No turning back on economic reforms

Bangladesh is approaching a moment of political and economic reckoning. The upcoming general election, now twinned with a referendum on constitutional reforms, is expected to provide the incoming government with the mandate and momentum necessary to act swiftly on crucial and long-overdue matters, including the task of putting the economy firmly back on track. The International Monetary Fund's recent decision to pause a crucial review under the $5.5 billion loan programme, and engage with the "newly elected authorities," only reaffirms the importance of a smooth transition.

The economic anxieties, including stubbornly high inflation and flagging growth, are not cyclical hiccups but rather the consequence of past failures to address deep-seated vulnerabilities. The core demands of the IMF—a simpler, fairer tax system and urgent banking sector reforms—are precisely what the Awami League government long avoided. Following its ouster, the interim government has "made notable progress in maintaining macroeconomic stability," as the IMF has acknowledged. To ease external imbalances and contain inflation, the authorities tightened both fiscal and monetary policies. Importantly, foreign exchange reserves have begun to rebuild following the exchange rate reform launched in May. However, the economy "continues to face significant macro-financial challenges" stemming from weak tax revenue and undercapitalisation in the financial sector.

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Timely election must for economic stability

The next administration will understandably inherit these and other economic challenges. That's precisely why it must embrace necessary but often painful reforms to drive recovery. The political transition following the election must not become a pretext for delay. Bangladesh can no longer afford to postpone the difficult decisions required to clean up state-owned banks, implement tax reforms, and enforce strict monetary discipline. Economic complacency is exactly what the IMF cautions against, and any indulgence at this stage would be a costly mistake.

Bangladesh is required to act on three fronts. First, it must launch the ambitious tax reform demanded by the IMF, eliminating non-essential exemptions and subsidies. The new government must be ready to take on the powerful lobbies that thrive on tax loopholes. Generating more revenue means the state will be capable of expanding social safety nets and infrastructure, key requirements for inclusive growth. Second, the new leadership must take banking reforms forward. That requires political courage, as it will inevitably mean confronting powerful figures and vested interests. Finally, the central bank's independence in conducting monetary policy must be safeguarded. The transition period must not be allowed to undermine the recent progress made in adopting a flexible exchange rate regime.

Delayed or inadequate policy action in addressing fiscal and banking challenges would weaken growth, raise inflation, and increase macro-financial risks. Any success in these cases will be measured by the government's willingness to make hard, politically uncomfortable choices. It's a crucial test, one in which we must not fail.