Fitch flags weak reforms, external vulnerability

* Fiscal weaknesses, inflation
* Slower growth prospects
* Banking sector concerns
* Debt outlook

Global credit rating agency Fitch Ratings has revised Bangladesh’s sovereign outlook to “negative” from “stable,” while affirming the country’s Long-Term Issuer Default Rating (IDR) at “B+.”

The agency cited rising external vulnerabilities and slow progress on structural reforms as key factors behind the decision.

In a statement issued from Hong Kong on 13 May, Fitch highlighted growing macroeconomic and external financing risks stemming from the ongoing conflict in the Middle East. Limited progress in implementing reforms aimed at strengthening policy frameworks, public finances, and the financial sector also contributed to the negative outlook.

Fitch further noted that persistent weaknesses in institutional governance are gradually reducing Bangladesh’s ability to absorb economic shocks. Nevertheless, the agency maintained the “B+” rating, pointing to moderate government debt levels and continued access to concessional external financing as mitigating factors.

The agency emphasised Bangladesh’s significant exposure to the Middle East, with nearly half of its remittances — equivalent to 3.5per cent of GDP in 2025 — coming from the region. Crude oil and petroleum products account for around 15per cent of total imports, or roughly $10 billion in 2025.

While strong remittance inflows in FY26 have provided short-term support to external finances, Fitch warned that uncertainty over the duration of the conflict poses substantial downside risks. The agency also cautioned that wider current account deficits, increased domestic demand for foreign exchange, or reduced external financing—including potential disruptions to the IMF programme — could place further pressure on the currency and reserves.

Fitch expressed concern over the new administration’s commitment to reform. Several key fiscal and financial sector reforms, including measures to strengthen banking governance and ensure the independence of public institutions, are under review. Constitutional reforms, including proposals on term limits for the prime minister and judicial independence, remain stalled.

Low government revenue relative to GDP continues to be a long-standing weakness, falling to 7.9per cent in FY25 from 8.3per cent in FY24. Fitch noted that revenue shortfalls, driven by tax exemptions, inefficient administration, and weak compliance, have contributed to widening fiscal deficits, projected to reach 3.6per cent of GDP by 2027.

Inflationary pressures remain elevated, partly due to shortages of essential commodities. Headline inflation eased to 8.71per cent in March 2026 from 9.13per cent in February but remains above the central bank’s FY26 target range of 6.5–7per cent. Recent fuel price hikes, including kerosene, diesel, petrol, and LPG, are expected to add further pressure. Fitch forecasts inflation will remain around 9per cent in FY27.

Fitch expects Bangladesh’s economy to grow by 3.7per cent in FY26 and 3.5per cent in FY27. The agency warned that sustained high energy prices and global uncertainty could weigh on growth, noting that ready-made garment exports have been declining due to weaker global demand, rising domestic costs, and diversion of some export orders following reciprocal tariffs.

The banking sector continues to face challenges, particularly among state-owned banks. The gross non-performing loan (NPL) ratio rose to 30.6per cent by December 2025, with most bad loans concentrated in state-owned institutions.

Fitch warned that NPLs could increase further once temporary regulatory forbearance measures end, posing contingent liabilities if financial stress intensifies. Private sector credit growth also slowed to 6per cent in January 2026 from nearly 10per cent two years earlier, dampening investment activity.

Fitch expects gross government debt to stabilise at around 38pc of GDP over the medium term, below the median for countries rated ‘B’. However, contingent liabilities from the banking sector, state-owned enterprises, and rising borrowing costs could pose risks.

The interest-to-revenue ratio rose to around 29pc by end-2025, more than double the ‘B’ median of 14pc, further increasing fiscal pressures.

External debt is primarily owed to bilateral and multilateral lenders, and Fitch expects continued financing from these sources to support debt-servicing capacity.