Bangladesh’s economic landscape is facing mounting challenges as high interest rates and ongoing political and financial uncertainty dampen demand for loans and stifle investment. Credit growth in the private sector has hit a 42-month low, reflecting the country’s broader economic struggles.
Interest rates have surged to 14-15%, which has led to a significant reduction in businesses seeking term loans and trade financing. Economists are voicing concerns over the impact of this trend, which is curbing economic activity and preventing a much-needed recovery.
Dr. Ayesha Khatun, an economist at the Bangladesh Institute of Development Studies (BIDS), explained that the increase in interest rates is a major deterrent for businesses looking to expand. “The rise in borrowing costs is forcing businesses to delay or cancel investments,” she said. “The uncertainty surrounding the political climate and the higher financial risks are creating an environment where entrepreneurs are reluctant to take on new debt or make long-term commitments.”
Private sector credit growth dropped to 7.66% in November 2024, down from 8.30% the previous month, marking a significant decline. This trend reflects the broader stagnation in investment, with imports of capital equipment also falling sharply.
Dr. Khatun added that the downturn in credit flow is likely to have long-term consequences for employment and economic stability. “Fewer investments mean fewer job opportunities and lower economic growth. This will likely lead to higher unemployment rates and further strain the country’s already fragile economy.”
Syed Mahbubur Rahman, a former chairman of the Association of Bankers Bangladesh and managing director of Mutual Trust Bank, echoed similar concerns. He highlighted that banks are taking a more conservative approach to lending. “Given the current financial climate, most banks are reluctant to approve new loans without strong collateral,” Rahman said. “This cautious approach is meant to protect the banks from increasing risks of loan defaults in the face of uncertainty.”
The high interest rates are also impacting the country’s imports, with capital equipment imports dropping by nearly 22% during the first five months of the 2024-25 fiscal year. This decline indicates that new industries and factories are not being established at the same pace as in previous years.
“Businesses are waiting for political stability and better financial conditions before making any significant investments,” Rahman explained. “Until then, both domestic and foreign investments are likely to remain subdued.”
Both economists agree that the government needs to take immediate action to restore investor confidence. “Political stability, uninterrupted power supply, and financial reforms are key to improving the investment climate in Bangladesh,” said Dr. Khatun. “Until these issues are addressed, we can expect continued stagnation in credit growth and investment.”
With unemployment rising and investment stagnating, experts stress that without significant changes, Bangladesh’s economy will continue to struggle in the face of rising borrowing costs and ongoing uncertainty.
A senior official at a private commercial bank explained that the uncertainty in the market, coupled with elevated borrowing costs, has significantly suppressed loan demand. “The ongoing financial risks have led businessmen to hold off on investments, further stagnating economic activity,” the official said.
According to Bangladesh Bank’s private sector credit statistics, credit growth fell to 7.66% annually in November 2024, a decline from 8.30% in October. This is well below the central bank’s target of 9.80% for the first half of the 2024-25 fiscal year. The dip in credit flow mirrors broader economic struggles, as growth in this sector has been steadily declining since mid-2024.
In September 2024, credit growth dropped to a three-year low of 9.20%, further slumping to 8.30% in the following month. In May 2021, credit growth had similarly fallen to 7.55% amid the pandemic.
The high interest rates and slow economic momentum have led to a sharp decline in investments. Entrepreneurs are hesitant to invest due to the financial risks associated with rising borrowing costs. As a result, imports of capital equipment have also decreased, as new factories and industries are not being established at current interest rates.
The decline in private sector credit has broader economic consequences. Analysts warn that stagnation in investment and imports could negatively impact employment rates and tax collection, further straining the country’s economy.
The ongoing economic strain is reflected in the decision by Keya Group to close four factories permanently on January 2, 2025. This move is part of a larger trend of factory closures in the country, which has been exacerbated by the combination of political uncertainty, high borrowing costs, and weak demand.
Syed Mahbubur Rahman, former chairman of the Association of Bankers Bangladesh, emphasized that banks are now adopting a more cautious approach when approving new loans. “Banks are focused on ensuring proper collateral to minimize the risk of loan defaults in this sluggish financial environment,” Rahman explained.
To reverse this downward trend, experts argue that political stability and uninterrupted power supply are essential to restoring confidence and encouraging investment. The government will need to address these issues and implement necessary reforms to help the economy recover from its current challenges.
