Measuring the Macroeconomic and Financial Stability of Bangladesh

TL;DR

This paper develops an Aggregate Financial Stability Index for Bangladesh, assessing systemic health from 2016 to 2024, revealing overall deterioration driven by weaknesses in key sectors and providing a tool for early warning and policy guidance.

Contribution

It introduces a comprehensive AFSI framework for Bangladesh, integrating 19 macrofinancial indicators across sectors, and offers a novel early warning tool for financial stability assessment.

Findings

Overall financial stability declined in 2024

Weaknesses in the Financial and Monetary Sector and External Sector

Indicators include rising non-performing loans and declining reserves

Abstract

This study constructs an Aggregate Financial Stability Index (AFSI) for Bangladesh to evaluate the systemic health and resilience of the countrys financial system during the period from 2016 to 2024. The index incorporates 19 macrofinancial indicators across four key sectors Real Sector, Financial and Monetary Sector, Fiscal Sector and External Sector. Using a normalized scoring approach and equal weighting scheme, sub-indices were aggregated to form a comprehensive measure of financial stability. The findings indicate that while the Real and Fiscal sectors demonstrated modest improvements in FY2024, overall financial stability deteriorated, largely due to poor performance in the Financial and Monetary Sector and continued weakness in the External Sector. Key stress indicators include rising non-performing loans, declining capital adequacy ratios, weak capital market performance, growing external debt, and shrinking foreign exchange reserves. The study highlights the interconnectedness of macro-financial sectors and the urgent need for structural reforms, stronger regulatory oversight, and enhanced macroprudential policy coordination. The AFSI framework developed in this paper offers an early warning tool for policymakers and contributes to the literature on financial stability measurement in emerging economies.