The latest Economic Update and Outlook (October 2025) published by the General Economics Division (GED) of Bangladesh’s Planning Commission paints a cautious picture of the economy ahead of the upcoming national election. While inflation has shown signs of easing, the government’s ongoing contractionary monetary policy has led to a severe slowdown in private sector lending and investment-raising concerns over the sustainability of growth and employment.
According to the report, the economy is “under cautious observation” as the election approaches, with mixed signals across key sectors. On the one hand, the stability in the foreign exchange market and an increase in bank deposits indicate growing confidence in the formal financial system. On the other, private credit growth has plummeted to its lowest level in 22 years, reflecting widespread stagnation in business activity and investment.
A Bleak Private Sector Landscape: The GED report emphasizes that the central bank’s contractionary stance-marked by higher policy interest rates-has created an unfavorable environment for private borrowing. The Bangladesh Bank’s data shows that private sector credit growth dropped to just 6.35 percent in August 2025, the lowest since 2003.The report explains the mechanism succinctly: “Under contractionary policy, when the central bank increases the policy rate, commercial banks prefer parking funds with the central bank instead of lending to private businesses, perceiving it as a safer and more profitable option.”
This has had a chain effect: businesses struggling to access affordable credit, delayed investment projects, and reduced working capital for small and medium enterprises. As liquidity tightens, market money flow has slowed down, directly affecting production and employment.
Despite stable foreign exchange reserves and slight improvements in remittance inflows, Bangladesh’s private sector has yet to regain its footing. The manufacturing, construction, and service sectors, which collectively account for more than 70 percent of GDP, have reported declining output over recent months.
“The private sector is essentially in paralysis,” one senior economist quoted in the report stated. “While the banks are holding excess liquidity, they are reluctant to lend due to elevated policy rates and uncertainty in the business environment.”
Deposits Rise, but Lending Declines: Interestingly, while credit activity has contracted, commercial banks have witnessed a significant surge in deposits. According to the GED report, both the government’s fiscal reforms and the Bangladesh Bank’s regulatory tightening have restored some confidence among depositors.
Several factors contributed to this trend: Reduced interest rates on national savings certificates (NSCs) have made traditional bank deposits more attractive. Higher remittance inflows have increased liquidity in the formal banking system. Stability in the exchange rate has encouraged people to keep savings in Taka rather than converting to foreign currency.
However, the GED warns that the rise in deposits has not translated into productive investments. The gap between savings and lending continues to widen, indicating inefficiency in monetary transmission. “The paradox is clear,” the report states. “While deposits are growing, the private sector’s access to credit is shrinking. Without reversing this imbalance, growth will remain fragile.”
Export Slowdown Despite Stable Currency: Another area of concern raised by the GED is the decline in export momentum, even as the Taka has remained stable against major currencies. Bangladesh’s export earnings have slowed down over the past quarter, particularly in ready-made garments, leather goods, and frozen food-sectors that traditionally drive the country’s foreign exchange inflows.
Economists attribute this to both global and domestic factors. Global demand has weakened due to sluggish recovery in Europe and the United States, while domestically, higher borrowing costs and dollar shortages have disrupted production and export financing. “Exchange rate stability alone cannot sustain export competitiveness,” the GED cautioned. “When exporters face difficulties accessing pre-shipment finance, even a stable currency offers little relief.” The contractionary stance, while aimed at reducing inflation, is inadvertently hurting export-oriented industries that rely heavily on bank financing for working capital and raw material imports.
Reforms Bring Modest Revenue Gains: The GED report also acknowledges some positive developments-particularly in fiscal management. Administrative and procedural reforms initiated by the interim government have resulted in improved revenue collection. Revenue performance has picked up pace in recent months due to enhanced monitoring by the National Board of Revenue (NBR), digitization of tax filing systems, and the elimination of certain loopholes in VAT enforcement. “While revenue growth is encouraging, it remains insufficient to offset the slowdown in private investment,” the report concludes.
Experts Warn of Pre-Election Economic Volatility: Speaking to Daily Industry, Dr. M. K. Mujeri, former Director General of the Bangladesh Institute of Development Studies (BIDS) and former Chief Economist of Bangladesh Bank, expressed deep concern over the evolving macroeconomic conditions.
“The optimism we saw earlier this year about the February election has faded,” Dr. Mujeri said. “The disagreements among political parties following the July certification process have once again created uncertainty. If this persists, we may see greater economic and social instability in the months ahead.”
Dr. Mujeri warned that if the election is eventually held amid political tension, non-productive spending could surge dramatically. Candidates may inject large sums of both legal and illicit funds into campaigns, fueling short-term liquidity and consumption.
“This injection of cash may temporarily boost consumer spending but will ultimately stoke inflationary pressures,” he added. “Common people will suffer as prices of essentials rise again.” According to him, the coexistence of two conflicting forces-credit stagnation and unproductive cash flow from election spending-could create a dangerous economic imbalance. “We are looking at a possible scenario where investment freezes while inflation rises, an early warning sign of stagflation,” Dr. Mujeri cautioned.
The Election Factor: A Double-Edged Sword: The GED report maintains a cautiously optimistic tone regarding election-related activities. It suggests that as election preparations intensify, economic activity may temporarily rebound, especially in sectors tied to logistics, advertising, printing, and construction. Such spending could help restore business sentiment in the short term.
However, economists and business leaders warn that the quality of this growth is questionable. Most election-related spending is non-productive and short-lived, providing little support for sustainable industrial or infrastructural development.
“Elections inject liquidity, not investment,” said a senior official from the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI). “Once the election is over, that cash vanishes from circulation, leaving behind higher prices and weakened confidence.”
Inflation Eases but Remains a Threat: The Planning Commission acknowledged that headline inflation has shown signs of moderation, largely due to a decline in rice prices following government interventions in the food market. However, core inflation-driven by non-food items such as rent, healthcare, and services-remains stubbornly high. Experts argue that the slowdown in inflation may not last long, especially if election-related spending escalates and the central bank fails to manage liquidity effectively. “The challenge for policymakers is to balance inflation control with growth recovery,” said a senior economist at Dhaka University. “Tight money reduces inflation but also kills investment-the very engine of future growth.”
A Looming Policy Dilemma: Bangladesh Bank now faces a complex dilemma: whether to maintain the current contractionary stance to preserve price stability or ease it to revive investment and job creation. The GED hints that some policy recalibration may be needed in the coming months.
“A purely contractionary approach cannot sustain long-term stability,” the report notes. “Monetary policy should gradually transition toward a more accommodative framework once inflationary pressures subside.”
The private sector, meanwhile, continues to appeal for interest rate relief and improved access to credit. Business chambers have repeatedly warned that without fresh investment, the country’s GDP growth could fall below 5 percent in the 2025-26 fiscal year-a sharp decline from previous projections.
As Bangladesh navigates the critical months leading up to the national election, its economy remains caught between monetary rigidity and political uncertainty. While inflation control has offered temporary stability, the ongoing contractionary monetary policy is strangling private credit, choking investment, and undermining long-term growth prospects. The GED’s cautious outlook is a clear signal that without timely policy adjustment and restored investor confidence, the country risks sliding into a deeper economic malaise. As Dr. Mujeri warns, “If we fail to strike the right balance now, the combination of tight money, weak investment, and rising political spending could push the economy toward a perfect storm.”
