Economic Reforms Needed to Revive Economy: Fahmida Khatun

Dr Fahmida Khatun is a renowned Bangladeshi economist and researcher. She currently serves as a Distinguished Fellow of the Centre for Policy Dialogue (CPD). She is the longest-serving Executive Director of CPD to date. For many years, she has played an important role in research and policy discussions on Bangladesh’s macroeconomy, development, poverty, foreign trade, fiscal policy, investment and economic reforms. 

Her analyses on economic policy and development are widely cited in the media and among policymakers. In an exclusive interview with The Daily Observer, she discussed various challenges facing Bangladesh’s economy, particularly inflation, the banking sector, revenue mobilisation, investment and energy security. The interview was conducted by Mizanur Rahman, Senior Correspondent of The Daily Observer. The following is an excerpt from the interview:

Daily Observer: It has been around six months since the current government took office. How do you assess the overall state of the country’s economy?
Fahmida Khatun: When the current government took office, the economy was in a very fragile state. Earlier, the interim government had also inherited a fragile economy in August 2024. It made some efforts to stabilise the economy to some extent, but it cannot be said that there has been any major success.

Before the election, the current government set various targets in its manifesto, including taking the size of the economy to US$1 trillion by 2034, increasing investment and raising revenue. Some of these objectives are also reflected in the FY2026-27 budget.

However, cosmetic or temporary measures will not be enough to revive the economy. We need deep and structural reforms. Six months is not a very long period to assess a government. However, during this period, some initiatives can be taken. We see some improvement in certain indicators, such as inflation and foreign exchange reserves. However, major challenges remain in productivity, investment, employment, the banking sector and energy.

Daily Observer: Inflation has declined somewhat. Do you see this as a source of relief for ordinary people?
Fahmida Khatun: Inflation fell to 8.32 per cent in July from 9.16 per cent in the previous month. This is certainly a positive development. But we cannot describe a one-month decline in inflation as a sustained trend. More importantly, although the inflation rate has declined, the high price level already established has not come down.

If the price of a product rises from Tk2 to Tk4, inflation measures how much the price subsequently increases from that Tk4 level. But the Tk4 price level remains, while wages have not increased. Therefore, the erosion in people’s purchasing power also remains.

Real relief for people will come only when their wages and incomes increase in line with inflation. At present, against inflation of 8.32 per cent, the wage index is around 8.2 per cent. This means income growth is also failing to keep pace with inflation.

Daily Observer: There are also concerns over the growth outlook. What is your assessment?
Fahmida Khatun: The growth trend is certainly worrying. A downward trend in growth has been visible for the last few years. Growth was around 3.5 per cent in FY2025-26, while, according to the Bangladesh Bureau of Statistics (BBS) estimate, it could reach 4.14 per cent in 2026. However, this estimate is based on data from three quarters, while fourth-quarter data were not yet available.

Growth was 3.03 per cent in the second quarter but declined to 2.22 per cent in the third quarter. Particularly concerning, the industrial sector contracted by 0.28 per cent during the January-March quarter. 

Therefore, we need to examine closely how the sources of growth are performing. We cannot simply look at the GDP figure.

Daily Observer: Private investment growth is currently negative. What is your view on this?
Fahmida Khatun: This is extremely concerning. For nearly a decade, private investment as a share of GDP remained stagnant at around 23-24 per cent. It has now fallen below 22 per cent. Private-sector credit growth also declined to 4.47 per cent in June, the lowest level in the past decade.

Foreign direct investment has also declined by around 15 per cent. The main reasons are uncertainty, a lack of policy predictability, energy shortages, weaknesses in the banking sector and high costs of doing business. How can employment and income increase without investment?

Daily Observer: On the other hand, there appears to be some comfort on the foreign exchange reserve front. How do you assess the situation?
Fahmida Khatun: This is a positive aspect of the external sector. In terms of BPM6, net reserves rose to slightly above $32 billion around August. One key reason is remittances. In FY2026, remittance inflows increased by more than 35.5 per cent. Bangladesh Bank also purchased dollars from the market to increase reserves.

However, the overall external sector cannot be described as being in a good position. Total exports declined by 0.58 per cent in FY2026, while garment exports fell by 1.64 per cent. In contrast, import expenditure increased by around 10.5 per cent.

The concern is that this increase in imports was not driven by capital machinery or industrial raw materials. Rather, imports of fuel and essential commodities increased. In other words, the import figures do not reflect an expansion in production and investment.

Daily Observer: What are the biggest weaknesses in revenue collection and government expenditure?
Fahmida Khatun: Revenue mobilisation has been a longstanding problem. For more than a decade, revenue targets have not been achieved. In the current fiscal year, collection increased by around 12 per cent compared with the previous year. Even so, there is a shortfall of around Tk88,000 crore against the target.

On the other hand, we have seen in the past that the government was unable to fully spend the funds allocated under the development budget. ADP implementation usually remains above 80 per cent, but it has declined further this year.

The other issue is that simply spending money is not enough. We also need to see whether it is being spent on time, efficiently and without waste or corruption. Delays in project implementation increase costs and reduce the benefits expected by the people.

Daily Observer: What are the problems and your suggestions regarding the banking sector?
Fahmida Khatun: The banking sector is now one of the major weaknesses of the economy. At the end of June, non-performing loans (NPLs) stood at Tk6 lakh 6 thousand crore, accounting for 32.78 per cent of total disbursed loans. Such a high level of non-performing loans indicates a major governance crisis in the banking sector.

Political influence has also fostered a tendency towards wilful default. With demand for private-sector credit currently low, the liquidity crisis is less visible. But when investment demand rises, the key question will be whether banks can provide adequate credit at affordable interest rates.

Asset Quality Review (AQR) is extremely important. AQRs have been conducted for six banks in the first phase. Once the actual financial health of more banks becomes known, NPLs may increase further. The policymakers will have to make difficult decisions about whether weak banks should be closed, merged or restructured.

Daily Observer: The energy crisis has also become a major obstacle for industries. What is the solution?
Fahmida Khatun: Shortages of gas and electricity are severely disrupting industrial production. Production is falling short of targets. If export-oriented industries fail to deliver products on time, international market confidence in Bangladesh will decline, and the country’s competitiveness will be undermined.

In the short term, we have to manage the crisis by importing LNG. However, this is extremely costly and will increase pressure on subsidies in the future. Therefore, alongside addressing the current crisis, we need a clear medium- and long-term plan for energy security that reduces dependence on imports.

Daily Observer: What, then, are the most urgent reforms the government needs to undertake?
Fahmida Khatun: First, the supply system and market management must be strengthened to control inflation. We need better market information, monitoring, competition and assured supply.

Second, revenue reform is essential. The NBR needs to be modernised, technology must be used more widely, the tax base needs to be broadened, and tax exemptions should be time-bound with a ‘sunset clause’.

The tariff structure will also need to be restructured in view of Bangladesh’s LDC graduation. At the same time, banking sector discipline must be restored, and necessary restructuring must be carried out. Structural problems related to energy, infrastructure, ports, technology and bureaucratic complexities must also be addressed.

Most importantly, we need policy continuity, policy coherence and predictability. Political stability has returned, but business and investor confidence has not yet fully recovered. Therefore, alongside addressing immediate crises, the government must move towards sustainable medium- and long-term solutions.