Bangladesh’s economy has shown signs of stabilising after a turbulent fiscal year, but deep-rooted structural weaknesses and political uncertainties continue to cast a long shadow over its growth prospects, according to the World Bank’s latest Bangladesh Development Update.
KEY OVERVIEW
- Real GDP Growth – 4.0pc in FY25
- Inflation – 10.0pc (FY25 average)
- Banking Sector Stress – NPLs at 24.1pc
- Current Account Surplus – $149m
- Fiscal Deficit – 4.7pc of GDP
“The economy has shown resilience, but this cannot be taken for granted,” said Jean Pesme, World Bank Division Director for Bangladesh and Bhutan. ‘To ensure a strong growth path and more and better jobs, Bangladesh needs bold reforms and faster implementation to address and enhance domestic revenue mobilisation, banking sector vulnerabilities, reduce energy subsidies, plan urbanisation, and improve the investment climate.”
Real GDP growth slowed slightly to 4.0 per cent in the 2024–25 fiscal year (FY25) from 4.2 per cent the previous year, despite a sharp first-quarter slump triggered by student-led protests and severe flooding. Economic activity gained momentum later in the year, supported by a surge in remittance inflows and robust export earnings, particularly from the ready-made garment (RMG) sector.
Remittances jumped by 26.8 per cent year-on-year, while export earnings grew by 8.8 per cent, lifting the current account into a surplus of US$149 million — Bangladesh’s first in eight years. The balance of payments also improved markedly, swinging from a US$4.3 billion deficit in FY24 to a US$3.4 billion surplus in FY25. Foreign exchange reserves stabilised at around US$26.5 billion by September 2025, following the adoption of a more flexible exchange rate regime in May.
Despite these positive developments, investment activity remained muted. Private sector credit growth fell to a 22-year low of 6.5 per cent, while imports of capital goods and machinery declined by over 10 per cent, reflecting subdued private and public investment. Political uncertainty ahead of the February 2026 national election has compounded the slowdown, with businesses adopting a cautious “wait-and-see” approach.
The labour market has also weakened, with the labour force participation rate falling from 60.9 per cent to 58.9 per cent between 2023 and 2024, driven largely by a sharp decline in female participation. The employment-to-working-age population ratio dropped by 2.1 percentage points to 56.7 per cent, while unemployment edged up to 3.7 per cent. All major sectors shed jobs, with services suffering the steepest losses. The national poverty rate rose to 21.2 per cent in FY25, pushing an additional 1.2 million people below the poverty line.
Inflation, though easing slightly in recent months, remained stubbornly high at an average of 10 per cent in FY25, up from 9.7 per cent a year earlier. Food prices, which peaked at 13.8 per cent in late 2024, drove much of the increase. The recent moderation has been attributed to exchange rate stability, a tighter monetary stance, reduced import duties on essentials, and strong harvests. However, real wages for low-income workers have continued to lag behind inflation, eroding purchasing power.
The banking sector remains a major source of concern. Following tighter regulatory standards, non-performing loans (NPLs) surged to 24.1 per cent by March 2025, more than triple the South Asian average of 7.9 per cent. The capital adequacy ratio fell to 6.3 per cent, well below the regulatory minimum of 10 per cent, raising fears over systemic stability. In response, authorities have launched wide-ranging banking sector reforms, including a new Bank Resolution Ordinance and plans to strengthen deposit protection and improve governance, particularly in state-owned banks.
Fiscal pressures have intensified as well. The budget deficit widened to 4.7 per cent of GDP in FY25, up from 3.9 per cent the previous year, amid falling tax revenue and rising subsidy and interest payment costs. Tax revenue dropped to 6.8 per cent of GDP, while current expenditure rose sharply to 9.2 per cent of GDP. The World Bank and the International Monetary Fund (IMF) have reclassified Bangladesh’s risk of debt distress from “low” to “moderate,” with public debt now standing at 38.1 per cent of GDP.
Looking ahead, the World Bank projects a modest recovery, with growth rising to 4.8 per cent in FY26 as inflation eases and private consumption strengthens. However, the outlook is clouded by significant risks, including potential banking sector instability, heightened political tensions ahead of the election, delayed reforms, and global trade disruptions. Public debt is expected to climb further, reaching 41.7 per cent of GDP by FY27.
Bangladesh’s planned graduation from Least Developed Country (LDC) status in November 2026 presents both opportunities and challenges. Preferential tariff access to the European Union — its largest export market — will continue until 2029, providing breathing room for deeper structural reforms. Policymakers are urged to accelerate revenue mobilisation, strengthen financial governance, and pursue spatially targeted urbanisation strategies to boost job creation and inclusive growth.
Despite its resilience, Bangladesh’s economy stands at a critical crossroads. Without decisive reforms and renewed investment momentum, sustaining growth and reducing poverty could become increasingly difficult in the years ahead.
Farrukh Khosru
