Bangladesh 2026: The Yunus Interim, Fiscal Stress, and the Banking Cleanup

The political reset #

Sheikh Hasina resigned on 5 August 2024 and flew to India after a student-led July uprising that began over public sector job quotas and ended with security forces firing on crowds in Dhaka, Narayanganj, and Chattogram. The United Nations Office of the High Commissioner for Human Rights documented up to 1,400 killings between 15 July and 5 August. Three days later Muhammad Yunus, the Nobel laureate microfinance economist, was sworn in as Chief Adviser of an interim government under a constitutional doctrine of necessity. The Awami League, which governed continuously since January 2009, has not contested an election since.

The advisory council Yunus assembled is small, technocratic, and weighted toward law, finance, and civil society. Asif Nazrul, a Dhaka University law professor, holds the law portfolio and has driven the Office of the Chief Prosecutor at the International Crimes Tribunal. Salehuddin Ahmed, a former Bangladesh Bank governor, runs Finance and Commerce. Wahiduddin Mahmud, a respected development economist, has Planning and Education. Adilur Rahman Khan of Odhikar holds Industries and Civil Aviation. The composition signals a deliberate distance from the two main political parties and from the military, even as the army's role in maintaining order remains visible at every district headquarters.

Reform commissions and the election clock #

Yunus established six reform commissions in October 2024 covering the constitution, the electoral system, the judiciary, the police, the public administration, and anti-corruption. Ali Riaz of Illinois State University leads the constitutional reform commission. Badiul Alam Majumdar of SHUJAN leads the electoral reform commission. Their interim reports, delivered in January 2026, recommend a bicameral legislature, a two-term cap on the prime minister, judicial appointment reform, and a permanent caretaker mechanism for transitions. The constitutional commission has explicitly engaged the question of whether the 1972 charter requires amendment or replacement, a debate that now defines the political contest between the BNP, Jamaat-e-Islami, and the new student-led Jatiya Nagorik Party.

The election timetable has slipped twice. Yunus initially floated late 2025, then publicly committed in his March 2026 address to a window between December 2025 and June 2026 contingent on completion of voter roll cleanup and reform consensus. The Election Commission, reconstituted in November 2024, is rebuilding a roll the prior commission had inflated and has signaled that a credible national poll is feasible by mid-2026. The BNP, the largest party with established machinery, prefers an early election; Jamaat and the student parties prefer time to build organization and to lock in reform first. The Awami League is not currently registered to contest, with the Election Commission having suspended its registration in May 2025 pending resolution of cases at the International Crimes Tribunal.

Fiscal stress and the IMF program #

The IMF Extended Fund Facility approved in January 2023 at SDR 2.5 billion, roughly USD 3.3 billion, was augmented in June 2024 and again under the interim government to a total package near USD 4.7 billion across the EFF, the Resilience and Sustainability Facility, and supplemental support. The fifth review, completed in late 2025, released a tranche of USD 1.3 billion and confirmed that the interim government had moved on the most politically difficult prior actions: a market-determined exchange rate corridor, a new monetary policy framework anchored on the policy rate, VAT base broadening, and the start of a banking sector triage exercise.

The FY2026 budget targets a fiscal deficit near 5.2 percent of GDP, down from 5.6 percent in FY2024 but above the program path. Revenue mobilization remains the structural bottleneck: the National Board of Revenue collected about 7.4 percent of GDP in FY2025, among the lowest ratios in South Asia, against a program target near 9 percent by FY2027. The interim government raised supplementary duties on tobacco, telecommunications, and selected luxury items, withdrew zero-rated VAT for several services, and is preparing a new Income Tax Act for the next parliament. Sisyphus reads the program as durable but tight: the IMF has accepted slower revenue convergence in exchange for faster banking and exchange rate reform, and Argus assigns roughly a 30 percent probability to a sixth review delay if the FY2027 budget loosens beyond program parameters.

Inflation, the taka, and the crawling peg #

Headline CPI averaged 9.7 percent in FY2025 and only slipped below 9 percent in March 2026, with food inflation running about 150 basis points above non-food. Bangladesh Bank under Governor Ahsan H. Mansur, a former senior IMF staff member appointed in August 2024, replaced the prior monetary targeting regime with an interest rate corridor and lifted the policy repo rate to 10 percent by mid-2025. The standing lending facility sits at 11.5 percent and the standing deposit facility at 8.5 percent. Real policy rates turned positive for the first time in this cycle in early 2026.

The exchange rate regime moved from a hard managed peg around 110 taka per dollar in early 2024 to a crawling peg corridor that allowed the taka to depreciate to about 122 to 124 by mid-2025 and toward 128 to 130 in episodes of FX stress. Bangladesh Bank publishes a reference rate and tolerates a band that has widened progressively under the IMF program. The crawling peg has narrowed the kerb premium from a peak above 7 percent in late 2023 to under 2 percent at most readings in 2026, a meaningful achievement that has restored remittance flows through formal channels to roughly USD 27 billion in FY2025.

Argus expects the taka to drift toward 132 to 135 over the next twelve months under a base case of orderly depreciation, with reserve cover holding at 3.2 to 3.5 months. The risk case is a political event in the run-up to the election, or a renewed energy import bill spike, that forces Bangladesh Bank to defend the band and run reserves toward the USD 18 billion floor that would trigger an IMF program review.

Banking cleanup and the S Alam problem #

The interim government inherited a banking system whose published non-performing loan ratio understated the problem by a wide margin. By December 2025, with revised classification rules under the Bank Company (Amendment) Act 2024, system-wide gross NPLs reached 20.2 percent, the highest print on record and roughly double the level reported a year earlier. The amendment tightened related-party lending limits, gave Bangladesh Bank explicit authority to remove directors of weak banks, and introduced a special resolution regime for banks deemed systemically critical or critically undercapitalized.

S Alam Group, a Chattogram-based conglomerate with documented control over six private banks including Islami Bank Bangladesh, First Security Islami, Social Islami, Union, Global Islami, and Bangladesh Commerce, is the single largest exposure. Bangladesh Bank reconstituted all six boards within ninety days of the political transition, froze related-party accounts, and engaged international forensic accounting support. Total S Alam-linked exposure under investigation exceeds USD 12 billion, of which a meaningful share will require write-down or recapitalization. BRAC Bank and Pubali Bank sit at the cleaner end with NPL ratios in mid-single digits and capital adequacy above the 12.5 percent regulatory minimum. The four large state-owned commercial banks, Sonali, Janata, Agrani, and Rupali, carry the highest reported NPLs and will require capital injection through the FY2027 budget cycle. Sisyphus models the total recapitalization need at USD 8 to 12 billion over three years, roughly 1.5 to 2.5 percent of FY2026 GDP.

Garments, energy, and the Adani contract #

Ready-made garments remain the macro anchor. RMG exports reached USD 38.5 billion in FY2025, roughly 84 percent of total goods exports, with knitwear holding a slight edge over woven and the European Union absorbing a larger share than the United States for the third consecutive year. Top buyer relationships with H&M, Inditex, Levi Strauss, Walmart, Uniqlo, and Marks and Spencer have continued through the political transition without major disruption, and the Bangladesh Garment Manufacturers and Exporters Association reports order books in the first quarter of 2026 running about 6 percent ahead of the prior year. The wage settlement of November 2023, which lifted the minimum monthly wage to BDT 12,500, remains in force and has held labor unrest below the 2023 peak.

Energy is the binding macro headache. The contract with Adani Power for 1,496 megawatts from the Godda plant in Jharkhand, signed in 2017 and operational since 2023, accounted for roughly 9 percent of Bangladesh's grid power in 2024 at a tariff that the interim government and outside reviewers have judged unfavorable relative to comparable imports. Bangladesh Power Development Board arrears to Adani at the time of the political transition exceeded USD 800 million; partial payments through the IMF-supported reserves operations have brought the figure down toward USD 400 million by early 2026. The interim government has sought tariff renegotiation, raised the matter with the Indian government, and commissioned an independent legal review of the contract terms. A repudiation outcome is not the base case, but a renegotiated tariff and a longer settlement schedule are.

Geopolitics and three election scenarios #

India and Bangladesh enter 2026 in the most strained bilateral posture since 1975. Hasina's residence in India, repeated extradition requests under the bilateral treaty, and India's reluctance to engage the interim government at the senior political level have cooled trade facilitation, border management cooperation, and the cross-border power and connectivity agenda. Land port traffic at Petrapole and Benapole has slowed, and the Akhaura-Agartala rail link inaugurated in 2023 is operating below planned utilization. China has stepped into selected gaps, with renewed engagement on the Teesta River Comprehensive Management and Restoration Project and continued progress on the Payra port expansion. The interim government has been careful not to tilt explicitly, framing relations with both Delhi and Beijing as transactional and reform-conditioned.

Argus assigns roughly 50 percent probability to a base case in which a BNP-led government, possibly with Jamaat and student-party support, takes office between March and June 2026, retains the IMF program, completes the constitutional amendments recommended by the reform commissions, and restructures the worst banks under the new resolution regime. Growth runs at 5.5 to 6.0 percent, inflation slips toward 7 percent by end-2027, and the taka stabilizes near 132 to 135.

The upside case, at 25 percent probability, sees a clean election, a credible coalition, full implementation of bank resolution including S Alam asset recovery, a renegotiated Adani tariff, and a recovery in the relationship with India that restores regional connectivity. Growth pushes toward 6.5 percent and the sovereign credit narrative rebuilds toward investment grade conversation by 2028. The downside case, at 25 percent probability, combines an Awami League return route through judicial reinstatement or a delayed election, banking sector recognition that requires direct monetization, and a renewed FX crisis in which reserves fall below USD 18 billion. Across all three, the actionable variables for 2026 are the election date, the FY2027 budget envelope, and the disclosed scope of the S Alam asset recovery process.

Sources #

• Bangladesh Bank monetary policy and statistics
• Ministry of Finance Bangladesh budget documents
• IMF Article IV Bangladesh and EFF reviews
• World Bank Bangladesh Development Update
• Asian Development Bank Bangladesh country diagnostic
• Bangladesh Institute of Development Studies
• Centre for Policy Dialogue independent review
• S&P Global Ratings sovereign analysis
• The Daily Star coverage
• Prothom Alo coverage