If the national election proceeds as planned in February, the incoming government will be confronted with significant challenges in managing the economy, particularly regarding inflation and unemployment – two critical issues for any economy. Dealing with these two problems simultaneously is notoriously difficult due to the usual trade-off between them. When the central bank raises the policy interest rate to combat high inflation, it inadvertently increases unemployment by discouraging investments. Conversely, lowering interest rates to stimulate investment and reduce unemployment can exacerbate inflation by injecting more money into the economy.
This predicament can be likened to slowing down a car to minimize risks and enduring delays in reaching your destination. Conversely, speeding up increases the risk of accidents. Bangladesh currently grapples with high inflation and a rising unemployment rate, presenting a complex challenge. The Bangladesh Bank has raised the policy rate to nearly 10 percent, resulting in expensive credit as other banks charge lending rates around 15 percent or higher. Private credit growth, which was expected to be around 15 percent or higher, has plummeted to as low as six percent, a level unprecedented in the last two decades. This perplexing situation hints at the emergence of stagflation, a scenario unheard of in Bangladesh’s economy over the past 25 years.
The interim government inherited an inflation rate of 10.87 percent in August 2024, which decreased to 8.29 percent by November 2025. However, this reduction in inflation over one and a half years is not considered a significant achievement compared to neighboring countries. India’s inflation, for instance, dropped from 6.21 percent in October 2024 to below one percent in November 2025, indicating minimal concerns about price hikes. Pakistan also witnessed a substantial decline in inflation, from a peak of 38 percent in May 2023 to below one percent in April 2025. Despite a slight uptick to 6.1 percent in November, Pakistan’s inflation remains stable within its macroeconomic context. Sri Lanka managed to reduce its inflation from 50 percent in March 2023 to 1.3 percent within six months, reaching 2.1 percent by November 2025.
While Bangladesh has made commendable strides in areas like foreign reserves, its central bank has struggled to replicate the success of other South Asian counterparts in managing inflation. Despite implementing monetary measures such as maintaining policy rates above 10 percent, inflation remains unchecked due to various institutional shortcomings like corruption, lawlessness, fiscal weaknesses, and a decline in loan recoveries. The year 2025 has been characterized by deteriorating economic conditions, posing significant challenges for the new government’s economic stewardship in 2026.
Unemployment, a key factor in the student-led protests in July-August, should have been a primary focus for the interim government. However, attention was sporadic and lacked a comprehensive approach to address economic issues such as private investment, financial reforms, credit expansion, women’s empowerment, rural development, and law enforcement. The State of the Economy 2025 report by the General Economic Division indicates a slight worsening of the overall unemployment situation in 2024 compared to the previous year, with university graduates experiencing the highest unemployment rate at 13.54 percent.
The fear of job losses overshadowed prospects of job creation or improvements in job quality in the labor market. More than 100,000 garment workers in Bangladesh lost their jobs in the past year due to the closure of at least 258 factories, as reported by the Asia Floor Wage Alliance. While job creation in Bangladesh’s predominantly informal sector has historically been sluggish, the interim government’s tenure saw a spike in job losses due to sudden factory closures.
The incoming government must address this concerning trend of factory closures and job losses. Despite notable export growth in FY2025, the garments industry continues to grapple with unrest and uncertainty. With agriculture contributing only 11.15 percent to GDP but employing over 40 percent of the workforce, there is an imbalance in the employment sector. Industry, which has the potential to drive high employment and output growth, faced significant disruptions during the interim period.
The repercussions of industrial disturbances are evident in several areas, including modest private credit growth, a sharp rise in unemployment, and a worrying reversal in the declining poverty trend. Reports indicate slow progress in women’s job creation during the interim government’s term, a deviation from what was expected during a period of national advancement.
Notably, the interim government of 2007-2008 prioritized law and order over grand reform agendas, successfully maintaining macroeconomic stability and public security. These essential aspects are notably lacking in the current interim administration, underscoring the importance for the next government in 2026 to address these critical areas.
Bangladesh’s economic growth performance, at around four percent in FY2025 and an anticipated five percent in FY2026, falls short of its potential. The country must leverage its demographic dividend before it expires in 2035 to propel growth. Failure to do so