Economy on edge: growth slows, poverty rises

Bangladesh is facing a period of unprecedented economic vulnerability, with the World Bank warning that a convergence of slowing growth, entrenched inflation, a fragile banking system and a sharp decline in private investment is threatening the country’s overall financial stability.

The World Bank projects real GDP growth to drop to 3.9 per cent in FY2026, marking the third consecutive year of slowdown and a sharp break from the 7 per cent-plus growth the country maintained for much of the past decade.

The findings were presented on 18 May at a joint event hosted by the Policy Research Institute of Bangladesh and the World Bank, titled “Bangladesh Development Update: Special Focus – A Business Environment that Delivers Jobs.”

Economists, policymakers and business leaders attended, with Mahmud Hasan Khan as chief guest and Zaidi Sattar as chair.

The slowdown is already hitting households hard.

An estimated 1.4 million people fell into poverty in 2025, pushing the national poverty rate from 18.7 per cent in 2022 to a projected 21.4 per cent in 2025.

Rising prices and weak wage growth have caused real incomes for low-skilled workers to turn negative across agriculture, industry, and services.

Inflation remains entrenched at 8.5 per cent during July–February of FY2026, with both food and non-food prices persistently
high.

Supply chain inefficiencies and corruption, alongside demand pressures, are key drivers, the World Bank said.

The report flagged the banking sector as a critical weak point.

Regulatory capital stood at just 4.6 per cent in June 2025, less than half the 10 per cent minimum, with 22 banks controlling nearly half of total banking assets undercapitalised.

Non-performing loans have surged following stricter classification rules and restructuring, exposing deep asset quality issues, particularly in Islamic and state-owned banks.

Private sector credit growth slowed to 6 per cent in February FY2026, down from 6.8 per cent a year earlier, as government borrowing increasingly crowds out private lending.

The World Bank warned that urgent recapitalisation, faster resolution of bad loans, and stronger supervision are essential to prevent systemic risks from escalating.

Although the fiscal deficit narrowed slightly to 3.5 per cent of GDP in FY2025, tax revenue fell to 6.9 per cent of GDP – the lowest in 15 years – sharply limiting fiscal space.

Rising subsidies and persistent current expenditures have crowded out development spending, while public debt rose to 39.5 per cent of GDP, up from 37.6 per cent in FY2024.

The report urged comprehensive tax reform, including VAT restructuring and stronger tax administration.

Job creation has failed to keep pace with the growing working-age population.

Employment growth has increasingly shifted to low-productivity agriculture, while manufacturing and services have slowed.

For women, all employment gains since 2016 have come from agriculture, reversing progress in sectors such as garments.

The private sector is highly concentrated, with a small group of export-oriented firms – mainly in garments – generating 75 per cent of revenue and 70 per cent of exports, yet providing only 15 per cent of employment.

SMEs and informal businesses provide most jobs but receive limited support.

Business regulations remain a major obstacle, with senior managers spending up to 60 per cent of their time on compliance in some regions and formal business start-ups costing up to $10,000.

The World Bank highlighted the Middle East conflict as a major threat, warning that disruption of remittances and rising import costs could worsen inflation, squeeze household incomes, and strain fiscal and external balances.

The report recommends a two-stage strategy. Short-term priorities include tight monetary policy, rebuilding foreign exchange reserves, stabilising the banking sector, and increasing domestic revenue.

Medium-term reforms focus on infrastructure, business regulation, skills development, and female labour participation.

“Smart deregulation,” greater competition, expanded private investment, and stronger SME support are vital to ensure growth translates into sustainable employment.