The decision to reform the banking sector is a political one

Jyoti Rahman: As Mao Zedong once said, “Let a hundred flowers bloom.” From my perspective, the past two years since the uprising have witnessed the emergence and development of numerous initiatives and new ideas, both positive and negative. Overall, this process of “letting a hundred flowers bloom” and encouraging the growth of diverse ideas has been a positive one.

Rebellions are not unusual in the history of this region. Sheikh Abu'l Fazl Allami, the court historian of Emperor Akbar, once remarked in his description of this land that even its air carried the spirit of rebellion. However, Sheikh Hasina's system of rule had become so deeply rooted in personalised authoritarianism that I was always concerned about what would happen after the government's fall.

Even when power changes hands through popular movements, there is usually some degree of institutional continuity in the state structure. But the scale of state violence and repression in July was unprecedented. For the first time in the country's history, not only did the head of government flee during a mass movement, but the leaders of the state's principal institutions fled as well. As a result, the country effectively had no functioning government for three days.

And yet, despite the fresh memory of an extraordinarily bloody uprising, along with provocations from across the border and from various communal and sectarian groups within the country, our society displayed an astonishing degree of unity. Although that unity could not be sustained, partly because of the shortcomings of the interim government and partly because of the lack of foresight among political forces, our society nevertheless managed, through its own initiative, to contain much of the ensuing disorder. That is an encouraging sign.

Jyoti Rahman: I describe Awami League's economic model as "Hasinomics." One of its defining features was granting banking licences to politically connected individuals and favoured oligarchs, or enabling them to seize control of banks through illegal means. This was followed by the corruption of the legal and regulatory framework, allowing bank funds to be channeled into overpriced mega-projects or fictitious businesses through illicit lending practices. That, in turn, fueled money laundering on an unprecedented scale.

As long as the Hasina government believed its hold on power was secure, the economy maintained a certain momentum and a degree of "trickle-down effect." However, after the COVID-19 pandemic and the emergence of international sanctions-related pressures, the pace of money laundering through anonymous or fictitious bank loans increased dramatically, pushing the banking sector toward insolvency.

The harsh reality is that, of Bangladesh's 61 banks, no more than 10 to 12 are truly capable of remaining viable in the long run. At the same time, it is impossible to simply shut down so many banks overnight. Difficult measures must be taken up, such as consolidating banks through mergers or gradually reducing their number with the help of government support.

The most urgent concern is maintaining depositors' confidence. If public trust in banks collapses, the consequences will spread across the entire banking system. Moreover, keeping weak banks afloat or repeatedly recapitalising them requires taxpayers' money, making it extremely costly for the government. Recovering the vast sums of money that have already been moved abroad is also an extraordinarily difficult process.

For these reasons, banking sector reform is not merely a matter of economic expertise, it is also a political decision. Although the interim government never stated this explicitly, it became clear that it did not intend to initiate structural economic transformation. Its objective was simply to manage the immediate crisis. Judged by that standard, the interim government performed that task reasonably well during its limited tenure. It dealt with the emergency, fulfilled its role as a genuinely interim administration, and left the responsibility for structural reforms to an elected government.

Jyoti Rahman: The next government will essentially have to make a crucial political choice: does it want to take difficult decisions immediately in order to achieve a rapid economic recovery, or does it prefer a gradual reform process spread over several years through slower, incremental management? Whichever path it chooses, there is no alternative to structural reform of the banking sector.

Bangladesh has, in fact, undertaken banking sector reforms before. Significant reform efforts were made during the 1980s and 1990s, and those initiatives produced practical and meaningful policy recommendations. What matters now is adopting the political roadmap necessary to carry those reforms forward. So far, however, the current government appears to be hesitant and undecided.

Jyoti Rahman: The IMF made this assessment after completing a mission that held preliminary discussions with the government on a possible new lending program and reviewed Bangladesh's recent economic situation. It is clear that international partners are placing strong emphasis on reforms in the banking and revenue sectors.

The IMF's role in an economy is somewhat like that of a physician. A country typically turns to the IMF either when it is already facing an economic crisis or when it wants to prepare in advance, taking a kind of economic "vaccine" against a potential crisis. When a country approaches the IMF, international credit rating agencies, global financial markets, bilateral development partners, and even domestic capital markets closely monitor the process. In such circumstances, if a government seeks IMF assistance but then shows reluctance to implement the agreed conditions, it sends a negative signal to both international and domestic stakeholders.

For that reason, any government should determine in advance exactly what it hopes to achieve before approaching the IMF. It is not only about obtaining IMF financing directly. In many cases, an IMF program serves as a kind of "certificate of good standing" that helps a country secure substantial financing from other international development partners.

When the IMF calls for reforms in the banking and revenue sectors, it would be unwise to retreat simply for the sake of short-term political popularity. Doing so would lead international markets to conclude that the country's overall economic capacity, or its political resolve, is not credible.

Jyoti Rahman: The reforms the IMF has been advocating for the past 15 to 20 years are, to a large extent, consistent with the structural needs of Bangladesh's economy. The main disagreements generally arise over how those reforms should be implemented.

The central political-economic problem in Bangladesh is that the country's elite and privileged classes have a very weak fiscal and political relationship with the state. They do not rely on public systems for essential services such as education, healthcare, transportation, or travel. Apart from law enforcement, they have little direct dependence on state institutions. As a result, they feel little social or moral obligation to pay taxes.

When the government argues that Bangladesh's tax-to-GDP ratio is too low and seeks to increase tax revenues, these groups often respond by claiming that the state simply wastes money. The reality, however, is that the administrative and institutional capacity of the state is so limited that it often lacks the ability to effectively utilise large amounts of public funds in a planned and efficient manner.

Therefore, when the IMF recommends raising the tax-to-GDP ratio or increasing spending on education and healthcare, those objectives should not fundamentally conflict with the government's own development goals. Differences may arise only over the specific conditions and the details of negotiation and implementation.

The government must now decide how to reform the banking sector and the National Board of Revenue (NBR). Will it merge five to ten weak banks and nationalise them? Will it merge them and then sell them to private or foreign investors? Or will it liquidate them outright? These are technical questions. The fundamental decision, however, is a political one.

If the government instead chooses a path focused on satisfying politically connected interests and maintaining business groups through state-backed incentives and protection, it will only accelerate its own political self-destruction.

Jyoti Rahman: This is a very important question and one that deserves much more detailed research and discussion. It is clear that the government wants to deliver direct cash assistance to those at the bottom of the pyramid. In a country like Bangladesh, where state capacity is relatively weak, the government may have reasoned that if it waited for the bureaucracy to process everything, the proposal could become bogged down indefinitely. Instead, it appears to have decided to launch the programs first, on the assumption that once they are underway there will be no turning back, allowing adjustments and improvements to be made along the way based on experience. It is difficult to say in absolute terms whether this approach is right or wrong.

If the new system succeeds in eliminating the large-scale waste, leakage (theft), and double-counting that previously plagued social protection programs, then additional financing may not even be necessary. The savings generated by reducing those inefficiencies could be enough to fund the new cash transfer programs. If the money reaches the intended beneficiaries, it will have a positive impact on the economy as a whole.

Moreover, in an era of widespread digital financial transactions, international experience shows that it is more effective to use a single, unified card, with payments delivered through banks and mobile financial services (MFS), rather than operating multiple separate card schemes. However, the opposite outcome is also possible. If the old inefficiencies remain while new, open-ended expenditures are added, the programs could become a significant burden on the economy.

Jyoti Rahman: At this stage, during fiscal year 2026-27, it is unlikely to create major macroeconomic pressure because the scale of these programs is still relatively small compared with the size of the overall economy. The important question is what the government learns from these pilot projects and how effectively it uses those lessons to refine the programs.

The only way such initiatives can succeed is by expanding social protection while keeping waste, corruption, and systemic losses to an absolute minimum. However, if confidence in the banking sector remains weak, middlemen will play a larger role in cash transfers, undermining the very purpose of these initiatives. That is another reason why banking sector reform is critically important.

Jyoti Rahman: The conflict has already created considerable pressure on Bangladesh's economy. The government has responded with a combination of immediate and delayed measures. As global oil prices have risen, the country's energy sector has come under direct financial strain.

In such a situation, the government essentially has two options: either increase subsidies to shield consumers from higher world prices, or reduce subsidies and allow domestic fuel prices to rise. This is an extremely difficult political choice. Initially, the government did not rush to withdraw subsidies; instead, it took some time before eventually making partial price adjustments.

Looking ahead, the principal macroeconomic risk will be managing international energy prices and their impact on domestic inflation.

It is worth noting that, so far, Bangladesh's foreign exchange market has remained relatively stable, with no major volatility in the taka–US dollar exchange rate. How long that stability will last, however, is difficult to predict. One reason for the current stability is that remittance inflows remain strong. As long as those remittances continue at their present level, the exchange rate should remain reasonably predictable.

However, if global economic conditions trigger a depreciation of the taka, Bangladesh would face not only an energy crisis but also a new and far more serious set of economic challenges.

Jyoti Rahman: This is probably the first time since the collapse of the Soviet Union in the late 1980s that the international order is undergoing such a profound transformation. As a result, this is an entirely new experience for Bangladesh.

The world today is multipolar. Even the United States no longer appears committed to maintaining global influence primarily through institutions such as the WTO, the IMF, and the World Bank. At the same time, China is emerging as an increasingly influential global power. In this new environment, it would be rather shortsighted to look for economic opportunities through the lens of outdated assumptions.

The current geopolitical landscape offers Bangladesh an opportunity to develop a more independent foreign policy. Rather than viewing diplomacy solely through the prism of the United States, China, and India, Bangladesh should think more broadly. It can strengthen direct relationships with emerging regional powers such as Turkey, Japan, and the countries of Southeast Asia.

Jyoti Rahman: Mega projects are not inherently problematic, provided they are properly managed and implemented. The fundamental problem under the previous Hasina government was the absence of accountability, inflated project budgets, and corruption centered around public projects.

Past experience shows that project costs were not inflated primarily because of bureaucratic inefficiency. Rather, they were driven by the political leadership's rent-seeking and corruption. Projects that should have cost 10 taka were often budgeted at 25 taka.

The real issue, therefore, is political will. If the current government is committed to completing a project that should cost 10 taka for exactly 10 taka, then the existing bureaucracy is fully capable of implementing it efficiently and at a reasonable cost.