February 19, 2025
DHAKA – Bangladesh has gone through several political transitions since its independence in 1971. Caretaker or interim governments in the past have often delivered important institutional reforms. The present team under Professor Mohammad Yunus is no exception. But to meet the expectations of Bangladeshis during this short window, a focused reform agenda is required.
Bangladesh has come far in the past 53 years, but its economic engines were starting to sputter in the aftermath of Covid and Russia’s invasion of Ukraine. Recent data revisions suggest growth was considerably lower than previously estimated, while substantial capital flight weakened the financial sector’s health. Add to this the continuous loss in international reserves during the 2022-24 period and persistently high inflation, and the economy by mid-2024 was not in the best of health.
With the move to a crawling peg exchange rate, the tightening of monetary policy, the alignment of prudential standards with international norms, the launch of an asset quality review, and the appointment of independent boards for several of the troubled banks, the Bangladesh Bank has already taken important steps to regain macroeconomic and financial stability. These should now be completed with the introduction of a robust bank resolution framework that gives the central bank the tools necessary to intervene in failing banks, enforce capital requirements, and, importantly, protect depositors.
While stabilising the economy is a priority, the roots of Bangladesh’s recent turmoil lie in a crisis of governance. The interim government is pursuing a programme that can be described as one of full transparency and wide consultation to help put in place the rules and institutions needed to secure a fairer Bangladesh for the next generation. In the economic sphere, three priorities stand out:
First, today, the government loses a massive seven percent of GDP annually (about 3.5 lakh crore taka) from tax breaks awarded in non-transparent and arbitrary ways. While some tax incentives are justified, they should only be granted after a due process. Bangladesh does not have such a process and unsurprisingly has one of the highest rates of tax exemptions in the world. Transferring the authority to approve tax policy from the National Bureau of Revenues to the parliament, as is the case in almost all other countries globally, and separating tax policy from tax administration, are foundational reforms to ensure everyone pays their fair share.
The governance of public finances can also be strengthened by disclosing the winners and ownership of government contracts and granting independence to the Office of Comptroller and Auditor General. In the area of social assistance, the creation of a dynamic, unified social registry to better target welfare programmes is a positive step in the direction of greater transparency.
Second, lax regulation of banks allowed connected groups to secure loans that greatly increased the risks to banks. The Bangladesh Bank should require all banks to check and disclose their ultimate owners and borrowers and the links between them to manage risks.
In parallel, with the help of the international community, Bangladesh is working to recover some of the assets it believes were illicitly transferred out of the country. With a properly regulated banking system, the foundation would be laid for attracting additional investment into the sector, reducing the large stock of non-performing loans and rebooting private sector credit for growth and job creation.
Third, digital and data revolution offers great opportunities to strengthen public sector governance and service delivery. Reforms to bolster the quality and independence of the statistics system are under preparation. These could be complemented with the creation of a digital public infrastructure to make the public administration more transparent, user-friendly and efficient, following the example of other developing countries from Brazil to Estonia and Indonesia to India. Bangladesh—the country with the second largest population of digital gig workers—should not be far behind. A modern data protection framework, creating an interoperable digital payment system for mobile financial transactions, the creation of a unified digital ID system, and a consent-based data sharing framework could be priorities, as recommended by the task force on re-strategising the economy.
In strengthening the governance of public finances, the financial system and the administration of data and statistics, the interim government would leave a strong economic legacy on which all future elected governments could build.
Martin Raiser is vice president for the South Asia Region of the World Bank.
Views expressed in this article are the author’s own.