Political uncertainty in Bangladesh keeps investors on the sidelines, says economist Zahid Hussain

Growing political uncertainty surrounding the upcoming general election is eroding investor confidence in Bangladesh, leaving the country without a viable investment environment, according to senior economist Zahid Hussain.

In such an environment, he said, investors are more inclined to "keep their money in their pockets" than commit to new ventures.

Speaking on Inside Out, bdnews24.com's in-depth discussion programme on current affairs, the former lead economist at the World Bank's Dhaka office said: “Until the political fog clears, investment will remain stalled. Once there's clarity, investors will say ‘the cloud has lifted’.”

He added that the breakdown of the old political order and the interim government's attempts at reform offer both an opportunity for structural change and a pathway out of the current paralysis.

“But right now,” he said, “we’re in a holding pattern. Everyone knows this interim arrangement is temporary—but what comes next remains uncertain.”

The discussion was broadcast on bdnews24.com's YouTube channel and Facebook page.

Hussain, also a member of the interim administration’s white paper drafting committee on the state of the economy, emphasised that interest rates alone are not the main deterrent to investment.

“Even if loans are made cheaper, the current environment doesn’t support the kind of investments that contribute to growth and job creation,” he noted.

DOUBLE-EDGED DILEMMA: INFLATION VS GROWTH

Bangladesh’s economy continues to struggle under prolonged inflation, exacerbated since the post-pandemic recovery. For nearly three years, poor and low-income populations have borne the brunt of the crisis.

The interim government has raised policy interest rates several times to tame inflation, which has suppressed liquidity and further weakened private-sector investment. Private credit growth has now fallen to around 7 percent.

“There’s a classic policy trade-off,” Hussain explained. “To control inflation, rates must remain high. But higher interest rates inevitably dampen borrowing and investment.”

He warned that easing rates prematurely could trigger another surge in inflation.

THE REAL ROADBLOCK: POLITICAL INSTABILITY

Hussain identified political uncertainty as the single greatest threat to economic recovery and investment. “If investors can’t see a clear future, they’ll wait it out. We’re in a transition, but we don’t yet know what we’re transitioning to.”

He expressed hope that the Consensus Commission, tasked with shaping a new political framework, will deliver a clear direction. “If a national consensus emerges around what the future political system should look like, and how we’ll get there, that could ease investor concerns,” he said.

He stressed that without such clarity, even perfect economic policies could prove meaningless. “What use is a smooth path,” he asked, “if it ends in a cliff?”

POLICY CONSISTENCY MATTERS

Hussain also underscored the need for predictable policy, particularly in taxation. Even if the interim government introduces sound policies, businesses remain cautious, unsure whether such policies will survive once a political government returns.

“The private sector’s wait-and-see attitude is entirely rational,” he said.

‘PAINFULLY HIGH’ INFLATION, AND 'NEW PLAYERS'

Despite official statistics showing a slight easing in recent months, inflation remains one of the most pressing concerns for ordinary Bangladeshis, particularly when it comes to food prices. For over two years, headline inflation has hovered above 9 percent. Hussain described the current price levels as “intolerable,” particularly for low-income groups.

“For low-income and impoverished communities, it’s extremely difficult to cope. The recent dip is no cause for celebration; there’s no guarantee it will continue,” he warned.

Hussain identified excessive distribution costs, not just production expenses, as a key driver of persistent inflation. When the cost of getting goods to market is several times higher than the cost of producing them, it suggests a long chain of intermediaries—each taking a profit, and in many cases, adding layers of extortion.

“When goods change hands multiple times, each actor in the chain adds a margin—some of it legitimate, some of it extortion.”

He pointed to a striking example from August 2024, in the aftermath of the student-led mass protests, when street-level extortion briefly subsided, and consumer prices noticeably fell.

“It became clear just how much price inflation was being fuelled by extortion at every stage of distribution. That month gave us a glimpse of what prices might look like without it.”

“Unfortunately, that vacuum didn’t last. By the end of August,” he continued, “new players had entered the market, and the same old game resumed—just with different faces.”

“THOSE WHO LAUNDERED MONEY FLED THEMSELVES"

Zahid Hussain cast doubt on the likelihood of recovering large sums of money siphoned off from Bangladesh’s financial system, saying that in most cases “the looters have fled along with the loot”.

Speaking on the challenges of retrieving laundered funds from overseas, he cited global data to illustrate the immense difficulty of asset recovery.

“If you look at international experience, roughly $1 trillion is illicitly moved across borders each year. But the recovery rate is shockingly low—for every $100 illegally taken out, only about $1 ever comes back,” he explained.

“The process is long, complex, and often ends in disappointment. So, placing all hope on recovering what's already gone may be unrealistic.”

In that context, he argued, the government’s top priority should be to prevent such capital flight from happening in the first place.

Referring to a recent drop in remittance inflows, widely seen as an indicator of growing informal money transfers and capital outflows, the former World Bank economist offered a stark diagnosis.

“It appears the same people who used to launder money are now gone themselves. That’s why we’re seeing a vacuum. But that vacuum hasn’t been filled yet.”

However, he warned that the gap may not remain empty for long.

“If extortion networks are anything to go by, that vacuum could soon be filled again. New players could enter the game and pick up right where the old ones left off.”

To break the cycle, Hussain urged the government to proactively identify money launderers and pursue legal action in the countries where the funds have been parked.

“By freezing assets abroad through proper legal channels, the government can send a clear message: the old games won’t be tolerated anymore. That alone could serve as a powerful deterrent going forward.”

CHARTING A PATH TO ECONOMIC RECOVERY

Amid a post-uprising political reset, the interim administration is signalling a shift in tone—and potentially in policy—across several economic sectors, notably investment.

Coupled with a deteriorating law and order and intensified geopolitical pressures, the country’s economic slowdown has become more pronounced. Leading institutions, including the International Monetary Fund (IMF), World Bank, and Asian Development Bank (ADB), have downgraded Bangladesh’s projected growth rate to below 4 percent for the 2024–25 fiscal year.

Asked about a path forward, economist Hussain pointed to a critical factor: the production sector is currently operating well below capacity. He emphasised that restoring productive capacity must be the government’s “prime goal”, particularly through resolving the nation’s energy shortfall, with gas supply being a central concern.

Commenting on the broader growth trajectory, he acknowledged that while the current growth rate is visibly lower than pre-pandemic levels, it’s unrealistic to expect an immediate return to the 7–8 percent range.

“If we can get growth back up to 5 to 6 percent, that alone could trigger a meaningful turnaround,” he said.

CAN AILING BANKS BE STABILISED?

The banking sector, long plagued by inefficiency and mismanagement, saw a sharp loss of public confidence in the immediate aftermath of the political transition in last August.

Zahid Hussain described the situation with a stark metaphor: “You could say the patient was bleeding heavily from a major wound, but we managed to prevent death.”

He recalled October as a particularly volatile month for financial institutions. Amid widespread panic, fears grew that even solvent banks might collapse. Depositors were hesitant, confidence waned, and liquidity came under stress. According to Hussain, decisive action during this period helped avert a full-blown crisis.

Some reforms have since been introduced. For instance, the timeline for recognizing defaulted loans has been shortened from 180 days to 90 days, in line with international standards. While this change is expected to sharply increase reported non-performing loans—which had previously been concealed—Hussain sees it as a step toward greater transparency and accountability.

He also welcomed the introduction of a new “resolution ordinance”, calling it a meaningful step forward in reforming the sector.

Regarding banks on the brink of collapse, Hussain outlined three possible solutions: liquidate non-viable institutions, pursue mergers and acquisitions, and as a last resort, inject public funds. But he warned against routine taxpayer-funded bailouts.

“We need a strategy that prevents distressed banks from becoming a permanent drain on the national budget,” he said. “That’s the future’s biggest challenge—how we resolve these failing institutions.”

TARIFF REFORM LOOMS POST-LDC STATUS

As Bangladesh prepares to graduate from the Least Developed Country (LDC) category next year, concerns are rising about how its trade policies will adapt in a more competitive, rules-based global market.

Hussain addressed the issue in the context of a now-paused tariff hike initiated by US President Donald Trump, which had targeted over 100 countries—including Bangladesh. Following appeals from affected nations, the tariff imposition has been suspended for 90 days, and the interim government has signalled it may seek a further extension, if needed.

Looking ahead, the economist cautioned against unilateral tariff reductions aimed solely at US imports, warning such a move could be deemed discriminatory by global trade bodies.

“If we lower tariffs only for American goods, we risk a challenge from the World Trade Organization (WTO),” he said, adding that the WTO could also object to such selective liberalisation.

Instead, he argued for a comprehensive tariff reform across the board. With over 8,000 tariff lines currently in place—many protected under policies designed to shield domestic industries—Bangladesh must begin reducing supplementary and restrictive tariffs, not just those targeting a single country.

“Tariff reform is inevitable after LDC graduation,” Hussain noted. “It’s better to start now—kill two birds with one stone—and ensure a smoother transition into developing country status.”

CAUTIONS AGAINST “OVERAMBITIOUS” BUDGET PLANS

Hussain has his reservations about the prospect of yet another overambitious national budget, warning that given Bangladesh’s current fiscal realities, a more pragmatic approach is essential.

“In the present context, I don’t want to see another lofty, unrealistic budget,” he said. “But from what I’m hearing, the projected figures are still quite large—too large to be realistically implemented.”

Instead, he urged the government to focus on a feasible and financeable budget.

“A realistic budget,” he explained, “is one that can be backed by actual financing—through domestic revenue, foreign aid, and internal borrowing. If those sources can support the spending plan, only then can we say implementation is truly possible.”

TAX REFORMS OVER TAX HIKES

The veteran economist also warned against the temptation to raise taxes as a shortcut to boosting revenue. Rather, he advocated for expanding the tax net and plugging loopholes that allow widespread tax evasion.

Simply increasing tax rates without addressing the structural inefficiencies in collection, he noted, could prove counterproductive.

PRIORITISE EDUCATION, HEALTH, AND SOCIAL WELFARE

Calling for increased spending in education, healthcare, and social protection, Hussain emphasised that these sectors deserve greater budgetary priority.

He dismissed the common bureaucratic argument that more allocation is pointless if departments cannot utilise the funds efficiently.

“It’s not enough to say ‘what’s the point of allocating more when they can’t spend it?’ That’s a weak excuse,” he said. “Instead, the system needs to be fixed so that essential sectors are both well-funded and well-functioning.”