How Bangladesh’s interim government can revive the country’s struggling economy

Slow growth in job creation and unemployment, especially among educated youth, have also long been a problem in Bangladesh. Around 40 percent of Bangladeshi citizens aged between 15 and 24 are currently neither in education, employment nor training, almost twice the global average.

Private investment in the country, which creates a large proportion of jobs, has largely stagnated over the past decade. And the ongoing turmoil will deal a further blow to the investment landscape.

At the same time, Bangladesh’s macroeconomic situation has been on shaky ground for some time. Its foreign exchange reserves have fallen dramatically, from $48 billion (£36.6 billion) in August 2021 to just over $18 billion (£13.8 billion) in May 2024.

Current reserve levels are barely sufficient to meet the minimum standard set by the International Monetary Fund (IMF) for countries to meet import payments.

A prolonged period of instability could lead to further deterioration as export and remittance earnings decline. These two main engines of growth in Bangladesh accounted for two-thirds of total per capita GDP growth between 2001 and 2020.

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Restoring the economy

The interim government’s main focus will be to lay the groundwork for an orderly transition to more permanent leadership, but it will also be expected to address the country’s most pressing economic challenges.

The immediate task is to fight inflation. Economists in Bangladesh and the IMF have accused the central bank of not using monetary policy properly in recent years. For example, interest rates were capped at 9% for loans and 6% for bank deposits between April 2020 and June 2023, despite growing inflationary pressures.

The government, led by Sheikh Hasina since 2009, has also borrowed heavily from the central bank to improve its poor performance in raising government revenue. However, borrowing from the central bank usually fuels inflationary pressures as it puts more money into circulation.

Renowned economist Ahsan H. Mansur has taken office as the new central bank governor and there are high expectations that the bank will fulfill its responsibilities.

But many of the challenges facing Bangladesh’s economy are structural in nature. The banking sector, for example, needs reforms to address problems such as very high loan default rates, poor corporate governance and inadequate risk management.

Data from the Bangladesh Bank shows that about 11 percent of loans are repaid late or not at all – the actual amount is likely to be twice as high.

To ensure that banks apply sound financial practices, greater transparency and more regulation are needed. The transitional government has announced that it will soon establish a banking commission to address these issues.

Tax revenues in Bangladesh are also much lower than in other countries with a similar level of development. The new government needs to expand the tax base, improve tax compliance and increase the efficiency of tax collection.

These reforms should enable an increase in public spending. Public spending in Bangladesh has been well below that of comparable countries in recent years, at around 15 percent of GDP.

This is partly the result of widespread corruption. During Hasina’s 15 years in office, nearly $150 billion (£115 billion) was siphoned out of the country. US-based think tank Global Financial Integrity found that most of the stolen funds came from loans taken out by banks, mainly by politically influential individuals and companies.

Finally, Bangladesh must overcome its dependence on the garment industry. Ready-made garments are by far the country’s largest export item, accounting for 85 percent of all export earnings.

But diversifying the export base will not be an easy task. Bangladesh is set to disappear from the UN list of least developed countries in 2026. As a result, the country will likely no longer benefit from the trade preferences it enjoys today in many countries, such as zero tariffs on its exports.

In addition, the country attracts very little foreign investment. To make Bangladeshi companies more attractive to investors, the new government must take steps to liberalize trade, relax investment regulations and remove structural barriers such as access to finance.

But ultimately, Bangladesh needs a stable government. To achieve this, all political parties and representatives of the country must unite behind a reform agenda.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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