Bangladesh's Economic Reset: A Fiscal Choice at the Polls

As Bangladesh heads to the polls on February 12—its first general election since the 2024 violent uprising that toppled Sheikh Hasina—voters are deciding more than a government. They are choosing who will own a difficult economic reset. The next administration will inherit an economy tied to IMF programmes, constrained by fragile foreign exchange reserves and weighed down by fiscal reforms that are politically costly but unavoidable. The political upheaval has been dramatic. The economic reality is less forgiving. When the Yunus-led interim government took charge in August 2024, growth was already slowing amid turbulence and years of opaque governance. GDP expanded 3.7 per cent in FY25, down from 4.2 per cent the previous year and 5.8 per cent in FY23, according to IMF data. The Fund expects growth to recover to 4.7 per cent in FY26 and gradually approach 6 per cent over the medium term, provided tax mobilisation improves and financial sector weaknesses are addressed. Inflation, however, is projected to remain elevated at 8.9 per cent in FY26. The IMF has flagged “mounting macroeconomic and financial challenges”, including weak revenue collection, banking vulnerabilities and incomplete exchange rate reforms. Foreign exchange reserves were depleted during the upheaval amid capital flight, import compression and weak exports. Reserves have since recovered to $26.8 billion in FY25 and are projected to rise to $30.9 billion in FY26. Yet at under four months of import cover, buffers remain thin for a $460-billion economy heavily reliant on garments and remittances. The IMF has pushed Dhaka to allow greater exchange rate flexibility. While economically sound, a weaker currency risks imported inflation at a time when food prices are already straining households. Bangladesh’s tax-to-GDP ratio remains among Asia’s lowest. Total revenue and grants were just 8 per cent of GDP in FY25—far below what is required for a country aspiring to middle-income status. The IMF has called for bold tax reforms and subsidy rationalisation, particularly in energy and state-owned enterprises. The fiscal deficit is projected to widen from 2.9 per cent of GDP in FY25 to 4.3 per cent in FY26 as development spending resumes. Public debt, at 42.1 per cent of GDP, remains manageable but is rising. Without stronger revenue mobilisation, the adjustment burden will fall on spending—a sensitive issue as unemployment rises and garment sector layoffs mount. The ready-made garments industry, which accounts for roughly 80 per cent of exports, is under strain. According to multiple reports, citing government data, more than 240 factories have shut since the 2024 unrest, and exports have declined for consecutive months. Competitive pressures are intensifying. India’s trade deal with the European Union eliminates tariffs on Indian textiles, eroding Bangladesh’s advantage under the EU’s Everything But Arms scheme. With Bangladesh set to graduate from Least Developed Country status in 2026 and transitional benefits expiring by 2029, exporters face a tariff cliff. Without securing GSP+ status, garments could face tariffs of around 12 per cent in the EU—a market that absorbs nearly half of Bangladesh’s exports. For the country’s export model, the risk is structural. The IMF has urged asset quality reviews of systemic and state-owned banks, warning against unsecured liquidity support. Years of politically directed lending have weakened parts of the financial system. Cleaning up balance sheets will require fiscal space and political will. Elections in Bangladesh have often disrupted reform cycles, and growth typically softens during periods of instability. FY24 and FY25 already reflect that slowdown. The Awami League’s absence from the race reduces immediate confrontation but raises questions over political legitimacy—a key factor for investor confidence. Whoever forms the next government—whether the BNP or a broader coalition—will confront inflation near 9 per cent, fragile reserves, a widening deficit and sluggish private credit growth. Political campaigns promises on jobs and infrastructure will collide with IMF-backed conditions that demand tighter monetary policy, higher tax compliance and subsidy cuts. There are no easy options. Expanding VAT compliance risks business resistance. Cutting energy subsidies hits households. Allowing currency flexibility could stoke short-term inflation. Bangladesh’s rise over the past two decades, powered by export growth and macro stability, masked structural weaknesses. The February election may reset politics. Economically, it begins a more austere phase. For voters, the choice appears political. In reality, it is fiscal. The next government will inherit not just power—but the bill for deferred reforms. 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