Why Bangladesh’s new government has no elbow room for any economic errors

The economy inherited by Bangladesh’s new government under Prime Minister Tarique Rahman will take much more than short-term stabilisation or rhetorical confidence to repair.

The new government is faced with the accumulated aftershocks of a long period of economic mispricing and institutional erosion that was exacerbated by political denial. These elements combined with volatile social dynamics to culminate in the revolutionary-scale uprising of July 2024.

The fall of Sheikh Hasina’s autocratic government of 16 years in that monsoon uprising has often been reduced to a story about student anger about job quotas. That explanation is convenient, but it is dangerously misleading. Though the quota movement was the spark, the precarious economy was the fuel.

For nearly a decade after 2013, Bangladesh lived with a political paradox. Democratic space narrowed, elections lost credibility, civil liberties eroded and dissent was criminalised.

Yet mass resistance failed to materialise. Fear alone does not explain that endurance – economic growth does.

Between fiscal year 2010 and fiscal year 2019, Bangladesh’s real GDP growth averaged roughly 6.6% to 7%, peaking at 8.15% in fiscal year 2019. tHIS WAS one of the fastest sustained growth rates in the developing world.

During the same period, poverty fell sharply, from about 31.5% in 2010 to around 20.5% by 2019. Per capita income rose from roughly $700 in 2010 to over $2,000 by 2022.

These gains produced a large new lower-middle-income group, especially in urban and semi-urban areas, whose political tolerance was directly tied to economic momentum.

As long as living standards improved, political repression was rationalised as the price of stability. The refrigerator stayed full, children stayed in school, the streets were calm and informal jobs, however precarious, were available.

Economic red flags

This narrative obscured the fact that Bangladesh’s growth was unusually narrow and externally dependent.

By 2019, ready-made garments accounted for more than 84% of export earnings, while remittances contributed roughly 6% to 7% of GDP.

The global environment was exceptionally favorable. Between 2015 and 2019, Brent crude prices averaged under $60 per barrel, easing the cost of energy imports. Global interest rates were historically low, enabling large-scale infrastructure borrowing.

Global demand recovered strongly after the financial crisis in 2008-’09, sustaining export expansion. Bangladesh did grow, but it did so riding a global tailwind rather than through deep domestic reform. Beneath the headline success, warning signs accumulated.

Capital-output efficiency deteriorated after 2016, meaning each taka of investment generated less growth. Regulatory capture deepened and credit allocation became politicised. At the same time, institutions hollowed out even as the GDP figures impressed.

The banking sector was where these distortions were quietly concentrated. Official non-performing loans rose from around 8.9% of total loans in 2015 to over 10% by 2019, despite repeated rescheduling schemes that disguised the true scale of stress.

Independent economists and former central bankers consistently estimated that once rescheduled and underreported loans were included, between 20% and 25% of the banking system was impaired. From 2016, politically connected borrowers extracted enormous volumes of credit without correspondingly productive investments.

Loans were rolled over, reclassified or ignored, while recovery rates remained among the weakest in South Asia. More damaging than defaults was where the money went. Instead of being reinvested domestically, large portions of the borrowed capital were siphoned off abroad through trade mispricing, over-invoicing and outright capital flight.

Bangladesh’s growth model depends on money circulating in the domestic economy. The harsh economic truth is that when corruption remains local, it still fuels demand. But when corruption is externalised, it hollows out growth itself.

The Covid-19 pandemic exposed how fragile this structure had become. In the fiscal year 2020, GDP growth collapsed to about 3.4%, the lowest in decades. The shock hit an economy where informal employment accounts for roughly 85% of total jobs.

Surveys by Bangladesh’s largest NGO, BRAC, and the state-owned think-tank Bangladesh Institute of Development Studies showed urban informal incomes falling by 60% to 80% during the lockdown, with household savings exhausted within months.

Government stimulus packages amounted to about 3.7% of GDP, but most support flowed through banks as loans rather than grants, excluding informal workers and microenterprises.

Lacklustre recovery measures

The Hasina administration, instead of repairing the banking system during the crisis, pegged its policy responses around artificially propping up weakened bank balance sheets, while currency erosion continued and additional risks were layered onto an already fragile financial system.

That essentially transformed a temporary shock into structural damage. Consumption collapsed, small and medium businesses disappeared, jobs were lost and household resilience was permanently reduced.

By the time the Ukraine war disrupted global commodity markets in 2022, Bangladesh was already vulnerable. In the fiscal year 2022, the import bill jumped by more than 40%, driven by fuel, food, machinery and fertilisers. Export growth slowed sharply as global demand weakened.

Bangladesh’s foreign exchange reserves, reported at nearly $48 billion in August 2021, fell rapidly once liabilities were accounted for, dropping to around $30 billion-$32 billion by late 2023 under International Monetary Fund definitions. Rather than allowing an adjustment through the exchange rate, policymakers of the Hasina regime attempted to defend a politically convenient taka – currency value was managed in a way that served short-term political goals rather than long-term economic stability.

Between 2021 and mid-2023, the taka eventually depreciated by over 35% but the adjustment was delayed through administrative controls. The result was economic paralysis. A de facto dual exchange-rate system emerged, with official rates bearing little resemblance to market reality.

Importers paid premiums of 10% to 15% above official rates to secure dollars. Exporters and remitters were punished by artificially low conversion rates, pushing dollars into informal channels.

By mid-2023, the system was breaking down. Letters of credit – bank guarantees to sellers – could not be opened. Factories could not secure raw materials. Production slowed, layoffs increased and working hours were cut. Inflation, initially driven by global supply shocks, became entrenched.

Headline inflation rose from 5.6% in 2020 to over 9% in 2022, peaking above 11% in mid-2023. Food inflation exceeded 12% to 13% for extended periods. Real wages turned negative for several quarters, particularly for low-income urban workers.

Economic downturn

The lower middle class experienced a rapid compression of purchasing power, while rural households faced rising input costs and declining real farm incomes. The credibility of Bangladesh Bank – the central bank – collapsed along with its balance sheet. Monetary policy lost traction as credit allocation remained politicised.

Environmental stress then delivered the final blow. The 2023-’24 El Niño cycle pushed temperatures to record highs, driving electricity demand sharply upward just as fuel imports became unaffordable. Load-shedding intensified, with industrial zones reporting four to six hours of daily outages during peak periods.

Agricultural output suffered from heat stress, erratic rainfall, and sudden flooding, compounding food shortages and reinforcing inflation. The economic pain was no longer abstract or urban. It spread to villages, farms, small towns, and informal workers, the very groups that had previously absorbed political repression in exchange for stability.

By July 2024, the political rupture was inevitable. Youth unemployment had risen above 11%, with educated youth unemployment significantly higher. Public-sector jobs remained one of the few perceived sources of security, making the job quota issue explosive.

But what drove people into the streets was broader and deeper. They were becoming poorer in real time, with no credible plan from the state to stop it. The social contract collapsed. Once economic security disappeared, repression no longer worked. The fall of the Hasina government was inevitable.

The interim administration led by Muhammad Yunus inherited an economy on the edge of dysfunction. Its main achievement was stabilisation. Exchange-rate distortions were partially reduced, informal arbitrage declined and incentives for formal remittance inflows improved.

Remittances rebounded by more than 15% year-on-year in early 2025. Reserves stabilised above immediate crisis thresholds. Inflation remained high but stopped accelerating, hovering around 8% to 9%. Just as importantly, expectations of freefall were reversed. The bleeding slowed.

The Yunus period also benefited from forces beyond policy control. El Niño receded, fuel prices softened and agricultural output rebounded. Power demand eased and the pressure on the import bill declined.

These developments mattered more than any single fiscal intervention. The interim government delivered relief and relief buys time in a fractured economy. But it does not obviously fix the structure.

Fragile inheritance

This is the context in which the Bangladesh Nationalist Party government took power on February 17. It inherits an economy that is no longer collapsing, but it is also far from healthy.

Private investment remains weak, below 23% of GDP. Private-sector credit growth hovers around 6%, the lowest in decades.

The tax-to-GDP ratio remains near 8%, among the lowest globally, constraining fiscal capacity. Public debt has risen steadily, and debt servicing absorbs an increasing share of revenue. Inflation continues to erode real incomes, and the banking system remains burdened with legacy non-performing loans.

The export sector remains dangerously concentrated in garments at a time when global trade is fragmenting and protectionism is rising. Graduation from least-developed-country status threatens preferential market access unless productivity and diversification improve rapidly.

Early signals from the new administration did not suggest an awareness of the stakes, particularly around monetary governance and banking supervision, as it was observed with the sudden removal of the central bank chief on February 25.

The electorate that removed Hasina did so because its economic buffer vanished. That buffer has not been rebuilt. Any renewed shock – be it inflation, power shortages, job losses or currency instability – will have immediate political consequences.

Bangladesh has crossed a threshold where economic failure translates directly into loss of political legitimacy.

The defining lesson of the past decade is stark. Politics in Bangladesh now follows economics, not the other way around.

Growth narratives cannot be manufactured anymore. Reserves cannot be defended by decree. Banking systems cannot be stabilised by loyalty.

The Bangladesh Nationalist Party government must now deliver structural repairs in a global environment far less forgiving than the one that sustained Bangladesh’s earlier rise. Stabilisation has removed the excuse of crisis. Expectations are rising. Resources are limited. And the memory of how quickly prosperity unraveled is still fresh.

If the new government governs as if 2015 has returned, it will discover, much as its predecessor did, that Bangladesh’s economy no longer allows that illusion.

Faisal Mahmud is a Dhaka-based journalist and analyst,