Political 'economy bankruptcy' eroding Bangladesh's growth foundations

Currently Bangladesh is not facing a conventional financial collapse. Its factories are continuing to operate, with export earnings still flowing through the apparel sector, and entrepreneurial activities remaining visible across both urban and rural markets.And on the surface, the economy retains most of the characteristics that had previously made the country one of the South Asia's most celebrated development stories - having a sputtering economic stimuli full of boosting political economic leadership.

But beneath that appearance of resilience, a quieter and potentially more dangerous crisis is unfolding: The gradual erosion of the institutional credibility.In the meantime, what Bangladesh increasingly confronts is not only a banking problem, but the early symptom of what may be described as a 'political economy bankruptcy': A condition in which the formal economy happens to continue functioning, while the institutions governing it steadily lose the authority, the discipline and the inherent public trust.

In fact, political economy -in its broadest sense, refers to the relationship between the political power and the economic system: Who controls resources, who benefits from policy decisions, how regulations are enforced, and how state institutions interact with private capital. In Bangladesh, this relationship has become critically entangled with the politically influenced banking, regulatory weakness, concentrated business interests and the uneven enforcement of the financial accountability.

The economy still functions. But the system governing it is becoming structurally fragile. This is highly concerning for any political government and the respected "Republics".Since the very beginning of this 21st century, the growth model of Bangladesh has just rested on several powerful foundations. The ready-made garment industry transformed the country into one of the world's leading apparel exporters, generating foreign exchange earnings, industrial employment and the global market integration.

Millions of women entered the workforce in the apparel sector, reshaping the very household incomes and the social mobility. Overseas remittances from migrant workers stabilised rural consumption and strengthened foreign exchange reserves. A large youthful population supplied labour to factories, construction sites and expanding service industries. Rural development initiatives led by institutions -such as BRAC and Grameen Bank improved literacy, financial inclusion and poverty.

Previously, equally important was the country's reputation for the relative macroeconomic discipline. Compared with many neighbouring economies, Bangladesh largely avoided sovereign debt crises, runaway inflation and chronic balance-of-payments instability. That stability encouraged investor confidence and sustained long periods of economic expansion - through the "sputtering windows" of the political economy.But these foundations are now under growing pressures.

In the centre of the problem lies the banking sector. Bangladesh's financial system has been weakened by politically connected lending, repeated loan rescheduling, regulatory forbearance and inconsistent supervision. Non-performing loans have become not merely a technical weakness but the unflinching symptom of the institutional decaying.This crisis of the national economy in danger has acquired renewed urgency following the introduction of the Bank Resolution Act 2026, allowing former owners of distressed or state-intervened banks to regain control under specified recapitalisation conditions. The proposal may appear economically pragmatic. Governments cannot indefinitely socialise the losses of failing institutions while private owners evade responsibility.

Financial systems function because depositors believe their savings are secure, investors trust regulators to enforce rules impartially, and markets assume that financial discipline applies equally to all participants. If ever that trust weakens, liquidity injections and accounting adjustments become insufficient.The consequences of institutional mistrust are already becoming visible. Businesses increasingly delay investment decisions amid uncertainty over credit availability, exchange-rate stability and policy consistency. Small and medium-sized enterprises - historically central to employment generation - face tightening financing conditions and rising operational costs.
 
Inflation is continuing to erode household purchasing power, while currency depreciation has increased the cost of imported raw materials and industrial inputs. Energy insecurity further disrupts manufacturing productivity at a time when global competition is intensifying.External risks compound these domestic vulnerabilities. Continued geopolitical instability surrounding major energy corridors, mostly the Strait of Hormuz, threatens to increase global oil prices and place additional pressure on Bangladesh's import bill and foreign exchange reserves.

Now, investors are becoming more cautious about economies where institutional weaknesses appear increasingly difficult to separate from economic policymaking itself.This represents a critical turning point for Bangladesh's development trajectory.The country's earlier growth model depended heavily on labour-cost competitiveness, export pragmatism and demographic advantage. Those drivers remain important, but they are no longer sufficient.

In practical political development terms, countries do not transition successfully into upper-middle-income status through cheap labour. Sustainable development ultimately depends on institutional strength: Credible banking systems, transparent regulation, rule-based governance, policy predictability and effective enforcement mechanisms.At present Bangladesh is facing the difficult transition from labour-intensive growth to institutionally driven growth.
That transition cannot occur while financial governance remains vulnerable to political interference. Regulatory independence must become a national economic priority. The central bank cannot function credibly if supervisory decisions remain subject to political or commercial influence.

The asset classification standards must also become transparent and uncompromising. Delayed recognition of non-performing loans merely postpones adjustment while increasing eventual systemic costs.Equally essential is the restoration of accountability. Wilful defaulters and influential borrowers who exploit systemic weaknesses must face consistent legal and financial consequences.Macroeconomic policy consistency is similarly crucial. Frequent regulatory reversals and policy ambiguity weaken confidence among both domestic depositors and foreign investors. Financial systems depend not only on liquidity but also on predictability.

Bangladesh retains substantial strengths: A large domestic market, an experienced manufacturing base, a resilient entrepreneurial culture and favourable demographic potential. Its economy has repeatedly demonstrated an ability to recover from political turbulence, natural disasters and external shocks.But the resilience alone cannot indefinitely compensate for weakening institutions.

The central question confronting Bangladesh presently is no longer whether the economy can continue growing in the short term. It is whether the institutional foundations beneath that growth remain sufficiently credible to sustain the next phase of national development.Countries rarely decline because they exhaust their economic potential. More often, they decline because institutions lose legitimacy faster than economies can generate growth.