From turmoil to stability: Will 2026 bring economic confidence back for Bangladesh?

Bangladesh stands at a crossroads, with an election-driven democratic transition scheduled for February 2026, while the economy awaits revival. The interim government, which assumed office in August 2024 amid high inflation, depleted foreign exchange reserves, soaring non-performing loans (NPLs), and entrenched governance failures, initiated several stabilisation measures that have begun to show early results. However, persistent law and order challenges, electoral uncertainty throughout much of 2025, and weakened institutional coordination have undermined economic turnaround efforts, while heightened business risk perceptions have further eroded economic confidence.

As highlighted in Bangladesh Bank's (BB) Half-Yearly Monetary Policy Statement (MPS) for H1 FY26, the economy continues to face significant challenges, including elevated inflation, ongoing exchange rate pressures, and subdued private investment. Reflecting these headwinds, GDP growth slowed to 3.69% in FY25, down from 4.22% in FY24. The Ministry of Finance targets 5.5% growth for the current FY26, contingent on the restoration of political stability and a sustained recovery in investor confidence.

Stabilization gains and persistent challenges

Inflation has been one of the most persistent challenges confronting Bangladesh since the interim government assumed office, driven by years of accommodative monetary policy, sharp depreciation of the Taka, energy price adjustments, and repeated supply disruptions. Bangladesh Bank responded with a firm tightening cycle, raising the policy rate to 10% by mid-FY25 and maintaining it alongside targeted supply-side interventions. The impact of these measures is now evident. Headline inflation peaked at 11.38% in November 2024 before easing to 8.29% by November 2025. Food inflation fell sharply from 13.80% to 7.36% over the same period, reflecting improved supply conditions, while non-food inflation remained sticky at around 9%, underscoring persistent underlying cost pressures.

Bangladesh's transition from stabilisation to sustained growth requires political legitimacy, policy continuity, and credible reform leadership—conditions that only an elected government can fully provide.

Foreign exchange reserves faced severe pressure during the political transition, plummeting to a low of $18.61 billion in November 2024. However, decisive policy measures and strong external inflows triggered a robust recovery, with reserves climbing back to $26.40 billion by November 2025. This rebound was largely driven by a 28.7% surge in workers' remittances, a sharp narrowing of the current account deficit, and an improved balance of payments position, despite the modest 3.94% depreciation of the Taka in FY25.

The shift to a flexible, market-based exchange rate regime, combined with Bangladesh Bank's targeted interventions and daily reference rate publications, has significantly reduced volatility and helped rebuild reserve buffers. If an elected government restores political stability and global trade conditions remain manageable, reserves have strong potential to surpass $30 billion in the coming year, providing greater protection against external shocks.

Remittances continue to be a bright spot for Bangladesh's economy, consistently remaining above the USD 2.5 billion monthly mark in recent months, reaching USD 2,562.44 million in October FY26. This was slightly lower than September's USD 2,685.56 million but still reflected year-on-year growth of around 7%, following solid inflows in August (USD 2,421.89 million) and earlier peaks such as USD 3,295.63 million in March FY25. Sustained remittance performance has been driven by incentives for formal transfer channels, a clampdown on cross-border illicit transfers, reduced reliance on hundi, and steady overseas employment.

Foreign Direct Investment (FDI) in Bangladesh rebounded modestly in FY25, reaching about $1.71 billion, a 20% increase from $1.47 billion in FY24, after fluctuations in previous years ($1.21 billion in FY20, $1.33 billion in FY21, $1.72 billion in FY22, and $1.61 billion in FY23). Much of this growth, however, came from reinvested earnings and intra-company loans rather than new equity, highlighting limited greenfield inflows.

Several reform initiatives have been undertaken to restore confidence in the financial system. In addition to the Bank Resolution Ordinance (2025) and the Deposit Protection Ordinance (2025), authorities introduced a more flexible, market-based exchange rate regime, tightened monetary policy to curb inflation, and improved liquidity management through clearer policy signalling. Regulatory oversight was reinforced through risk-based supervision, asset quality reviews of banks and NBFIs, stricter governance and ownership rules, and closer supervision of weak institutions. Legal reforms, including amendments to the Bank Company Act, Bankruptcy Act, and Money Loan Court Act, along with the creation of a Banking Sector Crisis Management Council and an asset recovery task force, signal a stronger commitment to financial discipline, transparency, and accountability.

Several growth drivers continue to perform poorly

Despite evident stabilisation gains in inflation, reserves, and remittances, the economic recovery during the interim period revealed significant structural weaknesses and missed opportunities that constrained its depth and inclusiveness.

Public investment through the Annual Development Programme (ADP) underperformed markedly, hampered by poor project selection, implementation delays—including land acquisition bottlenecks, tender issues, and inadequate feasibility studies—frequent revisions, and coordination failures. Utilisation rates were low (e.g., only 2–3% in early FY26), limiting infrastructure's role in crowding in private capital.

Exports came under sustained pressure from August 2025, declining for four consecutive months amid weakening global demand, US reciprocal tariffs, rising input costs, and competitive challenges, particularly in the RMG sector, which accounts for over 80% of earnings. November 2025 exports fell 5.54% year-on-year to $3.89 billion, reflecting reduced orders and buyer shifts to lower-cost competitors such as China and India.

Employment and poverty indicators deteriorated sharply. Layoffs outpaced hiring, with nearly 245 factories closing between August 2024 and July 2025, displacing around 100,000 workers, many in export-oriented industries. Displaced workers shifted to low-quality informal activities—such as ride-sharing or rickshaw driving—deepening job insecurity. Poverty reversed previous gains, rising to an estimated 27.93% in 2025 (per PPRC survey) from 18.7% in 2022, with extreme poverty nearly doubling to 9.35%. World Bank projections indicate over 36 million are poor, driven by job losses (up to 2.8 million in recent years), stagnant wages, and high inflation disproportionately affecting low-income households.

Small and medium enterprises (SMEs) faced near-collapse risks from restricted credit, weak demand, high operating costs, and energy disruptions, leading to shutdowns and further job losses. SME credit disbursement hit a four-year low at Tk 2.05 lakh crore in FY25 (down 9% year-on-year), exacerbated by limited access, high collateral requirements, and bank risk aversion. Energy-intensive SMEs—including textiles and light engineering—were particularly hard hit, with many operating below capacity or closing due to gas shortages and rising costs.

Energy supply shocks persisted, with gas supply often below 3,000 mmcfd against a demand of ~4,000 mmcfd, and industrial pressure dropping to 1–3 PSI (vs the required 10–15 PSI), forcing factories to run at 10–30% capacity or shut down entirely. Industrial gas tariffs rose to Tk 40–42/m³, power load-shedding averaged 2–4 hours daily in many areas, and reliance on costly diesel or LPG further eroded competitiveness, triggering additional SME closures.

Non-performing loans (NPLs) surged to a record 35.73% (Tk 644,515 crore) by September 2025, up from 16.93% a year earlier, exposing deep governance failures. Regulators responded with asset quality reviews, mergers, recapitalisations (targeting halving NPLs by FY27), closure/consolidation of five weak banks into a new entity, and enhanced supervision of 15 private banks, including board replacements. New ordinances strengthened depositor protection, ownership rules, and transparency.

Non-Bank Financial Institutions (NBFIs) saw mixed loan recoveries amid cautious lending, declining from BDT 58.03 billion in Q1 to 48.58 billion in Q3 2025. The Bank Resolution Ordinance expanded Bangladesh Bank's restructuring powers and unified oversight.

Why the weaknesses persisted: Confidence deficit, slow reforms, and structural constraints

The persistence of these weaknesses reflects a combination of political uncertainty, erosion of confidence, and long-standing structural challenges. The absence of an elected government reduced policy predictability and reform ownership, prompting businesses and investors to adopt a cautious, wait-and-see stance. Uncertainty surrounding the timing and credibility of elections, coupled with law-and-order concerns, heightened perceived risks and delayed investment decisions.

Business confidence in Bangladesh has weakened markedly over the past year, as firms postponed expansion plans amid political uncertainty, rising operational costs, and tightening financial conditions. This caution is reinforced by clear financial signals of a sustained slowdown in private sector credit growth. After hovering near double digits in early 2024, credit growth fell from a peak of 10.49% in March to 6.23% by October 2025. The slowdown reflects banks' risk aversion amid high non-performing loans and tight liquidity, constraining working capital and dampening investment appetite.

Political stability could unlock delayed investment by restoring policy predictability and enabling more decisive reforms. Bangladesh Bank's Monetary Policy Statement underscores that, despite subdued private investment, improvements in governance, liquidity, and depositor confidence are laying the groundwork for recovery. A credible election could therefore trigger a rebound in business confidence, supporting credit expansion and easing cost pressures.

Private investment in Bangladesh remains subdued, with the ratio declining to 22.48% of GDP in FY25—the lowest in five years. While some optimism exists for gradual improvement in FY26 through eased regulations and an infrastructure push, private investment is unlikely to rebound sharply without addressing these structural hurdles.

Moreover, reform implementation has been slow, and reform sequencing during the interim period focused primarily on stabilisation and crisis management. While necessary, this approach left limited scope for deeper reforms in revenue mobilisation, public financial management, insolvency resolution, and investment climate enhancement. Consequently, macroeconomic stabilisation alone proved insufficient to restore business confidence or unlock a sustained recovery.

What must be its top priorities

Bangladesh's transition from stabilisation to sustained growth requires political legitimacy, policy continuity, and credible reform leadership—conditions that only an elected government can fully provide.

Consolidating macroeconomic stability: Maintaining prudent monetary and fiscal discipline to anchor inflation expectations, preserve exchange rate flexibility, and rebuild foreign exchange buffers.

Reigniting growth drivers: Stimulating exports, private investment, SMEs, and employment through improved credit access, lower cost pressures, and more effective public investment under the Annual Development Programme (ADP).

Restoring governance and institutional credibility: Strengthening the rule of law, regulatory independence, transparency, and accountability across public institutions, particularly in the financial sector.

Rolling out and implementing reform programmes: Accelerating banking and NBFI restructuring, tax administration reform, insolvency and bankruptcy reforms, and broader structural adjustment measures.

Why an Elected Government Delivers Clear Economic Advantages

Restoring democratic legitimacy: Rebuilding public trust, social cohesion, and political stability while enhancing policy credibility at home and abroad.

Reducing policy uncertainty: Providing predictability and continuity that encourage businesses and investors to unlock delayed investment decisions.

Strengthening reform ownership: Enabling difficult but necessary economic reforms to be implemented with greater authority and public acceptance.

Improving institutional coordination: Facilitating faster decision-making and more effective execution across ministries, regulators, and public agencies.

Key thematic priority areas for economic revival

Stabilising the macroeconomy: Anchoring inflation, safeguarding foreign exchange reserves, and ensuring fiscal sustainability.

Strengthening public financial management: Improving revenue mobilisation, expenditure efficiency, and the quality and credibility of budget execution.

Sustaining export growth: Enhancing competitiveness through diversification, trade facilitation, and reduced logistics and port-related costs.

Catalysing private investment: Addressing banking sector stress, lowering borrowing costs, and improving the overall ease of doing business.

Creating more and better jobs: Supporting labour-intensive sectors, SMEs, and skills development to generate productive and formal employment.

Consolidating banking sector governance: Enforcing stronger supervision, resolving non-performing loans, and protecting depositor confidence.

Ensuring energy security: Expanding reliable and affordable energy supply, with greater emphasis on efficiency and renewable sources.

Dr M Masrur Reaz is Chairman and CEO of Policy Exchange Bangladesh.