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Since taking over the rein of the country the interim government has been facing numerous challenges, from slow growth, high inflation and unemployment to delays in implementing crucial reforms across the judiciary, political system and economy. The law-and-order situation also remains unsatisfactory partly due to the lingering effects of the July uprising. Furthermore, there is a growing concern that the criminal syndicates run by ousted Hasina are regrouping and becoming active as reflected in the incidents that happened in Gopalganj recently.
Thus after almost close to a year in power, there remains a sense of unease about the future and optimism that the Yunus government can get the economy back on track while spearheading political reforms needed to rebuild a durable open democratic system and prevent another dictator from emerging. It is a monumental challenge.
The military has historically been involved in the country's politics as a major actor and its influence over the government in a democratic process is concerning and this has contributed to significant political instability. There are concerns now that in this unstable political situation, the army may decide to take a more direct hand in political governance.
While it is clearly understood what steps need to be taken to forestall the re-emergence of a Hasina type regime returning to power over the last 11 months, no clear policy outline has yet been made public by the interim government. And the reason for this delay remains a mystery given that some peripheral issues such as the humanitarian corridor and port management issues appear to have captured the media attention and public debate.
However, many are expressing concern that the interim government is being hemmed in by various political interests at home and abroad. The wide-ranging reform programmes that have been undertaken appear to be going nowhere including the constitutional reform which is possibly the most crucial reform issue to forestall emergence of another Shekh Hasina or a similar type of tyrant.
The new policy direction is important because political stability based on a well-functioning democratic process is the most essential prerequisite for the government to not only to attain political stability but to gain the ability to reform and revive the economy. In fact, the July uprising has provided "once in a life time opportunity" to bring about systemic change in the country's political system and culture.
The Bangladesh economy historically has shown resilience to global challenges and internal issues that usually contribute to causing major economic stress. Despite positive signs in exports and remittances, a combination of slow growth, high inflation and rising unemployment and income inequality suggest a potential stagflationary trend.
For a LDC like Bangladesh stagflation can have particularly severe consequences. It can lead to reduced growth, increased poverty, and greater vulnerability to debt crises. Stagflation can, in essence, act as a major impediment to economic growth and potentially destabilise the political and social system. Over and above, the country's reliance on exports makes it highly susceptible to fluctuations in the world economy. Now Trump Tariffs have added a new challenge.
On the other hand, the rise in global commodity prices (e.g., energy, food) directly impacts Bangladesh because the country is heavily reliant on import of those products. This increases production costs and can make goods less competitive in the global market. Uncertainty and high inflation can discourage both domestic and foreign investment, further hindering economic growth.
High inflation erodes the purchasing power of consumers, particularly low-income individuals who spend a larger portion of their income on essential goods and increases misery and hopelessness. Growing social misery and hopelessness are also reflected in an unprecedented rise in crimes. The government is addressing the issues of poverty and lawlessness with rhetoric instead of firm action.
Bangladesh has achieved, as claimed, an annual average growth rate of about 6.5 per cent over the last decade and a half. But the growth rate has slowed down considerably since the onset of the pandemic and the Russia-Ukraine conflict. The current macroeconomic crisis is manifested in slowing GDP growth, high inflation and unemployment, looming debt burden and a banking system in deep trouble.
The Bangladesh Bureau of Statistics (BBS) recently published the provisional GDP estimate for 2024-25 and it stands at 3.9 per cent. Early this year, multilateral and regional organisations such as the WB, IMF and ADB have downgraded Bangladesh GDP growth rate for 2025 to 3.3 per cent, 3.8 per cent and 3.9 per cent respectively. But they all provided a better growth forecast for 2026.
The economic slowdown is due to declining exports, reduced domestic and foreign investment, and falling agricultural output. Additionally, the fiscal year started in 2024 amid a turbulent and unstable political environment.
In 2024, Bangladesh's public debt was $181,008 million. This amount represented 40.13 per cent of the GDP. Bangladesh's private debt and household debt stand at 36.92 per cent and 6.69 per cent respectively of GDP in 2025.
Now the debt/GDP ratio is also set to rise further at the end of fiscal 2025-26 due to further deficit financing as evident in the current fiscal year's budget. Interest payment will account for 22 per cent of total revenue budget or 15.5 per cent of total spending. Between 1979-80 and 2024-25, Bangladesh always ran budget deficits except for four years. It indicates the budget has a structural deficit problem rather than cyclical.
According to the World Bank during the interim government's tenure, more than 2.7 million people have become new-poor. Of these, 1.8 million are women. Sluggish investment contributes to unemployment, leading to increased poverty. The interim government failed to prop up investment climate or investor confidence. Also, not much has been done to deal with underinvestment in infrastructure, a self-serving financial sector, educational decline, and a dysfunctional healthcare system.
The budget presented for fiscal year 2025-26 continued with the past fiscal practices except trimming the size by decreasing annual development expenditure by 13.2 per cent from the original allocation in the previous budget. The budget included unrealistic inflation and growth forecasts, which will not enhance investor confidence due to issues like infrastructure deficiency, bureaucratic corruption and delays and extortion rackets which cause distribution costs to outstrip production costs.
The proposed fiscal deficit of TK 1.25 trillion will further balloon the already accumulated public debt despite the austerity measures. In 2024, Bangladesh's public debt was $181,008 million. This amount represented 40.13 per cent of the country's GDP. Bangladesh's debt per capita in 2024 was $1,056. The public debt is composed of domestic debt (56 per cent of total debt) and external debt (44 per cent).
The RMG industry that grew and expanded since the early 1980s, reflects a structural inability to explore markets beyond primarily to the US and a few west European countries or to go up in value addition or product diversification. Wages have not kept up with inflation, reducing real incomes. High inflation and increasing unemployment are indicators of an economy potentially experiencing stagflation. Domestic and foreign investment are stagnant, and income inequality is increasing, thus further worsening economic turmoil. Worsening economic crisis cannot be addressed by ramping up rhetoric rather than action.
In 2024, Bangladesh exported goods worth nearly $8.4 billion to the US, of which US$7.34 billion were ready-made garments (RMG). More than four million people work in the RMG industry. If Bangladesh wishes to continue to rely on RMG exports, the industry needs to keep pace with technological progress and innovate to remain a relevant player in global apparel trade.
Bangladesh faces multifrontal economic challenges. The country's economic fortune is too closely linked to low-tech and low-skill based manufacturing and remittances coming from expatriate workers. And this has been the case for a long a time and that indicates deep inbuilt structural rigidities. Policymakers in Bangladesh appear to be unable or unwilling to address domestic structural deficiencies. The government must ensure a stable and predictable policy environment with a firm commitment to economic openness and to growth and that will help ease the structural limitations.
The interim government must implement reforms to attract investment, including FDI. That implies a strong focus should be placed on policies to reinvigorate investment, innovation and productivity. Far more importantly, a more radical reimagining of the economy is crucial that could create new opportunities and spark a long-overdue economic transformation. The effect of Bangladesh's multifrontal challenges depends on how quickly and effectively the government addresses them.