For economists tracking Bangladesh’s trajectory, few moments have presented such a confounding paradox as the one unfolding before us. The household budgets of ordinary citizens creak under the weight of stubborn inflation. Bank balance sheets sag under unprecedented loads of defaulted loans.
Factory floors fall silent amid persistent energy shortages. Private investment, the lifeblood of job creation, falters. And yet, the country’s capital market has mounted one of its most impressive recoveries in recent memory, while record remittance inflows have bolstered foreign exchange reserves, offering a welcome cushion to the external sector.
This jarring coexistence of optimism and economic fragility defines the landscape as Bangladesh approaches its long-anticipated graduation from Least Developed Country (LDC) status in November 2026. The question before us is not whether encouraging indicators exist – they plainly do. The question is whether they herald a durable recovery or merely obscure structural ailments that remain untreated.
A remarkable rally
Few observers anticipated the Dhaka Stock Exchange’s dramatic turnaround after years of investor despondency. Despite an exceptionally difficult global backdrop – geopolitical tensions, elevated energy prices and tight monetary conditions – the market reversed its prolonged decline throughout FY2025–26.
The benchmark DSEX index gained approximately 19 per cent, rising by 924 points to close at 5,762. The DS-30 index advanced by nearly 20 per cent, reflecting renewed confidence in blue-chip companies.
Yet more revealing than the rise in share prices was the return of liquidity. Daily turnover climbed from Tk464 crore during the comparable period a year earlier to Tk1,573.65 crore on the final trading session of the fiscal year. Market capitalisation increased by more than Tk36,000 crore, reaching nearly Tk6.98 lakh crore. Textile companies accounted for the largest share of trading activity, followed by banks and pharmaceutical firms.
Regional comparisons underscore the significance of this recovery. During the first half of 2026, Bangladesh ranked among Asia’s strongest-performing emerging equity markets, outperforming several larger regional exchanges. Attractive valuations and comparatively high dividend yields enhanced the market’s appeal for long-term investors.
Policy changes undoubtedly catalysed the recovery. Following the February general election, the new administration pledged to restore confidence in the financial sector. Leadership changes at the Bangladesh Securities and Exchange Commission, including the appointment of experienced corporate executive Masud Khan as chairman, signalled a more reform-oriented approach.
The removal of the long-disputed floor price system restored normal price discovery. Tax incentives in the FY2026–27 budget – including reduced taxes on dividend income, lower corporate tax rates for listed companies, expanded incentives for mutual funds and tax exemptions on zero-coupon bonds – provided additional momentum. Regulatory reforms affecting non-resident investor taka accounts further encouraged institutional participation.
Yet the rally remains vulnerable. A significant portion of listed companies continues to suffer from weak governance. Nearly one-third of DSE-listed firms remain in the Z category because of irregular dividend payments or failure to comply with corporate governance requirements, while dozens have ceased operations altogether. Unless these ineffective companies are removed and stronger corporate listings enter the market, speculative trading could once again overshadow genuine investment.
Recent profit-taking following the market’s rapid appreciation should therefore be viewed as a normal correction rather than evidence that the recovery has lost momentum.
Strong external accounts, weak domestic conditions
While financial markets have grown increasingly optimistic, the conditions facing ordinary Bangladeshis tell a different story.
The external sector has strengthened considerably over the past year. Expatriate Bangladeshis sent a record $35.44 billion through formal banking channels during FY2025–26, representing growth of more than 17 per cent. Higher remittance inflows enabled Bangladesh Bank to rebuild foreign exchange reserves beyond $37 billion for the first time in several years while also helping stabilise the foreign exchange market. Export earnings also recorded encouraging growth, led once again by the ready-made garment sector.
Yet these achievements have offered limited relief to households.
Inflation has remained stubbornly above 9 per cent, with non-food inflation continuing to exert heavy pressure on consumers. Rising fuel prices, sharply higher LPG costs and elevated transportation expenses have pushed production costs higher across agriculture and manufacturing.
Real wages have failed to keep pace with price increases, resulting in a sustained erosion of purchasing power. Essential commodities – from rice and lentils to poultry and beef – continue to impose increasing financial strain on middle-income and lower-income families.
This disconnect between macroeconomic improvements and household realities remains one of the defining challenges facing policymakers. Rising living costs have pushed additional households below the poverty line, reversing progress in poverty reduction. International organisations continue to warn that prolonged geopolitical instability and supply chain disruptions could intensify inflationary pressures even further.
Banking – the economy’s weakest link
Despite encouraging developments elsewhere, Bangladesh’s banking sector continues to represent the country’s greatest macroeconomic vulnerability.
Years of weak governance, inadequate supervision, political interference and repeated loan restructuring have allowed non-performing loans to accumulate to alarming levels. While official statistics suggest a modest decline in the gross NPL ratio, many analysts argue that the improvement largely reflects accounting adjustments rather than genuine recovery. After accounting for provisions, problem loans remain substantially above internationally accepted standards.
The consequences extend far beyond bank balance sheets. Capital shortages and liquidity constraints have sharply reduced banks’ willingness to finance productive private-sector investment. Credit growth has slowed to historically low levels, limiting industrial expansion, employment generation and broader economic growth.
Meanwhile, prolonged shortages of gas and electricity have forced hundreds of manufacturing facilities to suspend operations permanently, particularly within textile and garment-related industries. The resulting job losses continue to weaken domestic demand while increasing social and economic pressures.
Budget ambitions confront fiscal reality
The FY2026–27 national budget reflects the government’s determination to sustain economic growth while reducing inflation. Yet the assumptions underpinning these objectives appear highly ambitious.
Achieving the projected revenue targets would require tax collection growth well beyond Bangladesh’s historical performance. With tax revenue remaining among the lowest relative to GDP in South Asia, meeting these targets without comprehensive tax administration reform appears unlikely.
Consequently, the government is expected to rely heavily on domestic bank borrowing to finance its deficit – a strategy that risks further crowding out private investment precisely when businesses require greater access to affordable credit.
Monetary policy presents another difficult balancing act. Bangladesh Bank has maintained a tight policy stance to combat inflation, keeping borrowing costs elevated. While this approach may help moderate price pressures, it simultaneously discourages business expansion and private investment.
Development spending also raises concerns. Implementation rates across several major sectors remain significantly below expectations, particularly in healthcare, infrastructure and energy projects, limiting the effectiveness of public expenditure as a driver of long-term growth.
LDC graduation will test export competitiveness
Bangladesh’s graduation from LDC status later this year will represent a historic national achievement. It will also expose long-standing structural weaknesses within the country’s export model.
The eventual loss of preferential market access under the European Union’s Everything But Arms initiative could subject Bangladeshi exports to tariffs ranging between 9 and 12 per cent unless alternative trade arrangements such as GSP Plus are secured.
This challenge extends beyond tariffs alone. Competing economies, particularly Vietnam, have successfully diversified into higher-value manufacturing sectors, including electronics, semiconductors and advanced industrial production. Bangladesh, by contrast, remains heavily dependent on ready-made garments, which still account for the overwhelming majority of export earnings.
Equally concerning is the country’s comparatively long production lead time. Heavy dependence on imported raw materials, logistics bottlenecks and inefficiencies at ports continue to reduce Bangladesh’s competitiveness relative to regional rivals. As labour cost advantages gradually diminish, productivity improvements, technological upgrading and logistics reform will become increasingly important determinants of export success.
The reform agenda cannot wait
Bangladesh’s current economic picture is neither wholly pessimistic nor unequivocally optimistic.
The recovery in the capital market demonstrates that investor confidence can return when credible reforms are introduced. Record remittance inflows show that the external sector remains resilient. Yet inflation continues to burden households, banks remain financially fragile and industrial growth is constrained by structural weaknesses that temporary policy adjustments cannot resolve.
Three reform priorities deserve immediate attention.
First, governance within the banking sector must be fundamentally strengthened through effective loan recovery, stronger regulatory enforcement and credible resolution mechanisms for distressed financial institutions.
Second, comprehensive tax administration reform is essential to broaden the revenue base while reducing dependence on bank financing. At the same time, deeper bond and capital markets should gradually assume a larger role in financing long-term investment.
Third, Bangladesh must prepare for the post-LDC environment through export diversification, higher labour productivity, logistics modernisation, improved customs efficiency and reliable energy supplies capable of supporting competitive industrial production.
The recent optimism surrounding Bangladesh’s financial markets should not be dismissed. It reflects genuine improvements in certain segments of the economy. But lasting prosperity will depend less on stock market rallies than on policymakers’ willingness to undertake difficult institutional reforms.
The clock is ticking.
The author is a capital market investor and vice president at the Bangladesh-American Chamber of Commerce USA Inc. The views expressed in the article solely those of the author.
