Bangladesh is the only country in South Asia that has seen an improvement in the Heritage Foundation's 2021 Index of Economic Freedom.
The country has been placed at the second most economically free nation in the region, only behind Bhutan.
Bangladesh's score has increased in government integrity, tax burden, business freedom, and labour freedom.
The increase is mainly contributed by a significant improvement in the tax burden score, which has been seen as a positive impact on the overall economic freedom of a nation.
According to the Heritage Foundation, the tax burden includes both the direct tax burden in terms of the top tax rates on individual and corporate incomes, and the overall amount of tax revenue as a percentage of GDP (gross domestic product).
Bangladesh has made slow but steady progress towards a greater economic freedom over the past decade, the Washington-based think tank said in its release.
India stands third, while Nepal ranked the lowest in the region in the economic freedom index.
Except Bangladesh, all South Asian countries have seen their scores decline this year.
However, globally, Bangladesh's economy stands 120th in the index released last week, scoring 56.5 in a scale of 100.
The score is below the global average economic freedom threshold set in the index, putting Bangladesh among 63 economies rated as "mostly unfree" along with its all regional neighbours.
Heritage Foundation evaluated a country's economic freedom in four broad policy areas: rule of law, government size, regulatory efficiency, and open markets.
The index measures 12 specific components: property rights, judicial effectiveness, government integrity, tax burden, government spending, fiscal health, business freedom, labor freedom, monetary freedom, trade freedom, investment freedom, and financial freedom.
"Bangladesh is performing well in the government size and open market category, but the problem lies in the rule of law and regulatory efficiency areas. Regulatory efficiency is very poor, arbitrary and sometimes irrational, while the market is more or less open," said Ahsan H Mansur, executive director of the Policy Research Institute.
Strong prevalence of the private sector in the economy and minimal conflict might have contributed to the improvement in economic freedom, he observed.
Like Bangladesh, other South Asian countries are suffering from similar problems – poor performance on rule of law and regulatory efficiency. There also exists institutional weakness among the nations and that is clearly reflected in the ranking, he further added.
He recommended, "Institutions should be made more stable and independent. They have to do what they are supposed to do, not being dictated by political interference. They also should have the technical capability to make the right and fair judgement on economic issues like the developed countries do."
"Impartiality, objectivity and lesser political interference should be exercised. This will improve institutional framework and enhance economic freedom," he further said.
Of the 178 economies ranked in the 2021 Index of Economic Freedom, five including Singapore, New Zealand and Australia are considered "free," while 33 including the United Kingdom, the United States and South Korea are classified as "mostly free."
Spain, Vietnam and Russia are among 59 economies classified as "moderately free."
On the other hand, 81 economies received scores below 60 and are rated "mostly unfree" or "repressed".
The world's least economically free nation remains North Korea, followed closely by Venezuela and Cuba.