With increase in gross domestic product (GDP), also known as gross development product, as the goal of macroeconomic policy, investment becomes the essential instrument to achieve the goal. In popular parlance, investment is the engine of growth. A lay person with a curious bent of mind may want to know how much of investment will increase GDP by 1 (one) per cent? Economists have a way of finding this by looking at investment as a percentage of GDP, known as investment-GDP ratio, and incremental capital output ratio (ICOR) at a particular time. ICOR is the number of capital units required to produce one unit of output. More intensive is the use of labour as against capital or more inefficient is the use of capital, higher is ICOR. By this metric, industrially developed countries are using more capital intensive production methods with efficiency has lower ICOR than a labour intensive country using capital less efficiently. ICOR = Change in Capital / Change in Output. In other words, ICOR = Investment (% of GDP) / Growth Rate of GDP. Thus, if the investment-GDP ratio is 24 per cent and GDP growth rate 6 per cent, then according to the formula, ICOR will be 6 per cent.
This has roughly been the relationship historically used used for Bangladesh. Let us suppose Bangladesh’s investment- GDP ratio rises from 24 to 25 per cent. That is a 1 percentage -point increase in investment, not a 1 per cent increase in investment. With an ICOR of 4 ( four), 1 ( one) percentage-point increase in investment divided by 4 unit of ICOR will yield 0.25 increase in GDP. Bangladesh’s GDP growth has been estimated by the World Bank at 1 percentage-point increase in private investment/GDP yielding 0.28 percentage point higher GDP growth, with a one year lag. Its estimate for public investment was about 0.33 percentage point GDP increase. Using an ICOR of 4 the following estimate can be arrived at for GDP growth associated with investment/GDP ratio: (1) 20 per cent investment/ GDP = 5 per cent GDP growth; (2) 24 per cent investment/ GDP = 6 per cent GDP; (3) 28 per cent investment / GDP = 7 per cent GDP; (4) 32 per cent investment/ GDP = 8 per cent GDP; (5) 36 per cent investment/ GDP = 9 per cent GDP growth. This is not a forecast, it merely shows the mechanical ICOR relationship. Bangladesh’s Eighth Five Year Plan (8FYP) assumed that raising investment from 32 per cent of GDP to about 37 per cent would help achieve its 8.51 per cent growth target, recognising that the ICOR would rise as Bangladesh became more capital intensive. ICOR would also rise if investment is of poor quality and productivity is poor, reducing the growth obtained from each additional unit of investment.
The crucial questions are: (a) How much Bangladesh is investing as percentage of GDP? (b) How much additional GDP is Bangladesh getting
from each taka of investment? If investment is rising but the ICOR is also rising, more investment can produce little additional growth. There is enough evidence that Bangladesh’s capital efficiency has deteriorated over time. For FY 2025, gross investment was about 28.2 per cent of GDP, while real GDP growth was only 3.7 per cent. From this, the ICOR can be calculated as follows: Investment/GDP of 28.2 per cent divided by GDP growth rate of 3.7 per cent yields an ICOR of 7.6.
Bangladesh’s total investment is currently around 28-29 per cent of GDP, with private investment about 23 per cent and public investment around 5-5.5 per cent. With ICOR of 4, the investment-GDP of 28 per cent would yield 7 per cent increase in GDP. But the ICOR estimated for FY2025 being 7.7, increase in GDP will be less than 4 per cent.
So, the growth strategy of Bangladesh has to focus both on increasing investment-GDP ratio and a lower ICOR achieved through efficient use of resources. Regarding the first, there is a policy choice between public and private sector investments or a mix of the two. In either case there are implications for sources of investment and sectors of investment with variation of ICOR in operation between the two.
Bangladesh started with a public sector-led growth strategy with almost all industries and businesses brought under the public sector in a centrally planned economy. After the regime change in 1975, there was a gradual shift towards market economy that allowed a private sector to grow. But investment by private sector grew at a slow pace as can be seen from the figures for investment-GDP ratio at different years since the regime change: (1) 1975: 5.5 per cent; (2) 1976: 8.7 per cent; (3) 1978: 11.0 per cent; (4) 1981: 14 per cent. The breakthrough in private sector investment came after 2000 when it reached 23 per cent of GDP. Economic liberalisation, denationalisation, privatisation and promotion of private sector both by the government and multilateral and bilateral institutions (proselytisers of Washington Consensus) led to a private sector-led development strategy that has continued to date. But the growth of private sector has not been linear and steady. During 2000-2022 period there has been a remarkable plateau in private sector investment. The investment-GDP ratio hovered between 22 to 24 per cent during the period under review. For reasons to be discussed below, private sector investment has not crossed above 24 per cent of GDP since 2022. Meanwhile, public investment increased substantially. The World Bank has shown public investment rising from 4.7 per cent of GDP in 2010 to 6.9 per cent in 2015. Later estimates put the figure around 7-8 per cent of GDP. The IMF’s data shows that private investment was 24.5 per cent of GDP in 2019 but only 22.4 per cent by 2024, while public sector investment was around 7-8 per cent of GDP.
If expansion of public sector investment was financed by public revenue earnings the expansion would not impinge on the growth of private sector investment. But government has resorted to borrowing, particularly from commercial banks, year to year, to meet its revenue shortfalls. This has crowded out private sector borrowing. On top of shortages of loan-able funds from banks, private sector borrowings have been hamstrung by high rates of interests. According to Bangladesh Bank statistics, private sector credit growth in November 2025 was 6.5 per cent which came down to 4.75 per cent in April, 2026, an all time record low. As a result of this lacklustre performance, the new monetary policy of Bangladesh Bank has reduced the target of private sector credit growth to 6.8.per cent in the current fiscal year. The central bank has also revised the estimate for private sector investment to 21.2 per cent of GDP. This is close to the provision made in the current budget for private sector investment at 21.04 per cent. In contrast, public sector investment has been increased to 13 per cent, an increase over past year. Applying a realistic ICOR these investment figures for the two sectors of the economy give less than expected increase in GDP.
These monetary obstacles have been compounded by disruptions and shortages of gas and power supply and policy uncertainty. An example of the latter has been the cancellation of payment guarantee by the interim government to financiers, local and foreign, for supply of solar energy equipments which not only deprived private sector of investment with borrowed money but also blocked augmentation of power supply through renewable energy. The Interim government’s failure to protect many running industries after 5 August 2024 not only stopped production of import substituting industries but also undermined confidence of private sector entrepreneurs.
During Awami League rule (2008-2024) though the government’s own planning documents (Perspective Plan) recognised that private investment was indispensable for accelerated growth, the government’s implementation increasingly concentrated political and financial attention on large (mega) public projects. With inadequate revenue income earnings government relied increasingly on bank borrowing, leaving little monetary space for the private sector. The government did not rescind its commitment to private sector-led growth strategy but its policy decisions on public sector projects one after another served to squeeze the private sector. The IMF reported that in FY23 credit to government grew 15.7 per cent while the same to private sector grew only 9.1 per cent. This was in stark contrast to an average private-credit growth of 15.4 per cent during FY14-FY19. IMF’s more recent data make the shift even clearer. According to its findings, net credit to government increased rapidly, while private sector credit expanded much more slowly. According to its 2025 Article IV data, government credit growth reached 48.5 per cent in one year, followed by growth above 20 per cent in subsequent years, whereas private-sector credit growth was generally only 6-12 per cent. This finding is consistent with a progressive displacement of private borrowers by the public sector in the banking system. In fact, private investment was already stuck around 23-25 per cent of GDP for many years starting from 2014. The IMF figures in this respect show
private investment at 24.0 per cent of GDP in 2014, 23.7 per cent in 2015, 24.5 per cent in 2016, 23.6 per cent in 2017, 23.3 per cent in 2018, and 24.0 per cent in 2019.
The mismatch of strategy produced a rather paradoxical situation. The explicit strategy was intended to work like this: public investment in mega projects (Padma bridge, highways, ports, power, metro-rail and economic zones) would lower infrastructure costs leading to greater private investment and finally end up with higher total investment and GDP. But the financing strategy increasingly
produced another effect: large public projects, large government borrowing, increasing share of bank credit sequestered by public sector, low private sector credit, failure of private sector to grow as expected in formal strategy adopted in five-year plans. The tension within the strategy made itself manifest in unbalanced development of the two sectors. The next question is even more revealing: how much of the government’s bank borrowing went into productive capital formation; and how much was spent on salaries, subsidies, interest payments and other recurrent non- development expenditures? To the extent this took place, investment in public sector contributed lesser to GDP than suggested by the size of investment. If corruption is factored in, public sector expenditures for development projects
contributed even less to GDP. Corruption can also be added to capital expenditures to show a high ICOR, more units of capital invested for lesser amount of output. This is the strongest argument against hijacking of private sector-led growth strategy by predatory public sector.
Of course, there are other factors inhibiting growth of private sector investments other than the financing side. Among these the major ones are: high and uncertain cost of finance, unreliable gas and power supply, foreign-exchange uncertainty, bureaucratic and regulatory obstacles, weak rule of law and contract enforcement, high cost of industrial land, poor transport and logistics, lack of skilled labour, weak competition, policy instability, tax and customs complexity, political uncertainty etc. These are structural problems which far outweigh the lack of entrepreneurial spirit and private sector confidence. The World Bank’s latest assessment describes the problem faced by private sector as a combination of weak finance, regulatory costs, unreliable infrastructures, uncertain utilities, inadequate competition and weak governance.
The present government formed by BNP in February, 2026 has inherited an economy that was almost gasping for breath. The interim government that preceded it for over a year did little to try to keep the collapsing economy on an even keel. Rather it made the future of the economy hostage to America’s trade hegemony by signing an unfair trade agreement. Besides, the undisclosed clauses in the bilateral agreement may have compromised the security interests of Bangladesh which may spill over into economic concerns. To be more specific on the state of the economy before the present government took over some salient facts can be mentioned which apart from highlighting the present predicament facing policy makers point to the setbacks suffered by the private sector growth strategy. The GDP growth rate which was 4.22 per cent in FY24 came down to 3.49 per cent in FY25. The investment-GDP ratio that was 30.70 per cent fell to 28.54 per cent during the same period. Industrial growth shrank to.3.71 per cent while agriculture slowed to 2.42 per cent and services to 4.35 per cent. Total investment fell from 30.70 per cent of GDP to 28.54 per cent in FY25. More importantly, private investment fell from 23.96 per cent to 22.48 per cent, its lowest level in five years. More significant is the deterioration in unemployment situation brought about by the political upheaval. Bangladesh Bureau of Statistics (BBS) puts unemployment rate at 4.48 per cent, compared with 4.15 per cent in 2023, with about 2.61 million people unemployed at the end of 2024. As regards, closing down of industries, a broad government survey found that nearly 245 factories closed between August 2024 and July 2025, affecting about 100,000 workers.
The BNP government, after coming to power, has taken vigorous measures for economic recovery, particularly to promote private sector growth. At its advice, the Bangladesh Bank has opened a Tk 40 billion refinance scheme for closed or struggling factories. Under this scheme commercial banks will lend to closed and struggling industries and Bangladesh Bank will provide refinance support to the banks. So the present government has opted to a policy of providing support to private sector rather than becoming investor or producer itself.
The BNP government’s commitment to private sector has also become clear from its policy towards the state owned enterprises. It has declared its intention to re-open the closed sugar, jute and silk industries to restore productive capacity and employment. But more importantly, the government has decided to sell or lease out 44 closed or loss-making or partly operational state-owned factories to private sector. The government is also considering several models in this respect : joint ventures with private sector, PPP (public-private partnership) and outright sale. Domestic and foreign investors have been invited to submit their proposals.
In the budget for 2026-27, the BNP government has explicitly targeted an ‘investment- led’ economy with 6.5 per cent growth target and employment creation as major objectives. The FY27 budget contains tax incentives and duty concessions intended to reduce the cost of investment. The budget has also proposed greater participation of private sector in infrastructure sectors.
The policy direction of the BNP government is clearly pro-private- sector but the actual evidence that private investment has already recovered
is still limited because the government has been in office only since February, 2026. The real test will be whether the BNP government can push private investment-GDP ratio back above 24 per cent and eventually toward 28-30 per cent in the near future. If it can do that without simultaneously expanding government borrowing
and crowding out private credit, Bangladesh could genuinely
move toward a private-sector-led growth strategy. The BNP government’s success will ultimately
be judged not by the size of its budget or number of government projects, but by whether private
investment rises, private-sector credit expands, industrial increases and employment grows.
