Bangladesh's economy is experiencing a surge in optimism as institutional reforms and positive investor sentiment take hold, according to LightCastle Partners, an international management consulting firm.

LightCastle highlighted these developments in its recent Bangladesh Update publication for August 2024, emphasising the country's emerging market potential.

"The Dhaka Stock Exchange has experienced a significant upswing, with the DSEX benchmark index rising by 786 points over a four-session period, marking a 12 percent increase, and market capitalisation surging by $5.8 billion as of August 11," LightCastle.

The positive momentum came about after Sheikh Hasina resigned from her post as prime minister and fled the country on August 5 in the face of a student-led mass uprising.

"The rally has been primarily driven by fundamentally strong businesses, which have seen steady stock price increases, indicating early signs of an efficient market. This suggests that investors are optimistic in light of the ongoing institutional reforms," it added.

Institutional reforms, aimed at improving governance and restoring business confidence, include the appointment of a new Supreme Court chief justice. The resignation of the Bangladesh Bank governor and the Bangladesh Securities and Exchange Commission chairman present further paths towards reform.

These departures, all political appointees, signal a broader shift towards depoliticising key institutions.

"These changes are expected to lead to further improvements in governance and are seen as crucial steps in addressing long-standing issues within the country's institutions, which have been marred by political influence and inefficiency," LightCastle said.

Despite the positive developments, the manufacturing sector, particularly the garments industry, continues to face challenges.

LightCastle pointed out that security concerns have kept factories from operating at full capacity.

At the same time, Chittagong port, a critical hub for the country's trade, is currently experiencing severe congestion, with container volumes exceeding capacity by 50 percent, as per data till August 14.

Additionally, the daily number of vehicles transporting goods from the port has plummeted, further exacerbating supply chain disruptions.

Expressing that the banking sector is still under pressure, the firm said that high levels of non-performing loans (around 10 percent) and capital flight have been masked by the previous regime.

"The sector has also been hit by inflation, declining foreign exchange reserves, and slowing economic growth, further straining financial stability," LightCastle said.

LightCastle also flagged other challenges, including the energy sector's rising payables, bureaucratic inefficiencies, and the need for constitutional reforms.

These issues, if left unaddressed, could hinder the country's economic progress, it added.

However, the ongoing institutional changes and renewed political consciousness among the youth, spurred by recent student movements, offer hope for long-term structural changes, the firm noted.

LightCastle observed that businesses are increasingly optimistic about the potential for fairer market practices and sustainable growth despite the current challenges.