Fitch says Bangladesh election eases uncertainty but reform risks remain

Fitch Ratings said Bangladesh’s Feb. 12 general election has reduced near-term political and policy uncertainty, potentially supporting macroeconomic stability, but warned that longstanding credit constraints will test the new government’s reform agenda.

The Bangladesh Nationalist Party-led alliance secured a parliamentary supermajority, along with a majority “yes” vote in a referendum that could pave the way for constitutional reforms. Fitch said the election outcome provides greater political clarity following the August 2024 overthrow of the Awami League government and a prolonged caretaker period that introduced significant reforms.

The BNP won 209 of the 299 contested seats, while Jamaat-e-Islami and its allies took 77 seats and smaller parties won the remainder. Fitch noted that the BNP’s two-thirds majority alone should support implementation of its policy agenda and reduce the risk of a prolonged political vacuum that could complicate economic decision-making.

However, the agency cautioned that Bangladesh’s structural weaknesses, including weak governance, banking-sector fragilities and a fragile external liquidity position, mean the government’s ability to execute macroeconomic and fiscal reforms will determine any rating impact.

Political and institutional risks

Despite the decisive election outcome, Fitch said political risk remains. Bangladesh, rated B+ with a Stable outlook, has a history of political polarization and pre-election violence, leaving scope for renewed tensions if the government underperforms expectations. The military may also continue to play a role in politics.

The referendum approval could enable constitutional changes aimed at strengthening institutions, including a potential shift to a bicameral system, stronger judicial independence and term limits for the prime minister. Fitch said implementation could prove complex and time-consuming, keeping execution risk elevated.

Reform agenda and fiscal pressures

Policy signals in the BNP manifesto suggest the new government is likely to sustain economic and fiscal reforms initiated under the caretaker administration. The agenda includes higher social spending, which could pressure public finances if revenue measures underperform and test the balance between growth, electoral commitments and fiscal consolidation.

Fitch said the reform agenda appears consistent with the macro-stabilization framework under the $5.5 billion International Monetary Fund program that began in January 2023 and runs through 2026-2027. Still, uncertainties remain around implementation and the durability of reforms beyond the IMF program.

The manifesto’s fiscal centerpiece is a medium-term target to raise the tax-to-GDP ratio to 10% through tax administration reforms, fewer exemptions and a broader tax base, along with a near-term revenue increase of 2% of GDP. Fitch said this is significant for credit quality because Bangladesh’s structurally low revenue intake remains a key weakness. It projects general government revenue to reach 8.6% of GDP by fiscal year 2027, up from 7.8% in fiscal year 2025.

The manifesto also outlines a pro-private-sector agenda, including simplified licensing, incentives for export-oriented sectors and a goal of lifting foreign direct investment to 2.5% of GDP from an estimated 0.4% in fiscal year 2025. A pledge to strengthen banking governance and tackle non-performing loans could, if successful, address a key constraint on the sovereign credit profile.

External liquidity remains a near-term indicator, even as reserves improve. Foreign-exchange reserves stood at $29.7 billion as of Feb. 10, up from $22.3 billion at the end of fiscal year 2024 and $26.9 billion in fiscal year 2025. Fitch said a manageable external debt repayment profile and the prevalence of government-backed debt help contain refinancing risks, but underscore the importance of maintaining macro-stabilization policies to keep external financing risks in check.