Economy set for gradual recovery despite continued pressure

Staff Reporter :

The economy of Bangladesh will continue to face inflationary pressures, financial sector vulnerabilities, and political uncertainty in the current fiscal year of 2024-25, according to the World Bank (WB).

The organisation estimates that citizens may experience some relief as inflation is expected to moderate by the end of FY25.

Overall inflation is projected to
decline to 9 percent in FY25 from 9.7 percent in FY24, and further to 7.5 percent in FY26, according to the WB’s October edition of the Bangladesh Development Update, released on Tuesday.

Regarding inflation, Dhruv Sharma, World Bank senior economist and co-author of the report, stated: “Though we have seen significant disruption in the first quarter, by the end of this fiscal year, inflation will come down.

” He added that while inflation is expected to remain elevated in the near term, it should gradually subside in the medium term if supply-side issues stabilize and prudent monetary and fiscal policies are maintained.

The WB update also stated that Bangladesh’s gross domestic product (GDP) will decrease by 4 percent in FY25 but may rise to 5.5 percent in FY26.

The report emphasized that global and domestic factors have created a challenging macro-fiscal environment for the country.

“Political uncertainty, inadequate law enforcement, and labor unrest in industrial areas have continued to hinder the full normalization of economic activities,” the WB noted.

It is projected that GDP growth will decelerate to 4 percent in FY25, driven by subdued investment and industrial activities, before accelerating to 5.5 percent in FY26 and returning to a robust growth trajectory soon after.

Bangladesh also faces increasing income inequality, particularly in urban areas. From 2010 to 2022, the country’s Gini index-a measure of income inequality-increased by nearly three points, from 0.50 to 0.53.

The report highlights the need for urgent and bold reforms to help the country return to a path of strong, inclusive, and sustainable growth.

Despite the overall unemployment rate declining between 2016 and 2022, young people, especially in urban areas, face significantly higher unemployment rates. Job availability has declined for urban, educated youth, and job creation in large industries, such as the readymade garment sector, has stagnated.

“In recent years, Bangladesh’s growth has not translated into job creation for the large number of youths entering the job market every year.

Particularly, educated youth and women face difficulties in finding jobs to meet their aspirations,” said Abdoulaye Seck, World Bank country director for Bangladesh and Bhutan.

On the external front, the current account deficit narrowed to $6.5 billion in FY24, thanks to a contraction in imports and strong remittances. Although remittances declined in July due to disruptions, they rebounded. The balance of payments deficit also improved.

“In May 2024, Bangladesh Bank implemented a crawling peg exchange rate system as a step towards a market-driven exchange rate system.

This led to a narrowing of the gap between formal and informal exchange rates.

While the banking sector faces tight liquidity conditions and elevated non-performing loans, Bangladesh Bank has made restoring discipline and stability in the sector a priority alongside managing inflation,” Sharma explained.

The Bangladesh Development Update provides an assessment of the state of the economy, poverty trends, economic outlook, risks, and key reform challenges.

It covers developments in the real sector, inflation, monetary and financial sectors, external sector trends (focusing on balance of payments, foreign exchange reserves, and exchange rates), and fiscal outcomes (focusing on revenue mobilization, public expenditures, and deficit financing).

Meanwhile, according to Bangladesh Bureau of Statistics (BBS) data, in the first quarter of FY25, the consumer price index (CPI) increased by an average of 10.7 percent. Food inflation rose to 14.1 percent in July and averaged 11.9 percent in the first quarter.

The World Bank report further noted that inflation increased as supply chains were disrupted by social and political unrest during the political transition on August 5.

However, inflation is showing signs of easing as challenges to the food supply system begin to resolve.

On the monetary side, Bangladesh Bank has maintained a tight monetary policy during the first quarter of FY25 to address high inflation.