Cambodia is one of Bangladesh’s competitors in the ready-made garment (RMG) sector. Despite being a small Southeast Asian country with a GDP of less than $50 billion, Cambodia managed to attract nearly $8 billion in foreign direct investment (FDI) last year. A mix of economic stability, investor-friendly policies, strong infrastructure development, good governance, and low interest rates made this possible. In fact, Cambodia’s central bank policy interest rate is currently below 1 percent. Last month, inflation in the country was also under 1 percent.
Thailand, another major player in the region and also a competitor in the garment industry, is far ahead in attracting FDI. In 2024, Thailand secured foreign investment worth 1.14 trillion Baht—about $33 billion. That’s nearly a 35 percent jump from the previous year, the highest in the past decade. Thailand’s policy rate and inflation are both hovering around 2 percent.
It is not just Thailand or Cambodia. Almost every major economy in the region, including Bangladesh’s key competitors, now has significantly lower policy interest rates and inflation compared to Bangladesh. Currently, Bangladesh Bank’s policy rate (repo rate) stands at 10 percent. In contrast, India’s rate is at 6.25 percent, Nepal’s at 6.5 percent, and Sri Lanka’s at 7.5 percent. Among South Asian countries, only Pakistan’s rate is higher at 12 percent. However, the policy rate was 23 percent just a year ago. As inflation came down, Pakistan started slashing the policy rate.
Vietnam, another major RMG competitor, has dropped its rate to just 3 percent. China has lowered its rate to 3.10 percent. Even the U.S. has cut its interest rate down to 4.33 percent.
Analyzing central bank data from various developing and developed economies, it is evident that after the COVID-19 outbreak in 2020, most countries lowered interest rates to support growth. Then, as inflation spiked in early 2021, rates went up again. But over the past two years, with inflation coming under control, many countries began easing policy rates once more. However, Bangladesh took the opposite route.
Inflation in Bangladesh started rising in early 2022. Despite repeated warnings from economists, the central bank did not act. Only when inflation spun out of control did Bangladesh Bank raise the policy rate—from 4.5 percent all the way up to 10 percent. And bank loan interest rates soared to 14–15 percent. Yet, the benefits of high interest rates have not benefitted the public. Inflation ticked up again this March. According to the Bangladesh Bureau of Statistics (BBS), the inflation rate in February was 9.32 percent—but in March, it went up to 9.35 percent.
Economists argue that Bangladesh relied too heavily on just raising interest rates to control inflation. That move not only failed to rein in prices but also slowed the economy and dried up investment. Inflation in Bangladesh is being driven by supply shortages, market syndicates, and mafia-like control. These issues have persisted even after the fall of the Sheikh Hasina-led government. These issues are seen as reasons why inflation has not come down as expected. And with investment drying up, it is hard to inject momentum into the economy. Business costs are rising, and Bangladesh is losing its competitive edge in the global market.
Bangladesh’s struggle to control inflation boils down to indecision and poor market management, according to Dr. Fahmida Khatun, Executive Director of the Centre for Policy Dialogue (CPD). Speaking to Bonik Barta, she said, “While most countries around the world acted quickly to raise policy interest rates to curb inflation, Bangladesh Bank hesitated. That delay meant that while others managed to get inflation under control, we didn’t. And when the authorities here did finally raise the rate, they still didn’t focus on ensuring supply in the market, improving market discipline, or breaking syndicates.”
She added, “High interest rates aren’t the only problem. In Bangladesh, both local and foreign investors face a long list of challenges. Corruption and red tape became rampant, which discouraged foreign investment and even held back local investors. Now, we need to lower inflation and gradually bring interest rates down to a tolerable level. We’ve run the numbers, and across both developed and developing countries, product prices are generally lower than they are in Bangladesh.”
For years, the government tried to attract foreign investment. Even under the ousted Sheikh Hasina administration, several investment summits were held both at home and abroad. But they failed to generate much interest among international investors. According to Bangladesh Bank data, net FDI in 2022–23 was only $1.65 billion. That figure dropped to $1.47 billion in 2023–24. And things are looking even worse for the current fiscal year. In the first eight months of 2024–25 (July to February), net FDI totaled just $820 million. In comparison, Vietnam—a direct competitor—attracted $25.35 billion in 2024 alone, up 9.4 percent from the previous year.
Vietnam’s interest rate is also significantly lower than Bangladesh’s. To tackle the post-COVID economic crisis, the country had raised its policy interest rate to between 2.5 and 4.5 percent. But over the last two years, it has brought that rate back down to 3 percent. In March of this year, Vietnam’s inflation rate stood at just 3.13 percent—compared to Bangladesh’s policy rate of 10 percent and inflation at 9.35 percent.
According to Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank, high inflation is the main reason for rising loan interest rates in Bangladesh. Speaking to Bonik Barta, he said, “If you compare Bangladesh to countries in Southeast Asia—like Thailand or Vietnam—our inflation rate is much higher. With inflation close to 10 percent, it’s only natural that lending rates would hit 13 to 14 percent. One of the main reasons behind our high inflation is supply shortages. That’s why just raising interest rates hasn’t worked as expected. If businesses in the country have to borrow at higher rates than our competitors, of course we’re going to lose our competitive edge.”
To attract more foreign investment, the Bangladesh Investment Development Authority (BIDA) organized a four-day investment summit last week. At the event, the International Finance Corporation (IFC), a private sector arm of the World Bank, released a report titled ‘Country Private Sector Diagnostic (CPSD).’ The report focused on Bangladesh’s private sector.
According to the report, there are five major barriers to doing business or investing in Bangladesh: power shortages, limited access to finance, corruption, dominance of the informal sector, and high tax rates.
The report also presented foreign investment data based on figures from UNCTAD, the UN’s trade and development agency. The 2024 World Investment report showed that while global FDI dropped by about 1.75 percent in 2023, Bangladesh’s FDI fell by nearly 14 percent. In 2023, Bangladesh received just $3 billion in foreign investment. By comparison, India received $28.16 billion, Vietnam $18.5 billion, Indonesia $21.63 billion, Cambodia $3.96 billion, and even Pakistan attracted $1.82 billion. Foreign investment in Bangladesh has consistently fallen short of expectations.
The IFC report also pointed out that FDI in Bangladesh was just 0.4 percent of the country’s GDP in 2023. And most of that investment came from foreign companies already operating in Bangladesh, not new entrants.
Citing the foreign investment survey of 2024, the report said that Bangladesh’s regulatory environment is a major hurdle. Issues include excessive bureaucracy, frequent policy changes, lack of good governance, complex legal systems, institutional inefficiency, and poor coordination.
On top of that, Bangladesh now has the highest inflation rate in South Asia, along with high interest rates. In contrast, Sri Lanka’s inflation in March was negative 2.6 percent. Just two years ago, the island nation had declared bankruptcy and was grappling with inflation close to 70 percent. But like Sri Lanka, Pakistan has also seen a remarkable turnaround. In March, its inflation fell to just 0.7 percent. It is the lowest for the country in a decade. A year ago, that figure was over 20 percent. Other South Asian countries are also doing better than Bangladesh in terms of inflation. For instance, India’s inflation last month was 4.31 percent.
Anwar-ul-Alam Chowdhury Parvez, President of the Bangladesh Chamber of Industries (BCI), told Bonik Barta that everything from interest rates to electricity, fuel, and transportation costs is higher in Bangladesh. “Loan interest rates are now over 15 percent. Who’s going to invest at that rate?” he asked. “Beyond interest rates, our utility and transport costs are higher than those of our competitors. Let’s not even get into the bureaucratic red tape. So why would any foreign investor choose Bangladesh?”
He added, “Foreign investors don’t borrow from our banking system. Local investors do. But foreigners only invest when they see local businesses investing. Right now, local investors are holding back for a variety of reasons. If we don’t invest ourselves, foreign investors wouldn’t be interested either.”