Dollar and reserves offer relief, investment remains sluggish

High inflation, stagnation in investment, a weak banking sector, a large revenue shortfall and mounting debt-repayment pressure—these are the structural problems the BNP (Bangladesh Nationalist Party) government inherited. Six months into its tenure, these problems remain unresolved.

There is some relief, however, in the dollar market, foreign exchange reserves, remittances and exports. Inflation also edged down slightly in July. But people’s purchasing power is yet to recover after years of rising prices.

There are no clear signs of a turnaround in investment or employment either. On top of that, recent gas and electricity shortages have disrupted industrial production.

Over the past six months, the government has taken some initiatives to remove barriers to business, attract investment and lower borrowing costs. But visible progress in reforms of the banking, revenue and energy sectors remains limited. Overall, the economy has gained some stability, but recovery is yet to begin.

Finance Minister Amir Khasru Mahmud Chowdhury has also said that economic recovery will take two years. The government yesterday (Monday) released a list of measures it is taking to stabilise and revive the economy, including initiatives to control inflation, steps to reform the capital market and a Tk 190 billion refinancing programme.

The country's economy faced multiple crises during the final years of the Awami League government. A severe dollar shortage emerged, while foreign exchange reserves declined rapidly. Rising inflation increased the cost of living for ordinary people. Allegations of money laundering through bank loans also gained momentum. At the same time, dependence on large projects financed by foreign loans and on imported fuel continued to grow.

The interim government, after taking charge, sought to halt the economy's decline. It initiated some reforms in the exchange-rate regime and banking sector. The supply of dollars and the foreign exchange reserve situation also improved. Inflation eased somewhat. Investment, employment and economic growth, however, remained weak.

The current government therefore inherited a relatively stable foreign exchange market but an economy that remains weak overall. Its task now is not only to reduce inflation further but also to increase investment, credit flows and employment.

A national task force has been formed to remove unnecessary obstacles to business, while initiatives have been taken to bring private investment into closed state-owned factories. Bangladesh Bank has also lowered its policy interest rate.

However, a weak banking sector, a large revenue shortfall and the recent acute energy crisis have made economic recovery more difficult.

Without uninterrupted supplies of gas and electricity, normal production is disrupted. There is a risk of reduced supply in the market, creating conditions for prices to rise. Gas and electricity shortages discourage entrepreneurs from making new investments and increase the risk to existing investments. Overall, this means fewer new jobs are created.

People have been under the pressure of high inflation for nearly four years. Controlling inflation remains a major challenge for the BNP government as well.

During the interim government's tenure, inflation had fallen to 8.5 per cent. But in four of the six months since the current government took office, inflation remained above 9 per cent. It eased somewhat to 8.32 per cent in July.

Even so, consumers do not feel the impact of lower inflation when they go to the market.

Moreover, because wage growth has remained below the inflation rate for more than four and a half years, people's real purchasing power has declined. Against this backdrop, the government has taken steps to support low-income and poor people through Family Cards. The middle class, however, is suffering the most, and it is also the largest group.

In the outgoing 2025–26 fiscal year, the National Board of Revenue (NBR) fell short of its revenue collection target by around Tk 880 billion. Revenue growth was particularly weak during the final six months of the fiscal year.

One of the main reasons for the failure to collect revenue at the desired rate is the lack of reform. An initiative taken during the interim government's tenure to abolish the NBR and separate tax and customs policy from revenue collection has also stalled. The interim government did not place the relevant ordinance before parliament.

After seeking a new loan from the International Monetary Fund (IMF), however, the BNP government has decided to reintroduce the reform in the form of a new bill. A committee headed by the Prime Minister's Public Administration Adviser Md Ismail Zabihullah was formed last April to review the bill. More than three months have passed, but the committee is yet to submit its recommendations.

Investment has remained sluggish for more than a decade. The situation has not improved despite the change of government. Entrepreneurs remain reluctant to set up new industrial units.

Data from Bangladesh Bank show that in the 2025–26 fiscal year, settlement of letters of credit for imports of capital machinery fell by 10.5 per cent compared with the previous year. Imports of intermediate goods declined by 6.5 per cent, while imports of industrial raw materials fell by 3.33 per cent.

According to the Bangladesh Bureau of Statistics (BBS), private investment as a share of gross domestic product (GDP) is now at its lowest level in 14 years. It stands at 21.53 per cent of GDP. Private-sector credit growth is also at its lowest level in 20 years.

The government, however, is trying to increase both domestic and foreign investment. Prime Minister Tarique Rahman has already held several meetings with leading businesspeople to encourage local investment. Following those meetings, 14 companies and business groups have expressed interest in investing in closed and loss-making state-owned factories.

The government also formed a national task force on 10 August to reduce unnecessary steps and costs in business and trade.

The lack of new investment is leaving more educated young people unemployed. Over the past decade, the number of unemployed young people with higher education or bachelor's degrees has more than doubled. According to the BBS Labour Force Survey, the number now stands somewhere around 900,000. There has been little improvement in the employment situation over the past six months.

FBCCI Administrator Fazlul Hoque told Prothom Alo that the energy crisis is now the main topic of discussion in business and trade. This problem must be resolved as quickly as possible.

Pointing out that the banking sector is in disarray, the FBCCI administrator further said, the government has taken several good initiatives over the past six months. Among them, the formation of a national task force to facilitate business and trade is particularly noteworthy. Now it needs to be implemented.

The dollar shortage began to ease and the foreign exchange reserve situation improved during the interim government's tenure. Over the past six months, the current government has managed to maintain that stability. There has been no major dollar shortage during this period, and the exchange rate remained between Tk123 and Tk124 per dollar.

The two main sources of dollars for Bangladesh are remittances and export earnings. For six consecutive months, from December through May, monthly remittances exceeded US$3 billion. However, remittances fell below $3 billion again in June and July, raising some concern. Export earnings, meanwhile, have maintained momentum despite uncertainties over the Iran war and US President Donald Trump's tariff policies.

The positive flow of remittances and export earnings has further strengthened the country's reserves. According to Bangladesh Bank data as of 12 August, gross foreign exchange reserves had exceeded $37 billion. Under the International Monetary Fund's BPM6 methodology, reserves stood at $32.26 billion.

The interim government had taken an initiative to merge five weak banks in an effort to restore stability to the banking sector. Work also began at the time on a Bank Resolution Act to allow for the restructuring or closure of troubled banks.

The current government passed the law after taking office. However, it initially included a provision allowing former owners of weak banks to regain ownership. Following strong criticism, the government eventually scrapped the controversial provision.

Although the BNP had pledged in its election manifesto to form a commission for financial-sector reform, there has been no concrete initiative on that front. Political tensions surrounding Islami Bank, however, have eased for the time being.

Just 10 days after the current BNP government took office, it abruptly terminated the contract of former Bangladesh Bank Governor Ahsan H Mansur and appointed a new governor. The new governor, Mostaqur Rahman, is a businessman. It is the first time in Bangladesh that a businessman has been appointed governor of the central bank.

Former Bangladesh Bank governor Ahsan H Mansur had taken steps to bring previously concealed defaulted loans to light. Such classified loans now stand at Tk 5.89 trillion (588,704 crore,) equivalent to 32 per cent of total outstanding loans. If these defaulted loans cannot be recovered, the country's banking sector will remain at risk.

The incumbent government has also continued investigations, initiated during the interim government's tenure, into allegations of irregularities, corruption, tax evasion and money laundering involving former prime minister Sheikh Hasina and 10 major business groups.

At the same time, investigations are under way into whether 42 companies that have defaulted on loans of more than Tk 2 billion each have laundered money abroad. Eight major foreign firms have been assigned to trace assets allegedly siphoned abroad. Bangladesh Bank has instructed the relevant banks to sign agreements with those eight firms.

The current government has also inherited the growing pressure of servicing foreign debt. According to the Economic Relations Division (ERD), Bangladesh paid $4.5 billion in principal and interest on foreign loans in the outgoing fiscal year—the highest amount ever. Over the past 14 years, foreign debt servicing has increased more than fourfold.

The pressure will increase further in the coming years, as repayments on loans for the Rooppur Nuclear Power Plant and the third terminal of Hazrat Shahjalal International Airport are expected to begin soon. The loan for the third terminal will have to be repaid to Japan.

Meanwhile, repayments on loans for the Karnaphuli Tunnel and metro rail projects have already begun. Managing the debt, avoiding new foreign borrowing for less important projects, and ensuring the expected economic benefits from projects financed by foreign loans will therefore be major tests for the current government.

One of the major economic decisions taken during the new government's first six months was to cut the policy interest rate. In an effort to boost investment and employment, Bangladesh Bank cut the policy rate to 9.5 per cent on 30 July, after keeping it unchanged for 21 months.

The government's expectation is that lower lending rates will reduce business costs for entrepreneurs and encourage them to make new investments.

However, a cut in the policy rate does not guarantee that bank lending rates will fall quickly. Lower-cost credit alone does not necessarily lead to higher investment. Uninterrupted supplies of gas and electricity, a stable law-and-order situation, an environment free of bribery and corruption, simpler regulations and consistent tax policies are also important conditions for investment.

Therefore, the extent to which businesses will benefit from the policy-rate cut will depend on the banking sector's capacity and improvements in the overall business environment.

Mustafa K Mujeri, former chief economist of Bangladesh Bank, told Prothom Alo that the government has made considerable efforts to revive the economy and business. However, problems in the banking and financial sectors have become complex and will take time to resolve. Investment and employment are at very low levels, while unemployment among educated young people and women has increased.

According to Mujeri, the problems facing the economy are fundamental. For example, the country is experiencing shortages of gas and electricity. As the energy sector is heavily dependent on imports, it is now in a volatile state. Therefore, other efforts will not succeed unless the energy problem is resolved.

At the same time, high inflation is causing hardship for low-income people and lowering their standard of living. This issue also needs attention.

Speaking on the banking sector, Mujeri said it cannot be assumed that cutting the policy rate will automatically lower lending rates. An environment of distrust has developed around banks. Until the banking sector becomes stronger, it will be difficult to reduce borrowing costs through policy-rate cuts. Meanwhile, demand for credit is also likely to remain weak because of the energy crisis.