Economy under mounting strain

Bangladesh’s economic recovery is losing momentum, with the World Bank sharply downgrading its growth forecast for the current fiscal year to 3.4 per cent, citing prolonged energy shortages, persistent weakness in the banking sector, subdued private-sector credit and tighter fiscal constraints.

In its October 2026 South Asia Economic Update, titled Adopting AI for Growth, the World Bank revised its forecast for Bangladesh’s gross domestic product (GDP) growth in FY2026-27 down by 1.2 percentage points from its previous projection.

The country is also facing persistently high inflation, weak export prospects and a prolonged contraction in private investment.

The report says the anticipated revival in economic activity following the restoration of political stability has yet to materialise.

Bangladesh’s growth outlook has consequently been downgraded repeatedly in recent years, making it an exception to the broader South Asian economic trend.

While South Asia is projected to grow by 6.9 per cent in 2026, Bangladesh is expected to expand at just 3.4 per cent in FY27, reflecting the combined impact of domestic structural weaknesses and external economic pressures.

The banking sector has emerged as one of the most serious constraints on economic recovery.

The World Bank describes it as being in a state of acute vulnerability, with the capital adequacy ratio falling to negative 2.6 per cent in March 2026. The non-performing loan (NPL) ratio rose to 32.8 per cent in June.

Real private-sector credit has also been contracting steadily since January 2025, restricting investment and contributing to the slowdown in industrial activity.

In response, the World Bank approved a US$450 million loan in June 2026 to strengthen the foundations of the banking sector.

The programme includes reforms of state-owned banks and improvements in the supervisory capacity of Bangladesh Bank.

Investment weakness is another major concern. Private investment contracted for the second consecutive year, as energy-sector difficulties, high production costs and elevated interest rates outweighed the benefits of reduced political uncertainty.

Industrial activity has continued to expand, but at a slower pace. The report identifies weak global demand for ready-made garments as a major factor behind the steady decline in exports since the second half of 2025.

Garment exports are expected to face further pressure in the short term from subdued demand in the European Union and, over the longer term, from increased international competition for market share.

Inflation remains a significant burden on households and businesses. The World Bank estimates that inflation stood at 8.7 per cent in FY26, substantially above Bangladesh Bank’s target of 7.5 per cent. It projects inflation to remain elevated at 8.6 per cent in FY27.

Persistently high prices, combined with job losses, have weakened household purchasing power. Real wages among low-paid workers declined by about 0.5 per cent over the year, highlighting the pressure on vulnerable sections of the population.

Energy shortages and rising international prices have added to the economic difficulties.

Bangladesh is particularly exposed to higher fertiliser import costs, with fertiliser imports equivalent to more than 0.4 per cent of GDP, around three times the average for other emerging market and developing economies. Approximately 20 per cent of these imports pass through the Strait of Hormuz.

To strengthen food security and address import requirements, Bangladesh received US$1.1 billion in emergency World Bank support. Of this amount, US$300 million is planned for financing imports of approximately 600,000 tonnes of fertiliser.

Despite weak exports and higher import prices, strong remittance inflows have helped contain pressure on the external balance.

The current account deficit remained at 0.6 per cent of GDP in FY26, although the report identifies continuing risks from weak export earnings and expensive energy imports.

The World Bank also warns that Bangladesh’s economic challenges must be addressed against a difficult regional and global backdrop.

Disruptions to shipping through the Strait of Hormuz have pushed up oil and liquefied natural gas prices, increasing costs for energy-importing economies.

A prolonged period of elevated energy prices could further intensify inflationary pressures and constrain economic activity.

Beyond immediate macroeconomic concerns, the report highlights the need to create more productive employment, improve workforce skills and strengthen the foundations for technological development.

Artificial intelligence (AI), it says, could provide opportunities to improve productivity, expand exports and create higher-paying jobs. However, Bangladesh’s national AI strategy remains at the draft stage, while inadequate skills, infrastructure and regulatory clarity could constrain adoption.

The World Bank recommends strengthening basic education and technical and vocational training, improving physical and digital infrastructure, creating a more business-friendly environment and establishing predictable regulations for AI use.

It also identifies tourism and agribusiness as sectors with potential to generate employment on a large scale, provided investment requirements and regulatory barriers are addressed.

The report’s overall assessment suggests that restoring sustainable economic growth in Bangladesh will require more than political stability.

Addressing banking sector vulnerabilities, reviving private investment, easing energy constraints, controlling inflation and diversifying exports will be critical to reversing the current slowdown.