Why the economy lost its way

Bangladesh has been suffering from a mix of micro and macroeconomic pressures since August 2024. The banking sector, already weakened over many years, is now in trouble, marked by a capital shortfall, soaring non-performing loans (NPLs), and corruption. The current administration did inherit a surge in irregular lending and failures in bank governance, including allegations of large-scale fund diversion. Yet recent economic indicators show cracks so deep that the system risks pulling the wider economy down. Many experts even warn of possible food shortages, rising unemployment, and greater social disparity.

Banking should support economic growth, but in Bangladesh, it has become a brake on momentum. According to the World Bank, the country will face sustained high inflation along with persistent vulnerabilities in the financial sector. The gross NPL ratio remains alarming. In the third quarter of 2025, classified loans rose to 27.09 percent of total outstanding loans. Many banks are struggling with capital shortfalls, and some require unconditional government support for mergers and policy assistance. As credit tightens and fragility grows, the investment pipeline and broader economic activity continue to suffer. For example, SME loan disbursement reported up to September was the lowest in four years.

Growth projections from global institutions and foreign investors paint a bleak picture. The Asian Development Bank estimates 3.9 percent growth for FY25, while the World Bank forecasts only 3.3 percent. The gap between government expectations and reality is wide. With the investment engine stalled, the interim administration has been unable to rebuild investor confidence, unlock private financing, or attract the capital inflows needed to lift national growth.

Agriculture grew by only 1.79 percent in FY 2024-25, down from 3.30 percent the previous year. For a country like Bangladesh, this was a major setback for the poor, especially farmers. The service sector also lost pace, growing at 4.51 percent compared with higher figures earlier. Both segments employ vast numbers of people. Yet the administration has not managed to raise productivity, reform land use, strengthen rural credit, or adapt to climate shocks. The slowdown in services reflects weak structural transformation, low value addition, and poor links with the investment ecosystem.

A stable business environment depends on the rule of law. Business owners report weak enforcement, unpredictable labour unrest, and corruption-driven approval processes as major barriers. In addition, many firms face gas and power shortages, forcing factories to rely on costly diesel generators and driving production costs higher. These conditions increase risk premiums, discourage investment, raise operating costs, and, in many cases, push businesses to shut down rather than absorb losses.

The ready-made garment sector, the backbone of export earnings, has endured significant hardship over the past year. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) reports that about 258 export-oriented factories have closed, leaving more than 100,000 workers jobless. In September 2025, the association said that around 400 factories were forced to suspend production due to banking-related problems and called for policy support to help them reopen.

To reverse this damaging trajectory, the interim government must act immediately with several interlinked strategies.

First, the banking sector needs swift restructuring and a comprehensive bailout so that distressed assets are addressed proactively and credit flows can resume. Second, private investment, especially in agriculture, manufacturing, and services, must be encouraged. Investment in climate-resilient farming, rural credit systems, digital services, skills, and logistics can raise productivity in sectors that employ most citizens.

At the same time, monetary and fiscal policy must turn more counter-cyclical. Targeted fiscal expansion, efficient public investment, and effective monetary tools that support credit can help stabilise the economy. Finally, there is no alternative to good governance. Combating corruption, strengthening institutions, and enforcing the rule of law are essential for a durable recovery.

The writer is a senior banker