Bangladesh’s economy is currently facing one of its most acute investment slowdowns in recent years, as the government’s rising reliance on commercial banks to finance deficits continues to squeeze liquidity for the private sector. Economists warn that the trend-combined with inflationary pressures, weak business confidence, and vulnerabilities in the banking sector-is creating a “crowding-out effect” that threatens the country’s long-term growth prospects.
According to latest Bangladesh Bank data, private sector credit growth remains almost stagnant despite an uptick in deposit growth. In contrast, government borrowing from banks soared to 24.45% in September 2025, the highest in years. Experts say this imbalance reflects deeper structural stresses within the economy, where fiscal pressures, election-related uncertainties, and fragile banking governance have converged to limit domestic investment.
Inflation Eases, but Investment Sentiment Still Weak: After nearly two years of persistently high inflation, Bangladesh recorded a modest decline in October 2025, when headline inflation fell to 8.17%-down from 10.87% in the same month last year. Yet, the relief has not translated into improved investment confidence.
Deposit growth remained relatively stable-rising to 10.02% in August, before slightly easing to 9.98% in September-but private credit growth has barely moved, indicating businesses are holding back on borrowing as they wait for political and economic stability.
“High interest rates, tighter lending policies, weak investment sentiment, and political uncertainty are the main drivers behind private-sector stagnation,” noted a senior central banker quoted in Daily Industry.
Many entrepreneurs and industrialists say they are adopting a “wait-and-see” strategy ahead of the upcoming national elections, fearing policy reversals, market volatility, and further disruptions in the banking and energy sectors.
Government’s Borrowing Surge Puts Pressure on Banks: With declining development expenditure, reduced profits from government securities, and widening revenue shortfalls, the government increasingly turned to domestic banks for financing during the first quarter of FY2025-26.
NBR collected Tk 28,469 crore from three major sources in October-Tk 8,324 crore short of its monthly target. Meanwhile, ADP implementation, though slightly improved at 8.33% in the first four months, continues to suffer due to delays in fund release and project readiness.
Faced with a large financing gap, the Ministry of Finance has leaned heavily on state-owned and private commercial banks. This has worsened liquidity constraints for businesses, especially SMEs, who already face obstacles in securing working capital due to risk-averse lending practices.
“Such sustained government borrowing is crowding out private-sector investment,” several banking-sector experts told Daily Industry, adding that high spreads, rising non-performing loans, and operational inefficiencies are further restricting credit expansion.
Banking Sector Fragility Undermines Recovery: Although interest rate spreads remain relatively stable-between 5.55% and 5.68% for private commercial banks-non-performing loans (NPLs) and governance issues continue to undermine the sector’s ability to support economic activity. Bankers complain that weak financial discipline, loan rescheduling abuses, and inadequate capital buffers have eroded the banking sector’s resilience.
Moreover, industrialists say that artificial dollar shortages, ongoing LC restrictions, and frequent disruptions in power and gas supply are adding multiple layers of complexity to the investment slowdown.
External Sector Shows Strength, but Domestic Conditions Fragile: Bangladesh’s external indicators paint a mixed picture. The foreign exchange reserves show significant improvement-from $24.35 billion in November 2024 to $32.34 billion in October 2025-supported by rising remittances and controlled imports.
However, export earnings remain volatile. While July 2025 recorded a peak, subsequent months have seen fluctuating performance. Exports in October stood at $3.82 billion, recovering slightly from September but still far below the year’s high.
Meanwhile, imports of capital machinery-a key indicator of future industrial investment-plummeted to $267 million in July, underscoring the depth of the ongoing investment stagnation.
Economists warn that although inflation is easing and external buffers look strong, domestic vulnerabilities-particularly in banking, investment, and revenue collection-pose significant risks to sustained economic recovery.
Businesses Struggling Under High Costs and Energy Crisis: Industry leaders say that even if liquidity were to improve, structural barriers make it difficult for businesses to expand operations or undertake new investments.
BCI President: “Industry is under extreme pressure”: Bangladesh Chamber of Industries (BCI) President Anwar-ul-Alam Chowdhury Parvez expressed deep concern over the deteriorating industrial environment: “The government is not taking effective measures despite witnessing the dire situation of businesses. Since 2022, the shortages of electricity and gas have intensified to the point where most industries cannot maintain regular production. Nearly half of the small industries have already shut down.” Parvez emphasized that high interest rates, inflation, energy shortages, and stagnant demand are collectively suffocating the industrial sector. “To expand employment, ensure competitiveness, and diversify industrial production, the government must adopt more business-friendly policies,” he said. CPD: “Prolonged political uncertainty will deepen the economic crisis”
Dr. Fahmida Khatun, Executive Director of the Center for Policy Dialogue (CPD), said political transition will play a crucial role in shaping business confidence and investment flows. “Elections are essential for stability. Politics and economics complement each other. The longer the interim government remains, the greater the economic damage.”
She stressed that meaningful reforms-particularly in banking governance, financial discipline, energy security, and revenue administration-must be top priorities for any incoming administration.
Investors Waiting for Clarity: Interviews conducted by Daily Industry with investors and entrepreneurs reveal a consistent theme: uncertainty. Many business owners say they are delaying decisions on expansions, machinery imports, or new projects until they see: stable political conditions, stronger banking sector governance, a predictable exchange rate environment, and clear post-election economic policies. Several also mentioned frustration over slow government responses to the energy crisis, which continues to disrupt production and raise costs.
Crowding-Out Effect Already Visible: Economists point out that the crowding-out effect is no longer theoretical-it is already impacting Bangladesh’s economy: Public borrowing is absorbing a disproportionate share of available liquidity. Banks prefer lending to the government because of lower risk and negligible administrative cost.
Private borrowers, especially SMEs, face stricter screening and higher collateral requirements. Industrial production remains below capacity due to lack of capital for raw materials and equipment.
Outlook: A Recovery Possible-But Only With Reforms: Despite the turbulence, experts say Bangladesh’s economy can still regain strong growth momentum if key reforms are implemented early in the next political cycle.
These include: Strengthening banking sector governance and reducing NPLs, Enhancing financial discipline and eliminating fiscal leakages, Modernizing revenue administration to reduce dependence on bank borrowing, Ensuring reliable energy supply, Restoring investor confidence through policy stability.
Without these reforms, they warn that political uncertainty, revenue deficits, and credit distortions may prolong the investment slump and impede overall economic recovery.
In summary, Bangladesh stands at a critical crossroads. While external indicators show signs of stability, domestic economic challenges-exacerbated by heavy government borrowing-continue to weigh down private investment, industrial output, and long-term growth prospects. Experts uniformly agree that restoring confidence, reforming the banking sector, and ensuring political stability are essential for steering the economy back onto a sustainable development path.
