WAQAR AHMAD CHOUDHURY
Bangladesh’s economic success under the previous political regime rested on fragile foundations, with structural weaknesses masked by headline growth. These distortions fuelled a build-up of public debt and one of the world’s highest non-performing loan ratios, estimated at 35.7 percent, reflecting deep abuse in the banking sector.
As confidence eroded, foreign exchange reserves fell by nearly 40 percent between end-2022 and mid-2024, while inflation rose to a 12-year high. An artificially low interest rate cap and aggressive monetary expansion by the Bangladesh Bank intensified price pressures, with weak data transparency obscuring the scale of deterioration and contributing to political upheaval.
The interim government has made progress in stabilising the macroeconomy. Foreign exchange reserves rebounded by more than 30 percent, supported by restrictive import policies and a recovery in remittance inflows following the shift to a market-driven exchange rate. Inflation has moderated, and initial steps have been taken to address the NPL crisis. Yet the recovery remains fragile, with GDP growth slowing to 3.69 percent in FY2025 amid weak business confidence, declining equity-related foreign direct investment and lingering political uncertainty.
Political clarity has therefore emerged as a decisive factor shaping the outlook. While uncertainty surrounding the transition to an elected government has weighed on investor sentiment, the return of Tarique Rahman after a prolonged exile has reduced electoral ambiguity. His emphasis on stability and national unity has improved expectations of policy continuity, supporting a more constructive medium-term outlook, with the IMF projecting growth to rebound to 4.9 percent in 2026.
Despite these stabilisation gains, Bangladesh’s capital market continues to underperform. The DSEX remains near multi-year lows, valuations are deeply compressed and foreign participation has declined sharply, even as regional peers have rallied. This underperformance is structural, driven by a prolonged IPO drought, regulatory inefficiencies, the dominance of bank financing, elevated fixed-income yields and an underdeveloped institutional investor base. These weaknesses reinforce a cycle of low liquidity and weak participation.
Bangladesh now stands at a critical juncture. Macroeconomic stabilisation, improving reserves and emerging political clarity offer a narrow but meaningful window for capital market revival. Sustained recovery, however, will depend on a coordinated reform agenda that addresses structural bottlenecks, restores institutional credibility and realigns incentives towards long-term market development.
On the fiscal front, restoring listing incentives is essential. Expanding the corporate tax differential between listed and non-listed companies to 10 to 15 percentage points would reward transparency, while tax-free dividend income could redirect household savings towards equities.
Regulatory reforms are equally important. Streamlined, digitised financial reporting and a fast-tracked IPO process would help revive the listing pipeline, while stronger corporate governance and improved stock exchange oversight would enhance market integrity and investor protection.
Institutional strengthening remains central. Enhancing the effectiveness and accountability of the BSEC, alongside revitalising the Investment Corporation of Bangladesh, would restore regulatory credibility and provide counter-cyclical market support. Progress also depends on stronger inter-agency coordination, improved financial literacy and a better balance between bank financing and capital markets through incentives for private listings and rationalised savings instrument yields.
Sustainable capital market growth ultimately depends on building a strong institutional investor base, particularly through the development of the mutual fund industry. Greater mutual fund participation would help reduce volatility by reinforcing disciplined, long-term investment practices. Yet the sector remains underdeveloped.
Achieving durable, fundamentals-driven growth will require targeted policy support, including higher tax rebates on mutual fund investments, limited tax exemptions on dividend income, larger IPO quotas and the removal of the 15 percent bank investment cap on mutual funds. If implemented consistently, these measures could reposition the Bangladesh capital market as a credible engine of long-term economic growth.
The writer is managing director and CEO of Vanguard Asset Management Limited