The Pulse | Diplomacy | South Asia

Bangladesh’s Twin Challenges: Economic Revival and Great Power Balancing

Bangladesh’s security lies not in becoming part of someone else’s strategic rivalry, but in becoming economically strong, diplomatically flexible, and internally legitimate.

Bangladesh is entering a decisive phase in its political and economic evolution. After the upheavals that began with the fall of Sheikh Hasina’s government in August 2024, followed by a period of interim government rule under Muhammad Yunus, and then the formation of a new Bangladesh Nationalist Party (BNP)-led government under Tariq Rahman, Dhaka faces two urgent tasks. The first is domestic: to restore public confidence in governance and revive an economy damaged by the COVID-19 pandemic, political turmoil, and instability from the Iran war. The second is external: to manage relations with four nuclear powers — India, China, Pakistan, and the United States — without becoming subordinate to any one of them.

The most important priority for Bangladesh must be the economy. Foreign policy realignment may attract headlines, but for ordinary Bangladeshis, the central issues remain jobs, growth, inflation, exports, investment, and the fair distribution of public goods. The anger that brought down the previous order was not only about authoritarianism; it was also about a perception that the benefits of growth were distributed selectively. Young people, especially Gen Z, felt excluded from opportunity. Therefore, the new system cannot simply replace one political party and network with another. Its legitimacy will depend on whether it can convince citizens that the state serves the public rather than the ruling party.

Bangladesh’s recent growth figures show both vulnerability and resilience. In 2022, the economy grew at more than 7 percent, partly as a post-COVID recovery effect. Growth then fell to around 5.8 percent in 2023, dropped further in 2024, and declined to roughly 3.5 percent during the period of political uncertainty under the interim government. The first quarter of 2026, however, suggested a modest recovery, with growth rising to around 4.5 percent. This is encouraging, but not sufficient. For a developing economy with Bangladesh’s demographic pressures and aspirations, 4 to 5 percent growth is not enough. Dhaka needs to return to the 7 to 8 percent range if it wants to generate jobs, sustain export competitiveness, reduce poverty, and avoid renewed political dissatisfaction.

Foreign direct investment is another key indicator. Bangladesh’s annual FDI inflows have hovered around $1.2 billion to $1.7 billion in recent years. Interestingly, even during political turmoil, FDI did not collapse; in fact, during the Yunus interim period in 2025 Bangladesh got more FDI than in 2024. This suggests that international investors still see Bangladesh as a viable production platform, especially in garments and light manufacturing. But the numbers remain modest for a country of Bangladesh’s size and ambition. Dhaka must use political stabilization to attract larger, more diversified investment, not only in garments but also in energy, logistics, digital services, pharmaceuticals, agro-processing, and higher-value manufacturing.

The external challenge is equally complex. Under Hasina, Bangladesh enjoyed exceptionally close relations with India. Many border issues were resolved, security cooperation deepened, and economic ties expanded, though the Teesta water-sharing issue and migration disputes remained unresolved. The new government appears to be moving away from that India-centric posture. This partly reflects suspicion in Dhaka that New Delhi may have preferred the return of Hasina or at least remained emotionally invested in the old order. It also reflects a desire by Bangladesh’s new leadership to diversify its options and signal independence. While autonomy is good, given Bangladesh’s geographical as well as cultural ties to India, Bangladesh’s future is inextricably tied to India.

This shift has already produced visible consequences. Bangladesh is deepening ties with China, exploring symbolic and administrative cooperation with Pakistan, and expanding energy and trade relations with the United States. One striking example is the reported decision to send Bangladeshi civil servants for training in Lahore rather than in India’s Mussoorie. Substantively, this may not transform governance, since all three bureaucratic systems derive from the British colonial civil service tradition. Politically, however, it sends a strong message. It indicates that Bangladesh is no longer comfortable with India as the default administrative and strategic partner.

Yet Dhaka should be careful not to confuse symbolism with national interest. Bangladesh has outperformed Pakistan on many developmental indicators, including growth, gender empowerment, women’s participation in the economy, and per capita income. In many respects, Pakistan should be learning from Bangladesh, not the other way around. Improved Bangladesh-Pakistan ties may be useful for regional normalization, but they must be built on economic substance, not merely anti-India signaling. If mutual trade remains below $1 billion and investment remains negligible, then the relationship will remain more symbolic than strategic.

Bangladesh’s trade map is clear: China dominates with bilateral trade around $17.3 billion, India remains second but is........

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