World Bank report: Growth weakens, poverty rises, banking sector at risk

Economic growth in Bangladesh is slowing. Private investment and employment have weakened. Industrial production is being disrupted by gas and electricity shortages. Non-performing loans and capital shortfalls are increasing in the banking sector. High inflation is reducing people’s real incomes and purchasing power.

At the same time, although the government is spending large sums on social protection, electricity and fuel, and fertiliser subsidies, a significant portion of the money does not reach poor people. Many relatively well-off families receive benefits, while a large number of the poorest households remain outside the social protection system.

This picture of the economy has been presented in the World Bank’s October 2026 Bangladesh Development Update. The report, titled “Make Subsidies and Social Protection Work Better for the Poor,” was released today, Tuesday.

The report identifies restoring stability in the banking sector, ensuring energy security and good governance, and increasing tax revenue as key areas for reform. It also recommends gradually reducing broad-based subsidies and increasing targeted support for poor and vulnerable people.

According to the World Bank, Bangladesh’s real GDP growth stood at 3.4 per cent in fiscal year 2025–26. Growth was 5.8 per cent in FY2022–23, before falling to 4.2 per cent and 3.5 per cent in the following two fiscal years.

Growth fell to 2.2 per cent in the third quarter of the last fiscal year—the lowest quarterly growth recorded since the Covid-19 pandemic.

A major reason for the slowdown was a contraction in investment.

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.

Implementation of the Annual Development Programme (ADP) also fell to a historically low level. Development spending declined amid reviews of major infrastructure projects, caution over approving new projects and weak implementation capacity.

The report said industrial growth was around 2 per cent in FY2025–26. Industrial production contracted by 0.3 per cent in the third quarter—the first quarterly contraction in the industrial sector since the Covid-19 pandemic.

Many factories operated below capacity because of shortages of gas and electricity. Some companies reduced working hours, halted production or laid off workers.

Bangladesh was nearly self-sufficient in gas until 2017. It now has to meet about one-third of total demand through imports. Heavy reliance on several major gas fields and the floating LNG terminal in Maheshkhali means that a problem at any one facility can lead to supply cuts across large areas.

The slowdown in the economy has also affected the labour market. Many women who lost jobs in the industrial and services sectors have left the labour force.

Female labour force participation fell from 42.8 per cent in 2022 to 38.4 per cent in 2024. However, as no new labour force survey has been conducted since 2025, it is difficult to assess the latest situation accurately.

Average inflation fell from 10 per cent in FY2024–25 to 8.7 per cent in the last fiscal year. Point-to-point inflation stood at 8.3 per cent in August.

However, higher electricity and fuel prices, supply-side problems and growth in the money supply have kept inflation elevated.

The average retail price of electricity increased by about 16.7 per cent. Wages of low-income workers also failed to keep pace with inflation. Their real wages turned negative again in August.

Money supply increased in FY2025–26 due to government borrowing from banks, current expenditure including subsidies and interest payments, remittances, and the central bank’s purchases of dollars. However, private-sector credit and productive investment did not increase. As a result, growth in the money supply could put greater pressure on prices than on output.

According to the World Bank’s model-based estimates, 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. Around 2.1 million people fell below this poverty line during the year.

According to the national poverty line, the poverty rate has 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. Income inequality also increased during the same period.

The World Bank identified weaknesses in the banking sector as one of the most serious 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 ratio was 58.9 per cent in Islamic banks and 43.2 per cent in state-owned commercial banks.

The banking sector’s overall capital adequacy ratio fell to negative 2.6 per cent in December 2025, against a minimum regulatory requirement of 10 per cent.

Because provisioning requirements were relaxed, banks did not have to maintain provisions equivalent to about $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 provided by Bangladesh Bank to weak banks reached Tk 760 billion in June 2026. Asset-quality reviews of six Islamic banks have been completed, but progress for other banks has been slow.

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

Bangladesh Bank cut its policy rate by 0.5 percentage points to 9.5 per cent on 30 July. This was the first policy-rate cut in six years.

However, credit growth for individuals and private businesses fell to 4.5 per cent in June, the lowest level in 33 years. In contrast, credit growth to the government stood at 30.4 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 and riskier businesses to obtain credit. Banks may become more inclined to lend to large companies or the government rather than small and medium-sized enterprises. This could also weaken banks’ profitability and their ability to rebuild capital.

Remittances increased by 17.3 per cent to a record $35.6 billion in FY2025–26. However, the current account deficit widened to around $1.6 billion. Merchandise exports fell by 0.2 per cent in the last fiscal year. In contrast, imports rose by 10.5 per cent to $71.1 billion. Import spending on petroleum products increased by 107 per cent.

Bangladesh is also facing increased pressure in the US apparel market. In the first six months of 2026, total US apparel imports declined by 7.1 per cent, while imports from Bangladesh fell by 5.3 per cent. During the same period, US apparel imports from Vietnam, Indonesia and Cambodia increased.

Net foreign direct investment fell by 15 per cent to around $1.5 billion, equivalent to just 0.3 per cent of GDP. Although reinvested earnings by existing foreign companies increased, new equity investment declined by 70.3 per cent.

The exchange rate, meanwhile, remained broadly stable. The average interbank exchange rate was Tk 122.10 per dollar in FY2025–26, rising to around Tk 122.90 in August. To ease appreciation pressure on the taka, Bangladesh Bank bought a net $6.4 billion from commercial banks during the last fiscal year.

According to the report, the National Board of Revenue collected 82.6 per cent of its tax target in FY2025–26. Total revenue increased from 8 per cent of GDP to 8.3 per cent, with tax revenue accounting for around 7 per cent.

A narrow tax base, tax evasion, weak administration and excessive tax exemptions continue to hamper revenue growth. Efforts to separate tax policy-making from tax administration have also not been effective.

At the same time, total government expenditure rose from 11.4 per cent of GDP to 12.2 per cent. Current expenditure increased from 8.7 per cent to 9.7 per cent, while capital expenditure fell from 2.8 per cent to 2.5 per cent.

If the new government pay structure is fully implemented, basic salaries and allowances could increase by an average of around 120 per cent, while pensions could rise by about 70 per cent. This could increase government expenditure by around 0.6 per cent of GDP in FY2026–27.

The budget deficit increased from 3.4 per cent of GDP to 3.9 per cent. During the first 11 months of FY2025–26, 81.5 per cent of the government’s total financing came from the banking sector, compared with 34.8 per cent in the previous fiscal year.

Greater government borrowing from banks could reduce the availability of credit to the private sector. Lending rates may remain high, potentially hampering investment and employment.

Government debt also increased from 38.9 per cent of GDP to 40.5 per cent. Interest payments reached around 2.6 per cent of GDP.

According to the World Bank’s forecast, Bangladesh’s growth could remain at 3.4 per cent in FY2026–27. This is significantly below the 10-year average growth rate of 5.6 per cent. Growth could increase slightly to 3.9 per cent in FY2027–28.

Around 630,000 net jobs could be created in the next fiscal year. However, this level of employment generation will not be enough to reduce poverty rapidly.

The national poverty rate could rise to 22.8 per cent in FY2026–27 before declining slightly to 22.4 per cent in the following fiscal year.

Average inflation is projected to remain at 8.6 per cent and 7.1 per cent, respectively, over the same period. Fuel prices, supply-side problems and expansionary fiscal policy could keep inflation elevated.

The World Bank has recommended completing asset-quality reviews in the banking sector quickly and determining which banks can remain viable. It has also called for bank owners, investors and other stakeholders to bear the cost of losses and for regulatory concessions to be gradually withdrawn.

In the energy sector, the World Bank has recommended increasing domestic gas production and LNG infrastructure, improving electricity transmission and distribution systems, and investing in renewable energy. It also called for transparent and competitive bidding in project selection and electricity procurement.

To increase revenue, the World Bank recommended separating tax policy from tax administration, coordinating data across government agencies to identify tax evasion, and gradually reducing ineffective tax exemptions.