Bangladesh Economy: Challenges and Prospects
“With a huge pool of hard working and intelligent people, Bangladesh has tremendous potential to grow and has a lot to offer to the global community.”
Dr. Salehuddin Ahmed, Adviser, Ministry of Finance and Ministry of Science & Technology, Government of Bangladesh
In his book ‘Free Fall: America, Free Markets, and the Sinking of the World Economy’ Joseph Stiglitz wrote, "The only surprise about the economic crisis of 2008 was that it came as a surprise to so many." The essence of this message is that euphoria about something that does not have a solid foundation can bring forth shocks. Long before Stiglitz wrote this, Milton Friedman, another great mind, also said, "Only a crisis—actual or perceived—produces real change.”[1] What Friedman was trying to point out is that crisis comes with pain, but it is the pain that also drives people to find solutions to the problems. Following the historic July revolution and immediately after the Interim Government took oath last year, we scrambled to assess the situation. As we kept digging, we were surprised to find out that the foundation of the economy that had been so hyped and advertised over the past several years was actually very brittle. We did not have any option but to find quick solutions to the dire persisting issues and build from scratch a solid base on which the economy can build upon.
Inflation
The first and foremost challenge we faced was stubborn high inflation that wiped out significant chunks of real income. From 2022-23 it remained on average over 9 percent and reached as high as 11.66 percent on a point-to-point basis. In the same month point-to-point food inflation rose to 14.1 percent. Prices of essentials had been increasing rapidly since 2022. At the same time Taka was depreciated by almost 37 percent against the US dollar that made the situation even worse. Although inflation in our large trading partners cooled down and global prices of essential commodities reduced significantly by the end of 2023, inflation in Bangladesh kept soaring.
It is a core requirement for combatting inflation to keep the real interest rate above zero. Unfortunately, the previous regime did not realize this most fundamental concept. We did not make this mistake. Once we were given the responsibility to bring the country back on track, we sharply increased the policy rate by 150 basis points to 10 percent to ensure that the real interest rate remains above zero. The Standing Lending Facility (SLF) and the Standing Deposit Facility have been raised to 11.5 and 8.50 percent respectively. The weighted average interest rate on advances of the commercial banks rose to 11.89 percent in January 2025. To support the tight monetary policy stance, we simultaneously adopted various austerity measures to reduce expenditure.
While we kept taking various contractionary measures at home, in China and India, our biggest sources of imports, inflation has come down to less than 1 percent and to 3.6 percent respectively by the end of February 2025. The exchange rate of Taka against the US dollar has also remined stable for the last couple of months. Prices of fuel and other commodities have also fallen in the global market. Therefore, we should not experience imported inflation anymore. Moreover, we have not seen any shortages of the supply of essentials in the country.
All these factors generated expectations that inflation, like in our neighboring countries, would start to fall. And from the data of February 2025, it appeared so. Point-to-point inflation came down from 10.89 in December 2024 to 9.32 in February 2025. However, the rate of inflation itself is still at high levels and the fall is not fast enough. This indicates that we have serious supply chain issues.
We understand that it will take some time to root out the system that has been manipulating and hindering normal market developments in the country for the last several years. To do that the Ministry of Commerce and the Directorate of National Consumers’ Rights Protection have ramped up monitoring of the market. To strengthen monitoring across the country, special task forces consisting of 10 members were set up in every district in October last year. The task force is working closely with the local administration to keep the prices from jumping abruptly.
Keeping vulnerable people protected from the bite of inflation is also important. To generate a downward momentum for prices of essentials, import tariffs have been removed or reduced on several items including potato, onion, edible oil and egg. At the same time 10 million families are being provided with essential food items at subsidized prices. To protect the poor, subsidies for food and energy have also been increased.
We are committed to bringing inflation down. And the data shows that we have started achieving the desired results. This year, during the holy month of Ramadan, food prices fell, and the Consumer Price Index remained stable. We are expecting that by the end of June inflation will fall to 8 percent and will further continue to the downward path in the later months. To ensure that we have taken a tough stance against the market manipulators and have kept the storage facilities under close monitoring. We are also strengthening the Competition Commission which is mandated to create a competitive market environment for the benefit of the consumers. Necessary support for agricultural production is also being provided to keep the prices of essential food items within the reach of people.
Food Security
Our efforts to bring down inflation and ensure food security were threatened by the floods last year because of which yields of Aus and Aman crops were less than the targets. As a result, stock of food grains at this moment is less than what we want. To address this, the government decided to import 9 lakh metric tons of food grains, of which already 6 lakh metric tons have already been imported. We are also taking measures so that the farmers get the appropriate price for their products. To keep the cost of agricultural production, we are providing necessary subsidies for fertilizer and at the same time stock of fertilizers has been increased. Despite the small land mass compared to the size of the population, the agricultural sector has performed remarkably well in Bangladesh. We will continue our efforts to build on that.
Energy Security
Like inflation, the sting of energy security is felt across every echelon of society. Therefore, to improve the quality of life as well as to keep the economy moving forward, it is imperative to ensure an adequate supply of energy and to keep it affordable for the people. In the backdrop of the persistent high inflation, our government has decided to keep the price of electricity stable. However, as the amount of the budget spent on electricity subsidy, which is approximately 1 percent of the GDP, is quite high we need to find a way to reduce it. Our initial thoughts are centering around cost-cutting measures that will help reduce the cost of electricity generation.
A plan is being devised to reduce the overall cost of electricity generation by 10 percent within this fiscal year. If this plan can be realized, more than 11 thousand crore Taka will be saved. We are reviewing the power purchase agreements and initiatives have been taken to conduct an energy audit to reduce the electricity production cost. It has been planned to add 648 million cubic feet of gas supply from the domestic sources by the end of 2025. By December 2028, an additional 1500 million cubic feet of gas sourced from the local wells has been planned. Keeping these targets in mind, we have allocated necessary funds to enhance the capacity of BAPEX. To increase transparency and efficiency of electricity production, various acts and rules have also been amended or repealed.
Business and Investment Promotion
The COVID-19 pandemic and geopolitical instability created uncertainty because of which flow of foreign direct investment (FDI) was reduced. Data shows that although the inflow of FDI increased by 10.1 percent in 2021, growth rates of FDI in 2023 and 2024 were negative. Also, the level of annual FDI inflow has consistently remained below USD 2 billion since 2010. This indicates that Bangladesh has significant room to improve the investment climate. Therefore, it is now a top priority of the Interim Government to remove the barriers and create a conducive environment for business and investment.
Certain steps have already been taken to simplify the process of inward investments. For example, BEZA has been vested with the administrative affairs of the Korean EPZ, online services provided by various offices have been unified through a single landing webpage, business summit in presence of a large number of foreign investors have been successfully organized, FDI Heatmap has been created to guide the investors towards the high potential sectors, and a task force has been set up within the Chief Adviser’s Office to establish the semi-conductor industry in the country.
Revenue Mobilization
While we are taking bold steps to bring reforms necessary for the country, we realize that implementing those reforms and sustaining them will greatly depend on the government’s ability to spend in priority sectors. However, the tax revenue collection in Bangladesh has been historically low. Even though we became a lower-middle income country in 2015 and are now set to graduate from the group of LDCs, the tax-GDP ratio remained consistently below 8 percent, which is one of the lowest in the world.
To improve revenue collection, we have rolled out a fully automated system that has made submission of tax returns very easy. We expect that this will encourage more taxpayers to submit their returns. To increase efficiency of tax collection, several new offices have been established and related manpower and logistics have been approved for those offices. However, we realize that these measures are not sufficient.
Since the establishment of the National Board of Revenue (NBR), there has been a distinct conflict of interest encompassing the activities related to tax policy formulation and tax collection as both functions are done by the same entity. In almost all the comparable countries, these two functions are done by the separate entities with different set of manpower to avoid any conflict of interest. In Bangladesh, these two functions are done by the same set of people in the same office. Realizing the importance of separating these two functions, we have initiated a process and soon these two functions will be done by two different offices and two different set of experts.
Financial Sector
The financial sector of the country is yet another area where major reforms are needed. Discipline in this sector collapsed during the previous regime as state-sponsored cronyism took deep root in the banks and consequently several banks are now in deep trouble. The total volume of non-performing loans (NPL) in the banking sector increased from 6.12 percent in 2011 to 16.93 percent in 2024. These were underestimated numbers as many loans were rescheduled to avoid being classified as NPL. We have started working to assess and find out the true scenario of this sector so that appropriate policy responses can be designed.
We have already formed a task force to assess the risks including conducting asset quality review (AQR) and the liquidity situation of the banks. Amendments and formulation of relevant laws are also being made to support the reforms needed for the banking sector. We have also reconstructed the board of directors of several banks to make sure that those banks are run professionally. Although it will be very challenging to bring discipline into this sector, we are determined to do everything in our power to overcome the odds.
External Sector
The uncertainties in the external sector that the Interim Government has been facing originated from the wrong policies that the previous government pursued without giving proper attention to the fundamental principles of economics. For example, after the Russia-Ukraine war broke out, inflation soared everywhere and consequently almost all the countries raised interest rates. However, in Bangladesh, the authorities did not act promptly and kept the policy rate below the rate of inflation. For example, in December 2022 when point-to-point inflation reached 8.71 percent, the repo rate was still 5.75 percent. As the real interest rate remained negative for a long period, considerable pressure was built on the exchange rate.
To defend the exchange rate, the central bank started using the foreign exchange reserves. This inflicted twofold damage to the economy. On the one hand, the foreign exchange reserves continued to fall sharply and on the other hand further pressure accumulated on the exchange rate as the reserves fell. The foreign exchange reserves fell by more than 36 percent from USD 41.8 billion at the end of the fiscal year 2022 to USD 26.7 billion by the end of the fiscal year 2024. The average exchange rate of Taka against the US dollar, at the same time, fell by more than 28 percent from 86 Taka per US dollar to 111.6 Taka per US dollar. It is now stable at around 122 Taka per US dollar as we stopped using the reserves to defend the exchange rate and let it get close to the market rate. The exchange rate stability, supported by a surge in remittance inflow, appears to have contributed to regaining stability of foreign exchange reserves. In March 2025, total 3.29 billion remittance was received, which is a record high for any month in the history of Bangladesh. If this trend continues, total remittance inflow in FY 2024-25 could be as high as USD 30 billion.
As for the external trade, we are seeing continuous improvement in the current account balance as exports continue to continue to grow at a higher speed than imports. During the July to March period of the current fiscal year, exports grew by 10.5 percent from the exports of the same period of the previous fiscal year, while imports grew by 6.4 percent. The current account balance for at the end of February 2025 stood at USD –1.2 billion which was USD –4.1 billion at the end of February in 2024. However, as the government is doing austerity, the pace of the development projects has slowed down and as a result disbursement of foreign loans committed for the projects has also slowed down. During the July to February period of the current fiscal year, medium and long-term loans from foreign sources reduced by 22.8 percent to USD 3.86 billion from USD 4.99 billion of the previous fiscal year. However, this will surely pick up speed when the fight against inflation is won. That day is not far away.
Concluding Remarks
With a huge pool of hard working and intelligent people, Bangladesh has tremendous potential to grow and has a lot to offer to the global community. Yet, the benefits that Bangladesh will be able to reap will depend on the quality of planning to successfully integrate with the dynamic global landscape. The opportunities of the fourth industrial revolution are here as are the risks of climate change. Our journey from this crossroad will move towards the right direction only if our preparation is adequate and supported by necessary reforms.
[1] Capitalism and Freedom (1962)
