The interim government inherited a crippled economy. In the following 15 months, some wounds of the economy have healed, but it has not become fully healthy and robust. As a result, after the election, the new government will inherit a stagnant economy. The main reason is the slump in investment. Bangladesh has not seen such a deep investment downturn in many years.
Energy shortages, distress in the financial sector, high interest rates, high inflation, low wage growth, declining purchasing power—these problems already existed. But two major factors added during the present government’s time are instability and uncertainty. This has created a lack of confidence. Because of this, the economy is stagnant, investment is absent, and new employment has not been created. Consequently, economic growth is minimal.
There are successes too
The biggest success of the interim government is stabilising the macroeconomy. Remittance inflows have increased; export earnings initially grew, though declining again now. The fall in foreign exchange reserves has been halted. However, imports remain very low. Because of this, the balance of payments has returned to stability.
Before the interim government took office, the dollar exchange rate had risen to its highest point and remained stable. It increased a bit more afterward and has stayed at that high rate. During this period, the exchange rate has been made nearly market-based. Foreign investment has also increased somewhat. Therefore, compared to the previous government, the macroeconomic situation has certainly improved.
Highest inflation in South Asia
However, the lives of ordinary people have not become much more comfortable. Inflation is still above 8 per cent, which is the highest in South Asia. According to the Bangladesh Bureau of Statistics (BBS), the inflation rate in October was 8.17 per cent. In neighbouring India, the rate is 0.25 per cent. Bankruptcy-struck Sri Lanka now has inflation at 2.1 per cent.
After the fall of the Oli government in Nepal due to Gen-Z protests, a new interim government took office on 12 September. It has already announced an election date, 5 March next year, ending uncertainty. This has also affected inflation, which has now fallen to 1.47 per cent.
Pakistan is now the only South Asian country close to Bangladesh in inflation. Its inflation rate is 6.2 per cent. Bhutan and the Maldives have inflation rates of 3.93 per cent and 3.87 per cent, respectively.
For the people of Bangladesh, this is unfortunate. Ordinary citizens have had to endure prolonged economic hardship. The crisis began in 2020 during COVID-19. High inflation and low wage growth persisted for the following five years. Real income has fallen, and poverty has increased.
Private surveys indicate the poverty rate is now around 28 per cent, whereas government data put it at 18.7 per cent in 2022.
After COVID-19 and the Russia-Ukraine war, nearly all countries tightened monetary policy and raised interest rates to control inflation. They saw results. But during that time, the Awami League government did the opposite—it increased money supply. After the interim government took over, a new governor was appointed to the central bank. He has continuously raised the policy interest rate. Inflation has decreased, but very slowly.
How much confidence do people have?
In economics, there is the concept of inflation expectations. Regardless of government assurances, people form expectations based on their own spending, government expenditure, budget and taxation policies, central bank interest rate decisions, supply shortages, energy prices, and the exchange rate. Large economies make policy decisions based on inflation expectations. Bangladesh has done little in this regard.
The question is, do people truly believe inflation will fall quickly under current conditions? But government operating expenditures are still rising. Although austerity has been mentioned, it is not being practiced.
Large delegations are traveling abroad. Huge spending has gone into changing police uniforms. Meanwhile, people see their daily expenses rising steadily. Their incomes have not kept pace. The job market is shrinking. Many cannot withdraw deposits from banks. As a result, trust is falling. The government is not strict about law and order. Instability and uncertainty persist. Therefore, expectations of a sharp decline in inflation among the public are very low.
Two most concerning indicators
When the interim government took charge, year-on-year rise in government borrowing stood at 11.61 per cent. Private sector credit growth was 9.86 per cent. Now government borrowing has surged to 27.22 per cent, while private sector credit growth has fallen to 6.29 per cent.
This shows that the government is heavily borrowing from the banking system to finance its budget deficit. Government revenue is low, expenses high. In June 2023, the government recorded the highest-ever bank borrowing to finance the budget deficit—about 35 per cent. The second-highest record has now been made by the current interim government.
Meanwhile, the private sector is being neglected. Private sector credit has declined. This is the clearest example of an investment slump. It is being said that this year, private sector credit growth is the lowest in over two decades. It is true that interest rates have increased. But investment in Bangladesh has never been highly sensitive to interest rates. Still, lower interest rates would have benefitted small entrepreneurs. That is why, in a meeting on monetary and exchange rate policy on 10 November, the finance, planning, and commerce advisers recommended lowering interest rates. But the IMF is opposed to reducing interest rates at this time.
The question is why the private investment not coming. Reasons such as energy shortages, corruption and extortion, law and order situation, bureaucratic hurdles, and exchange rate volatility persist. However, the entrepreneurs say that the biggest reason is ongoing instability and uncertainty. The government has not taken significant steps to restore confidence in the private sector. Without reducing this lack of confidence, the investment slump will continue.
On one hand, the government is borrowing and spending more and development spending has decreased on the other. In the first four months of the current fiscal year, only 8.33 per cent of the Annual Development Programme (ADP) has been implemented. Even in FY 2024–25, ADP implementation was the lowest in recent years. Because of this poor development expenditure, rural economic activity is sluggish. New job opportunities are not emerging.
Non-performing loans another worry
Bangladesh is now the top country in Asia for non-performing loans (NPLs). The Asian Development Bank (ADB) published this information last September. Their data was from 2023, when NPLs were 9 per cent. Now the NPL rate has surpassed 28 per cent. According to the World Bank, the only countries with higher NPL rates are Equatorial Guinea (55.41 per cent), San Marino (53.14 per cent), Ukraine (37.4 per cent), and Chad (31.5 per cent).
The Awami League government left behind a nearly collapsed banking sector. The new government has brought hidden NPLs into the open, which is positive. But escaping this crisis will be extremely difficult. To reduce NPLs, Bangladesh Bank formed a special committee earlier this year. Based on its recommendations, the central bank issued a circular.
The committee recommended restructuring the NPLs of 280 institutions. However, several state-owned banks are reportedly not following those recommendations. There are even allegations of profiteering by some.
With a few strong banks and many weak ones, the country will remain in trouble.
The plan to merge five banks will not be easy. Establishing good governance in the banking sector is another challenge. For this, the Bank Company Act is being amended. Implementing the law will become a major challenge once an elected political government takes office.
Challenges for the new government
The newly elected government will inherit a stagnant economy. But many macroeconomic indicators are stable. Based on these, the economy can move forward. However, restoring stability and certainty and improving the investment climate will be crucial. To increase investment, the financial sector must be fixed.
When investment rises, imports will also increase. This will put pressure on the dollar exchange rate and reserves. Currently, demand for dollars is low, so the situation is stable. But when demand rises, export earnings, foreign investment, and remittance flows must continue to grow. In other words, the government will have to coordinate everything.
Overall, the challenges for the new government are immense. How skillfully these challenges are addressed will determine the country’s economic future.