It has been nearly six months since the new government took office in February. Although some indicators of Bangladesh’s economy have improved over the past six months, there is little reason for overall optimism.
Inflation is currently the most visible problem. Although the rate eased somewhat in July, it remains above 8 per cent. This cannot be described as a normal situation. Prolonged high inflation has reduced the real incomes of low- and middle-income people, eroded the value of their savings, and increased the cost of food, education, healthcare and housing. A decline in inflation does not mean that prices are falling; it simply means that prices are rising more slowly than before. Policymakers therefore have little room for complacency. Tight monetary policy may be necessary, but trying to curb inflation solely through high interest rates will put greater pressure on investment and employment. A large part of Bangladesh’s inflation is also linked to food supply, import costs, the exchange rate, energy costs and market management.
Remittances are providing some support to the external sector. But excessive dependence on remittances amid weak exports and rising import costs creates new risks. Strong remittance inflows provide relief, but they cannot substitute for productivity, export diversification and investment. In the long run, the country will need to broaden its export base in goods and services to ensure sustainable external stability.
The weakness of private investment is even more concerning. Bangladesh has no shortage of investment summits, economic zones, tax incentives or new institutions. But entrepreneurs make decisions based on their actual experiences. How reliable are gas and electricity supplies? How much does it cost to borrow? Is foreign currency available? How predictable are tax and tariff rules? How long does it take to obtain approvals? These factors determine investment decisions. When domestic entrepreneurs themselves are cautious about new investment, simply promoting the country as a destination for foreign investment will not be enough. The investment problem is essentially a problem of confidence, and that confidence is built through policy consistency and institutional conduct.
The energy crisis has further exacerbated this weakness. Disruptions in LNG supplies, gas shortages and shutdowns at fertiliser plants have shown that Bangladesh’s energy system has limited resilience. A shock to international prices or supplies quickly affects domestic production, inflation and investment. The government can manage the situation through emergency imports, loans and subsidies, but these measures merely buy time. The underlying problem remains. Unless there is rapid progress in domestic gas exploration, diversification of import sources, energy efficiency, renewable energy and grid development, the same crisis will recur.
A clear policy is also needed for energy pricing. Keeping prices artificially low for a prolonged period is not financially sustainable. At the same time, repeatedly raising prices without improving the quality of supply is also unacceptable. If prices need to be adjusted, the process should be gradual, announced in advance and part of a credible medium-term energy strategy. Industry can absorb even relatively high prices if supplies are reliable. But when both prices and supplies are uncertain, the calculation of investment become much weaker.
The shortcomings in fiscal policy are also clear. Almost every year, ambitious revenue targets are set, only to be missed later. The new budget also envisages a substantial increase in revenue. But reforms such as digitising tax administration, expanding the tax base and reducing tax exemptions take time. If spending plans are based on unrealistic revenue targets, the result is ultimately either higher borrowing or cuts in development spending. The tax base must certainly be expanded, but not by placing additional pressure on small businesses and middle-income groups that are easy to identify and tax. The same degree of firmness is needed in tackling large-scale tax evasion, undeclared assets, high-income professionals and influential groups.
A tougher approach is also needed in the banking sector. Years of weak oversight, preferential treatment of influential borrowers and repeated loan rescheduling have deepened the current crisis. Some banks may need restructuring or recapitalisation. But before public money is used, there must be a proper assessment of the true quality of assets, accountability for directors responsible for wrongdoing, a plan to recover non-performing loans and visible action against wilful defaulters. Otherwise, under the guise of reform, the cost of past losses will simply be transferred to taxpayers.
Against this backdrop, initiatives such as the Family Card and Farmer Card have been introduced. These initiatives have potential, but expectations must remain realistic. The Family Card could make social protection more integrated, while directly transferring money to women’s accounts could produce positive results. But the results of pilot programmes should be evaluated before any large-scale expansion. There must be reliable mechanisms to determine who is genuinely poor, identify those being excluded, integrate existing allowances, prevent individuals from receiving multiple benefits and resolve complaints. Rapid expansion without such mechanisms could increase both waste and political influence.
The same applies to the Farmer Card. If farmers can access fertiliser, seeds, loans, insurance, machinery, weather information and market prices through a single identity, their transaction costs could fall. But the card should not be portrayed as a solution to all problems. If fertiliser does not arrive on time, agricultural loans do not reach genuine farmers, or farmers do not receive fair prices in the market, a digital identity will make little difference. There is also a risk that sharecropper farmers and landless farmers who actually cultivate the land could be excluded if too much reliance is placed on land-ownership records. The quality of services is therefore more important than the technology itself.
The risks ahead are also significant. If instability in the Middle East persists, the cost of energy imports and inflation could rise. Continued weakness in exports would put pressure on foreign exchange. The cost of bank restructuring could hit the budget. Tight monetary policy could keep investment weak for some time. These challenges will be compounded by Bangladesh’s graduation from LDC status, uncertainty in global trade and climate-related risks to food and agriculture.
In the short term, the government’s priority should be to bring inflation down further without unnecessarily suppressing production. Information on food, fuel and fertiliser stocks and supplies should be published regularly. Instead of indiscriminate price subsidies, targeted cash assistance to verified poor and lower-middle-income households could be more effective. Clear priorities should be established for electricity and gas supplies, giving preference to hospitals, irrigation, fertiliser production, food storage and export-oriented industries.
In the medium term, domestic gas exploration, diversification of LNG sources, industrial energy efficiency, renewable energy and grid modernisation must move forward together. A full account of tax exemptions should be published, and ineffective incentives should be withdrawn. Banking reform should be viewed as part of the effort to revive investment. Family Cards, Farmer Cards and other social programmes should also be linked to a reliable social registry.
Finally, employment must be brought back to the centre of economic policy. Start-ups, freelancing and ICT have potential, but they are not enough to absorb a large labour force. Bangladesh needs labour-intensive manufacturing, agro-processing, logistics, small and medium-sized enterprises, and skills development linked to actual employers. The success of the economy should be judged not only by the rate of growth, but also by people’s real incomes and access to productive employment.
Overall, inflation remains high, investment is weak, and the risks in the energy and banking sectors are substantial. The government is taking new initiatives, but ultimately it is results—not the number of government programmes—that will matter. Bangladesh faces a long list of problems. That is precisely why the government’s list of priorities needs to be short and clear: sustainably controlling inflation, pursuing a realistic fiscal policy, ensuring accountability in the banking sector, securing reliable energy supplies, promoting productive investment, providing targeted social protection and creating employment.
#Selim Raihan is a professor of economics at the University of Dhaka and executive director of SANEM.
*selim.raihan@gmail.com
#This article, originally published in Prothom Alo print and online edition, has been rewritten in English by Rabiul Islam