However, there has been no meaningful reform at the micro level of business and trade. Businesses say they have seen little improvement in their day-to-day operations.

From land mutation and dealings with deputy commissioners' offices to the clearance of imported goods, corruption and extortion persist at every stage.

Concerns over inflation, investment and employment also persist. High prices of essentials remain a major concern for ordinary people, employment has not improved, and concerns over the investment climate have intensified.

Problems also persist in clearing imports. Although goods are supposed to be cleared within a day, the process often takes a month or even a month and a half.

The government itself faces financial constraints and cannot meet its expenditure from revenue earnings, forcing it to borrow more from the financial sector.

Political parties should understand the state of the economy and the country's investment climate. Many IMF recommendations have been adopted, but implementation remains inadequate.

Macroeconomic stability has returned but without micro-level reforms, these gains will not be sustainable. Reducing bureaucratic hurdles, eliminating corruption and adopting business-friendly policies are essential.