IMF, debt and dollars: The economic backdrop to the Bangladesh election

As Bangladesh heads to the polls on February 12—its first common election because the 2024 violent rebellion that toppled Sheikh Hasina—voters are deciding greater than a authorities. They’re selecting who will personal a tough financial reset.

The subsequent administration will inherit an economic system tied to IMF programmes, constrained by fragile overseas alternate reserves and weighed down by fiscal reforms which can be politically pricey however unavoidable.

The political upheaval has been dramatic. The financial actuality is much less forgiving.

When the Yunus-led interim authorities took cost in August 2024, development 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 earlier yr and 5.8 per cent in FY23, in line with IMF knowledge.

The Fund expects development to get better to 4.7 per cent in FY26 and step by step strategy 6 per cent over the medium time period, offered tax mobilisation improves and monetary sector weaknesses are addressed. Inflation, nonetheless, is projected to stay elevated at 8.9 per cent in FY26.

The IMF has flagged “mounting macroeconomic and monetary challenges”, together with weak income assortment, banking vulnerabilities and incomplete alternate price reforms.

Skinny foreign exchange cushion

International alternate reserves have been depleted through 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.

But at below 4 months of import cowl, buffers stay skinny for a $460-billion economic system closely reliant on clothes and remittances.

The IMF has pushed Dhaka to permit better alternate price flexibility. Whereas economically sound, a weaker forex dangers imported inflation at a time when meals costs are already straining households.

Income crunch and rising deficit

Bangladesh’s tax-to-GDP ratio stays amongst Asia’s lowest. Whole income and grants have been simply 8 per cent of GDP in FY25—far under what’s required for a rustic aspiring to middle-income standing.

The IMF has referred to as for daring tax reforms and subsidy rationalisation, notably in power 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 improvement spending resumes.

Public debt, at 42.1 per cent of GDP, stays manageable however is rising. With out stronger income mobilisation, the adjustment burden will fall on spending—a delicate concern as unemployment rises and garment sector layoffs mount.

Garment sector below stress

The ready-made clothes trade, which accounts for roughly 80 per cent of exports, is below pressure. In line with a number of experiences, citing authorities knowledge, greater than 240 factories have shut because the 2024 unrest, and exports have declined for consecutive months.

Aggressive pressures are intensifying. India’s commerce cope with the European Union eliminates tariffs on Indian textiles, eroding Bangladesh’s benefit below the EU’s The whole lot However Arms scheme.

With Bangladesh set to graduate from Least Developed Nation standing in 2026 and transitional advantages expiring by 2029, exporters face a tariff cliff. With out securing GSP+ standing, clothes might face tariffs of round 12 per cent within the EU—a market that absorbs almost half of Bangladesh’s exports.

For the nation’s export mannequin, the chance is structural.

Banking dangers and political uncertainty

The IMF has urged asset high quality critiques of systemic and state-owned banks, warning in opposition to unsecured liquidity assist. Years of politically directed lending have weakened elements of the monetary system. Cleansing up steadiness sheets would require fiscal house and political will.

Elections in Bangladesh have typically disrupted reform cycles, and development usually softens in periods of instability. FY24 and FY25 already mirror that slowdown.

The Awami League’s absence from the race reduces rapid confrontation however raises questions over political legitimacy—a key issue for investor confidence.

A check of financial resolve

Whoever varieties the following authorities—whether or not the BNP or a broader coalition—will confront inflation close to 9 per cent, fragile reserves, a widening deficit and sluggish non-public credit score development.

Political campaigns guarantees on jobs and infrastructure will collide with IMF-backed circumstances that demand tighter financial coverage, larger tax compliance and subsidy cuts.

There aren’t any straightforward choices. Increasing VAT compliance dangers enterprise resistance. Chopping power subsidies hits households. Permitting forex flexibility might stoke short-term inflation.

Bangladesh’s rise over the previous twenty years, powered by export development and macro stability, masked structural weaknesses. The February election might reset politics. Economically, it begins a extra austere part.

For voters, the selection seems political. In actuality, it’s fiscal.

The subsequent authorities will inherit not simply energy—however the invoice for deferred reforms.