Why Bangladesh must save more to grow

The savings-investment ratio is a key indicator of an economy’s long-term sustainability and growth potential. It reflects how effectively domestic savings are converted into productive investment that expands production, creates jobs, and improves living standards.

For Bangladesh, which is striving to achieve upper-middle-income status while adapting to the challenges of post-LDC graduation, the current savings-investment ratio has become a strategic priority.

Although the country has maintained moderate economic growth over the past two decades, the persistent gap between savings and investment, along with declining private savings and sluggish private investment, is increasingly constraining economic transformation.

Bangladesh’s gross domestic savings have remained below the level needed to finance the country’s ambitious development agenda.

At the same time, total investment has stagnated at about one-third of GDP for several years, while private investment has improved only modestly despite policy incentives.

Consequently, the economy has become increasingly reliant on foreign borrowing, external development assistance, foreign direct investment, and remittances to finance capital formation.

While external financing provides temporary relief, excessive dependence exposes the economy to exchange-rate volatility, rising debt-servicing obligations, and global financial uncertainties.

One significant implication of the current savings-investment pattern is slower capital accumulation. According to classical growth theory, higher savings generate more resources for investment, thereby expanding productive capacity and raising national income.

However, when household savings decline due to persistent inflation, rising living costs, and stagnant real wages, fewer domestic resources are available for productive investment.

Bangladesh has experienced prolonged inflationary pressures that have eroded disposable incomes, forcing many households to spend a larger share of their earnings on essential commodities rather than save. As a result, the pool of investable domestic funds has gradually weakened.

The weak savings base also affects the banking sector. Commercial banks rely heavily on household and institutional deposits to fund business and industrial loans.

When deposit growth slows, banks face liquidity constraints and often raise lending rates. Higher borrowing costs discourage private entrepreneurs from expanding production or establishing new industries.

Small and medium-sized enterprises, which generate a substantial share of employment in Bangladesh, are particularly vulnerable because they generally depend on bank financing. Consequently, lower domestic savings indirectly reduce investment, employment, and economic diversification.

The current investment ratio also reflects structural weaknesses in the economy. Although public investment has increased through infrastructure projects, private investment has remained below expectations.

Investors continue to face challenges, including bureaucratic delays, policy uncertainty, inadequate institutional quality, limited access to long-term finance, land-acquisition problems, and governance concerns.

Therefore, increasing savings alone would not automatically increase investment unless the investment climate improves.

The imbalance between savings and investment has significant implications for Bangladesh’s industrial transformation. Diversification into high-value manufacturing, pharmaceuticals, information technology, electronics, agro-processing, and renewable energy requires substantial long-term investment.

Insufficient domestic savings constrain the availability of long-term capital to finance these emerging industries, slowing structural transformation and reducing competitiveness in international markets.

Employment generation is another area directly affected by the savings-investment ratio. When investment growth slows, employment opportunities decline. Bangladesh’s rapidly growing educated youth population requires millions of quality jobs over the coming decade.

A sluggish investment environment, therefore, risks increasing educated unemployment, underemployment, and outward migration of skilled workers.

The country’s external sector is also affected. While foreign investment brings technology and managerial expertise, excessive reliance on external financing increases vulnerability to global interest rate shifts, exchange-rate depreciation, and geopolitical uncertainties.

Following Bangladesh’s graduation from LDC status, maintaining export competitiveness and attracting high-quality foreign investment have become even more important. A stronger domestic savings base would reduce external financing pressures and enhance macroeconomic resilience.

The quality of investment is as important as its quantity. Bangladesh has invested heavily in physical infrastructure over the past decade, improving connectivity, logistics, electricity generation, and regional integration.

However, greater investment in human capital, research and development, digital innovation, healthcare, technical education, and climate-resilient infrastructure is now essential to sustain productivity growth. Without complementary investments in knowledge and innovation, infrastructure alone may not deliver the desired economic returns.

Several policy interventions can strengthen Bangladesh’s savings-investment dynamics. First, maintaining macroeconomic stability and reducing inflation would help restore household purchasing power and encourage saving.

Second, financial inclusion should be expanded by promoting digital banking, mobile financial services, and formal savings instruments that attract rural households and informal-sector workers.

Third, tax incentives and attractive interest-bearing financial products can encourage long-term saving. Fourth, strengthening governance, improving the ease of doing business, ensuring regulatory consistency, and accelerating judicial reforms would stimulate private investment.

Last but not least, increasing the efficiency of public investment through transparent project selection, timely implementation, and rigorous monitoring would maximize returns on scarce financial resources.

The persistence of the savings-investment gap heightens dependence on external financing, constraints industrial diversification, limits job creation, and reduces resilience to global economic shocks.

Strengthening domestic savings, improving the investment climate, deepening financial markets, and enhancing institutional quality are therefore critical to sustaining inclusive growth.

If Bangladesh channels domestic savings into productive, innovation-driven investments, it will be better positioned to achieve higher productivity, stronger competitiveness, and sustainable economic prosperity in the post-LDC era.

(The author is a former Additional Secretary to the Government, currently Associate Professor of Public Policy, Bangladesh Institute of Governance and Management — A constituent institute of the University of Dhaka.)