Economic recovery requires a political settlement

Bangladesh’s economic recovery is no longer only an economic problem. It has become a problem of political organisation. The country does not lack reform proposals; it lacks a political ecosystem capable of carrying them through. The economy is confronting three structural fractures.

The first is in banking. Nearly one-third of bank loans are classified as non-performing, reflecting years of connected lending, weak supervision and accommodation of defaulters. A banking system burdened by bad assets cannot mobilise savings, price risk or finance investment.

Tap here to add The Daily Star as a trusted source

The second fracture is in energy. Excess generation capacity, capacity-payment obligations, fuel dependence and poorly designed contracts have burdened the Bangladesh Power Development Board and the budget. The result is a cycle of arrears, subsidies and renewed fiscal pressure, without improving reliable, affordable energy for industry.

The third is in public revenue. Bangladesh’s tax-to-GDP ratio has fallen below seven percent, leaving the state short of resources for health, education and social protection. This is not merely a problem of low tax rates. It reflects narrow coverage, extensive exemptions, weak enforcement, limited digital integration and an unreformed revenue administration.

Together, these fractures have trapped Bangladesh in a combination of elevated inflation, subdued private investment and weak growth. We cannot resolve a crisis rooted in impaired bank balance sheets, energy-sector liabilities and fiscal incapacity through policy tinkering. Economic recovery now requires structural repair.

The reform agenda is not mysterious. Distressed banks must undergo asset-quality reviews, resolution and recapitalisation, accompanied by loan recovery and stronger governance. Power contracts and capacity obligations require transparent review, while generation planning must reflect realistic demand, grid investment and a lower-cost energy transition. Revenue reform must expand the tax base, rationalise exemptions, digitise administration and separate policymaking from collection under stronger accountability mechanisms.

Yet identifying reforms is easier than carrying them out. These measures may be technocratic, but they are political in distribution. Their costs arrive first; their benefits come later. Powerful borrowers will resist recovery. Owners of privileged energy contracts will defend their rents. Beneficiaries of tax exemptions will oppose change. Bank restructuring may expose losses, revenue reform may create new obligations, and energy reform may require difficult adjustments. Necessary policies can become politically explosive before they become economically rewarding.

This is where Bangladesh’s political frame becomes a binding economic constraint. Major political actors remain locked in a zero-sum, tribal struggle in which compromise is treated as surrender and continuity as collaboration. Under such conditions, every reform can be branded partisan, reversed after a change of power, or paralysed by bureaucrats and populist opposition waiting for the tide to turn.

This is not a call for a grand coalition or ideological uniformity. Bangladesh does not need political agreement on everything. It does, however, need a minimum national compact on how recovery should be structured and how to navigate immediate consequences of tough reforms without resorting to populism. Major political stakeholders must create a platform to commit to a time-bound reform programme covering banking resolution, energy restructuring and revenue modernisation. Progress should be measured against transparent benchmarks, with independent institutions empowered to implement rules.

Without such a settlement, economic policy will remain hostage to political warfare. Bangladesh may then lose not merely a few percentage points of growth, but a decade to economic stagnation, while economies such as Vietnam deepen their integration into value chains. The question is no longer whether Bangladesh knows what must be done. It is whether our politics can create trust, patience and continuity to do it.

The writer is the principal economist at Policy Research Institute (PRI)