As the International Monetary Fund (IMF) recently noted, by all standard indicators, Bangladesh is in serious macroeconomic distress.
Inflation remains stubbornly high. The taka has lost significant value. Banks are undercapitalized and non-performing loans have increased sharply. At the same time, public trust in core institutions, particularly the judiciary and financial enforcement authorities, is declining.
The IMF, which is currently reviewing the fifth tranche of its $5.5 billion loan package for Bangladesh, has acknowledged these risks in unusually cautious language. In a statement released on November 13, Head of Mission Chris Papageorgiou praised the government’s monetary tightening and efforts to restore foreign reserves, but added a clear warning: “Downside risks remain significant, particularly if policy responses are delayed or inadequate.”
This line has particular importance. Specifically, the IMF signals concern not only about Bangladesh’s fiscal and fiscal health, but also about its institutional capacity to implement and sustain reforms. This concern should trigger a broader discussion about how global lenders deal with countries with weakened rule of law and whether conditionality frameworks keep pace with the political realities in many borrowing countries.
Institutional weakness is not just about inefficiency
International financial institutions have long focused on technical metrics: inflation targets, debt ratios, interest rates. However, technical factors cannot be separated from the institutional environment in which policies are made and enforced. When regulators become politically captured, when the judiciary lacks independence, and when enforcement becomes arbitrary, even well-designed programs can fail.
This is becoming increasingly clear in Bangladesh. The IMF itself emphasized the urgent need for reform in the banking sector, noting in its statement that “financial sector reforms are crucial to address the challenges facing the banking sector.” The Asset Quality Reviews (AQRs) launched by Bangladesh Bank have uncovered severe undercapitalization in Shariah-based banks, but appear to only scratch the surface. According to the IMF, reviews must now extend to all systemically important and state-owned banks, many of which remain opaque and politically exposed.
The core of the problem lies in the politicization of key financial decisions. From interest rate setting to exchange rate management, policy decisions increasingly reflect short-term policy priorities rather than long-term economic fundamentals. This erosion of technocratic independence has weakened investor confidence and left the central bank unable to respond quickly and credibly to inflation, currency instability or problems in the financial sector.
These are not marginal topics. The IMF has urged Bangladesh to make monetary policy more effective by fully implementing its new exchange rate regime and exiting quasi-fiscal operations. Without a credible and impartial central bank, policy commitments will lose credibility. Tightening monetary policy is more performative than effective. Exchange rate flexibility is becoming more rhetorical than concrete, and confidence at home and abroad is waning.
Rule of Law and the Problem of Selective Enforcement
Beyond the banking sector, there is a deeper structural problem – the arbitrary and politicized use of state authority to settle scores, reward allies and punish rivals. Legal procedures are often viewed as instruments of political expediency rather than neutral mechanisms of justice. Not surprisingly, companies and individuals are subject to retroactive asset seizures, selective tax audits, or sudden regulatory action, depending on their political leanings.
This climate of selective enforcement undermines the very premise of development lending. IMF support, particularly under programs such as the Extended Credit Facility (ECF), depends on agreed policy conditions being met in good faith. It is worth asking how reforms can be implemented or sustained when legal institutions are unreliable and enforcement is politicized.
The implications for the private sector are serious. Investors are reluctant to commit capital when ownership rights can be reversed overnight. Entrepreneurs are less likely to innovate or expand when they fear regulatory harassment. And when foreign companies seek redress, they often find that the domestic legal system is unwilling or unable to act impartially.
Lessons from other jurisdictions
Bangladesh is not the only country where lapses in the rule of law have jeopardized economic progress. In Tunisia, for example, the judiciary is coming under increasing political pressure, raising concerns about the country’s eligibility for future EU support. In Lebanon, the collapse of the banking sector has been exacerbated by years of lax regulation and cronyism, exacerbated by a weak and compromised legal system. In both cases, the economic recovery has stalled not only because of external shocks but also because of domestic institutional decay.
Even in middle-income countries like Turkey and Egypt, lenders have become more cautious. IMF programs suffered credibility gaps when tax reforms were promised but then watered down or reversed due to political pressure. In response, some institutions have begun to adapt. The European Bank for Reconstruction and Development (EBRD), for example, now includes governance and rule of law assessments in its country strategies and explicitly ties financing to institutional reform benchmarks.
The IMF also has instruments. It can structure payouts based on measurable governance milestones. It can support judicial reform projects in parallel with economic programs. And it can work with other institutions such as the World Bank or UNDP to help build a legal infrastructure that can support long-term stability.
Most importantly, it can refuse to disburse funds if the institutional environment deteriorates. This should not be viewed as a form of punishment, but rather as a form of caution that can be exercised. Lending without guardrails risks enabling exactly the kind of behavior that undermines economic credibility.
A turning point for conditionality?
Bangladesh could soon become a test case for these evolving standards. As the IMF weighs whether to release the next tranche of its loan, it faces a decision. Releasing funds without a stronger commitment to institutional reforms could send the wrong message, not only to Dhaka but also to other closely watching countries. However, insisting on credible improvements in judicial independence, regulatory transparency and central bank autonomy would reinforce the message that macroeconomic stability cannot be achieved without the rule of law.
The IMF is not a political actor. But it is inevitably an institutional one. Their credibility depends on their ability to enforce their own standards, especially in difficult political environments. In Bangladesh, that means confronting the institutional decay that threatens to undermine technological progress. It also means being able to say no when the foundations for reform are not there.
Ultimately, no economy can thrive when laws are selectively enforced, regulators are politically captured, and courts are guided by power rather than principle.
