Economy falters for lack of reforms

Bangladesh needs to accelerate structural reforms in taxation, public spending, employment and financial governance to strengthen its economic resilience and reduce dependence on foreign borrowing, economists have warned following the annual meetings of the International Monetary Fund (IMF) and the World Bank in Bangkok.

They said the discussions offered important lessons for Bangladesh as it grapples with weak revenue mobilisation, mounting energy costs, youth unemployment and technological changes threatening its export industries.

Translating the international institutions’ recommendations into domestic policy, however, will depend on the government’s willingness to tackle long-standing institutional weaknesses.

Professor Selim Raihan, executive director of the South Asian Network on Economic Modeling (SANEM) and a professor of economics at the University of Dhaka, said Bangladesh could no longer afford to postpone deep-rooted reforms, particularly in tax administration and subsidy management.

“The messages coming out of Bangkok are not entirely new to us, but the urgency with which they have been communicated should serve as a rude awakening for our policymakers,” he told the media.

The meetings of the IMF and the World Bank, held in Bangkok from October 12 to 18, brought together policymakers and financial regulators to discuss international economic cooperation, financial stability, investment and the challenges facing developing economies.

Bangladesh, which has long been regarded as a major test case for development, has a direct stake in these discussions, as the policy directions of the two institutions often influence its access to external financing and the course of its economic reforms.

A notable initiative at the meetings was the unveiling of the ‘Bangkok Blueprint’, a collaborative framework involving the Bank of Thailand, the IMF and regional financial regulators.

It sets out protocols for sharing intelligence on cross-border digital fraud, strengthening cybersecurity in emerging banking systems and building public confidence in financial technology.

The ‘Bangkok Dialogue Notes’, released at the end of the meetings, outlined principles for strengthening global resilience, including people-centred growth, reducing domestic and cross-border fragmentation, assessing investment by its contribution to local capacity and using middle powers as trusted connectors.

For Bangladesh, economists said, the challenge is to turn such broad commitments into practical measures that improve revenue collection, create productive employment, strengthen the financial system and reduce exposure to external economic shocks.

Tax reform and subsidy targeting
Raihan said Bangladesh’s persistently low tax-to-GDP ratio remained a major obstacle to fiscal stability. At around 8 to 9 per cent, the ratio leaves the government with limited resources to finance development and public services without increasing borrowing.

He called for a fundamental overhaul of the National Board of Revenue (NBR), including the separation of tax policy formulation from tax administration and a broader tax base that extends beyond salaried employees.

Without such reforms, Bangladesh would remain under pressure to borrow from abroad to meet its financial obligations, including servicing existing debt, he warned.

Raihan also questioned the effectiveness of broad-based subsidies, particularly those supporting the energy sector.

“For years, we have sustained massive fiscal deficits by propping up universal subsidies that disproportionately benefit the affluent rather than the vulnerable,” he said.

He argued that subsidies should be targeted, temporary and designed to protect low-income households rather than benefit consumers across all income groups.

“Protecting the poor through direct social safety nets while allowing energy prices to reflect market realities is a bitter pill we must swallow if we are to achieve macroeconomic stability,” he added.

For Bangladesh, better-targeted assistance could ease pressure on public finances while ensuring that vulnerable households receive support when energy and other essential costs rise.

Four priorities for Bangladesh
The next rounds of discussions between Bangladeshi officials and IMF-World Bank missions will test the government’s commitment to implementing reforms that successive administrations have struggled to complete.
Economists identify four broad priorities.

First, revenue mobilisation and fiscal discipline require separating the NBR’s tax policy and collection functions, reducing revenue leakages, expanding digital taxpayer records and reviewing non-development expenditure.

Second, better-targeted subsidies could reduce pressure on the budget by replacing broad-based energy support with direct assistance for low-income households.

Third, education reform and skills development should focus on vocational training, digital literacy and data-related skills to prepare young people for an economy increasingly shaped by AI and automation.

Fourth, financial sector governance requires rigorous assessments of banks’ asset quality, stronger action against wilful defaulters and greater protection of monetary policy from political interference.

The Bangkok meetings highlighted the continuing uncertainties facing developing economies, but Bangladesh’s ability to withstand external shocks will depend substantially on the quality of its domestic institutions and policy decisions.

For Dhaka, the immediate task is to convert the lessons from the meetings into a credible reform programme that strengthens public finances, creates productive jobs, improves energy security and prepares the economy for intensifying global competition.

Youth unemployment and the skills gap
Dr Zahid Hussein, a former lead economist at the World Bank’s Dhaka office, said Bangladesh’s employment challenges reflected a deep mismatch between the skills produced by its education system and those demanded by the labour market.

He said the global jobs deficit highlighted by World Bank President Ajay Banga was particularly relevant to Bangladesh, where a large young population was entering an economy unable to generate enough suitable employment.

“Ajay Banga’s warning about the global jobs deficit applies doubly to Bangladesh, where a massive youth bulge is colliding with an education system that produces parchment rather than productivity,” Hussein said.

Although the overall unemployment rate stood at around 3.5 per cent, he noted that youth unemployment and graduate joblessness, which had recently approached 14 per cent, pointed to a more serious problem.

Bangladesh continued to rely on low-skilled migrant workers to sustain remittance inflows, while domestic industries struggled to absorb university graduates because of gaps between educational qualifications and workplace requirements, he said.

Hussein called for a stronger focus on technical training, digital literacy and practical skills to help young people find productive employment and enable industries to move towards higher-value activities.

AI poses challenge to garment exports
The growing use of artificial intelligence (AI), automation and digital supply chains also presents significant challenges for Bangladesh’s ready-made garment (RMG) industry, the country’s principal export earner.

Hussein said rapid technological changes in global manufacturing and retail could undermine Bangladesh’s competitiveness if factories continued to depend primarily on cheap, low-skilled labour.

“Automation, smart manufacturing, and AI-driven supply chains are transforming global retail at lightning speed,” he said.

He warned that without greater investment in digital skills, smart manufacturing and product diversification, Bangladesh risked losing ground to technologically advanced competitors such as Vietnam.

“The Bangkok meetings rightly highlighted that human capital development and tech readiness are no longer optional-they are matters of economic survival,” he said.

AI could improve productivity in agriculture, manufacturing and financial services, but its expansion also carries risks, including the displacement of entry-level administrative workers, routine coding jobs and customer service staff.

These changes could narrow the traditional entry-level employment opportunities that have helped developing countries move workers into higher-productivity activities.

At the same time, the growth of digital financial transactions has increased exposure to cyberattacks and fraud.

For Bangladesh, which has pursued an ambitious digital transformation agenda while facing weaknesses in banking governance and data management, stronger regulatory oversight and institutional independence will be essential to ensure that digital expansion does not create further financial instability.

The proposed principles of the Bangkok Blueprint could provide a framework for strengthening cross-border fraud intelligence sharing and cybersecurity, provided they are translated into effective domestic regulations and enforcement.

Energy security and green financing
Energy security was another important area of concern for Bangladesh, which remains heavily dependent on imported fossil fuels and is vulnerable to fluctuations in international prices and supply disruptions.

External shocks, including geopolitical tensions in the Middle East and changes in liquefied natural gas (LNG) spot prices, can quickly increase import costs and put pressure on foreign exchange reserves and the balance of payments.

Bangladesh recorded more than $4.12 billion in additional energy expenditure over eight months because of external supply disruptions, underscoring the financial risks associated with import dependence.

Economists argue that expanding domestic gas exploration and accelerating investment in renewable energy are essential to reducing these vulnerabilities.

The interim government has initiated onshore and offshore gas exploration, sought foreign investment through business organisations such as the Foreign Investors’ Chamber of Commerce and Industry (FICCI), and pursued plans for a 10-gigawatt expansion of solar power over the coming years.

However, the pace of implementation will be critical to reducing pressure on the economy.

The IMF and World Bank have also emphasised the importance of making green financing available to developing countries on concessional terms.

Access to such funding can help countries invest in cleaner energy and strengthen their resilience to climate and energy shocks.

International financiers, however, generally expect predictable policies, transparent regulatory arrangements and credible safeguards against corruption before committing substantial climate-related funding.

Bangladesh’s forthcoming discussions with the IMF will therefore be important in determining how its fiscal and energy policies can support a more sustainable and diversified energy mix.