Economy under growing pressure, reforms in 3 sectors urgently needed

Several pressures are building up in Bangladesh’s economy at the same time. Growth is slowing, investment and employment are weakening, and high inflation is reducing people’s real incomes.

Weaknesses in the banking sector, energy shortages and a revenue shortfall are adding further risks to the economy.

The World Bank presented this assessment in the October edition of its Bangladesh Development Update, released yesterday, Tuesday. It identified weaknesses in the banking sector as one of the major risks to the economy.

The World Bank has forecast that GDP growth could fall to 3.4 per cent in the current fiscal year. Private-sector credit growth has dropped to its lowest level in 33 years.

Gas and electricity shortages are disrupting production at industrial plants; some have reduced working hours, while others have laid off workers. At the same time, poverty has increased amid high inflation and weak employment. The World Bank said around 2.1 million people fell below the poverty line in the last fiscal year.

Government revenue is also failing to keep pace with expenditure. As a result, reliance on bank financing is increasing, along with pressure from subsidies and interest payments.

To address the situation, the World Bank has called for swift and bold reforms in the banking, energy and revenue sectors. The organisation believes it could be difficult to manage the economy’s ongoing pressures without these three sets of reforms.

The World Bank also said global uncertainty is having a negative impact on investment and economic activity. A press conference was held at the World Bank’s Dhaka office to mark the release of the report, titled “Make Subsidies and Social Protection Work Better for the Poor.”

At the press conference, Jean Pesme, World Bank Country Director for Bangladesh and Bhutan, said swift and bold reforms in the banking sector, domestic revenue mobilisation and energy were needed to avoid an economic downturn and return to a path of inclusive growth driven by private investment. Urgent action is needed to implement the necessary reforms to protect poor people and create decent jobs, he said.

Finance Minister Amir Khosru Mahmud Chowdhury held a meeting at the National Board of Revenue yesterday afternoon. After the meeting, journalists asked him about the World Bank’s growth forecast and report. The finance minister replied, “Wait and see.” He made no further comment.

Growth to fall to 3.4pc this year

GDP growth has declined for three consecutive years. According to the World Bank’s forecast, GDP growth in the current fiscal year (2026–27) could fall to 3.4 per cent. Growth could remain at the same rate in the next fiscal year. Growth was 5.8 per cent in FY2022–23 and declined further over the following two years.

The World Bank believes a major reason for the slowdown is the contraction in investment. According to its estimates, private investment fell by 0.5 per cent and public investment by 0.7 per cent in FY2025–26. During the same period, real exports of goods and services declined by 4.8 per cent. Private-sector credit growth fell to 4.5 per cent, the lowest level in 33 years.

Implementation of the Annual Development Programme (ADP), which represents public investment, also remains low. Development spending has declined amid reviews of major infrastructure projects, caution over approving new projects and weak implementation capacity.

Pressure on industry and employment

The report said gas and electricity shortages have forced many factories to operate below capacity. Some companies have reduced working hours, halted production or laid off workers. Although Bangladesh was nearly self-sufficient in gas until 2017, it now has to meet about one-third of total demand through imports.

The World Bank said the economic slowdown is also affecting the labour market. Many women who lost jobs in the industrial and services sectors have left the labour force. Women’s participation in the labour force was around 43 per cent in 2022, but fell to 38.4 per cent in 2024.

Pressure from high inflation

The World Bank believes inflation has eased somewhat but remains high. Inflation stood at 8.3 per cent in August.

According to the World Bank, higher energy prices, supply-side constraints and growth in the money supply are driving high inflation. Inflation could remain elevated in the future because of fuel prices, supply problems and expansionary fiscal policy.

Poverty has increased because of falling real incomes caused by high inflation, weak employment and other factors. According to the World Bank, around 2.1 million more people fell below the poverty line in FY2025–26 than in FY2024–25. The poverty rate at the international poverty line of $3 a day increased by 1.1 percentage points to 10.1 per cent in FY2025–26.

The national poverty rate has also increased for the fourth consecutive year. It stood at 18.7 per cent in 2022 and is estimated to have risen to 22.5 per cent in the last fiscal year. It could rise further to 22.8 per cent in the current fiscal year. Income inequality has also increased during the same period.

The World Bank said around 630,000 net jobs could be created in the next fiscal year. However, this will not be enough to reduce poverty rapidly.

Major risks in the banking sector

The World Bank considers weaknesses in the banking sector one of the major risks to Bangladesh’s economy. The non-performing loan ratio stood at 20.2 per cent at the end of December 2024, rising to 33.2 per cent in June 2026.

The World Bank said that, because provisioning requirements had been relaxed, banks did not have to maintain provisions equivalent to around $17 billion through March 2026. As a result, the true extent of weaknesses in the banking sector is not being fully reflected.

Unsecured liquidity support to weak banks reached Tk 760 billion at the end of June 2026. Asset-quality reviews of six Islamic banks have been completed, but progress for other banks has been limited.

The World Bank viewed the passage of the Bank Resolution Act and Deposit Protection Act as positive developments. However, it believes repeated concessions and liquidity support to weak banks are delaying the process of identifying and addressing their actual losses.

Private-sector credit at 33-year low

The World Bank report said private-sector credit growth fell to 4.5 per cent in June, the lowest level in 33 years. In contrast, credit growth to the government exceeded 30 per cent.

On 29 June, the maximum spread between deposit and lending rates for loans other than credit cards and consumer financing was set at 4 per cent.

According to the World Bank, capping the interest-rate spread in this way could make it harder for small businesses to obtain credit. Banks may become more inclined to lend to large companies or the government rather than small and medium-sized enterprises.

The World Bank said increasing revenue is one of the government’s major challenges, noting that revenue growth has failed to keep pace with the increase in budget expenditure.

The revenue-to-GDP ratio did not increase significantly in the last fiscal year because of weaknesses in tax policy, low tax compliance and weak tax administration.

At the same time, pressure on government expenditure increased because of higher spending on subsidies, interest payments, social protection and bank recapitalisation.

According to the World Bank, the fiscal deficit increased to 3.9 per cent of GDP. As a result, the government is increasingly relying on bank borrowing to meet its additional financing needs.

During the first 11 months of FY2025–26, 81.5 per cent of the government’s total financing came from the banking sector. Interest payments reached around 2.6 per cent of GDP in the last fiscal year.

The World Bank said greater government borrowing from banks could reduce the availability of credit to the private sector. Lending rates could remain high, hampering investment and employment. Government debt also increased from 38.9 per cent of GDP to 40.5 per cent.

Remittances provide relief, investment remains weak

Despite the various pressures on the economy, remittances have provided some relief. Remittances reached a record $35.6 billion in FY2025–26. However, exports declined while imports increased. The World Bank said the cost of importing petroleum products increased by 107 per cent in the last fiscal year.

The report also highlighted increased pressure on Bangladesh in the US apparel market. According to the report, although US apparel imports from Bangladesh declined in the first six months of 2026, imports from Vietnam, Indonesia and Cambodia increased.

Highlighting weak investment, the World Bank said net foreign direct investment fell by 15 per cent in the last fiscal year to just $1.5 billion. Although reinvested earnings by existing foreign companies increased, new equity investment declined by 70.3 per cent.

3 reform priorities

The World Bank has recommended urgently prioritising three types of reforms to restore stability to the economy.

First, asset-quality reviews in the banking sector should be completed quickly to determine which banks can remain viable. Bank owners, investors and other stakeholders should bear the cost of losses, while concessions granted to them should be gradually withdrawn.

Second, in the energy sector, domestic gas production and LNG infrastructure should be expanded, electricity transmission and distribution systems improved, and investment in renewable energy increased.

Transparent and competitive bidding should be ensured in project selection and electricity procurement.

Third, to increase revenue, tax policy and tax administration should be separated, tax evasion should be identified, and tax exemptions should be gradually reduced.