B Mirror Report: Bangladesh’s economy is under increasing pressure as growth slows and poverty rises, according to the World Bank’s latest Bangladesh Development Update released on Wednesday.
The report forecasts economic growth to decline to 3.9% in FY2026, citing persistent inflation, weak private investment, and ongoing stress in the banking sector.
The World Bank warned that external risks, particularly the ongoing conflict in the Middle East, could further strain the economy. A prolonged conflict may lead to higher inflation, increased fiscal pressure due to rising energy subsidies, and a weaker current account driven by higher import costs, reduced exports, and lower remittances.
With limited foreign exchange reserves, tight fiscal and monetary conditions, and a fragile banking system, Bangladesh has little room to absorb prolonged external shocks, especially for vulnerable populations.
However, the report noted that political stability following the 2026 elections and faster progress in structural reforms could support a stronger recovery.
The World Bank emphasized the need for urgent reforms to restore macroeconomic stability, boost revenue collection, strengthen the financial sector, and improve the business environment to create jobs and sustain inclusive growth.
“Bangladesh’s growth has been supported by resilience, but without decisive structural reforms especially in revenue mobilization, the financial sector, and the business climate this resilience may not last,” said Jean Pesme, World Bank Division Director for Bangladesh and Bhutan.
He added that bold and immediate reforms are essential to return to a more resilient and inclusive growth path.
Inflation remained high at 8.5% in FY2026, with both food and non-food prices elevated. Low-income workers have seen their purchasing power decline as wages failed to keep pace with rising prices.
The national poverty rate increased to 21.4% in 2025 from 18.7% in 2022, pushing an additional 1.4 million people into poverty. Earlier projections suggested 1.7 million people would escape poverty this year, but due to the Middle East conflict, that number has dropped to just 0.5 million.
The financial sector remains a major concern, with non-performing loans reaching 30.6% in December 2025. Overall capital adequacy has fallen below regulatory requirements, leaving several banks vulnerable.
While external sector pressures eased in FY2025 and early FY2026 due to strong remittance inflows, risks remain. The introduction of a more flexible exchange rate in mid-2025 helped stabilize the taka and rebuild reserves, but exports remain vulnerable to global shocks and foreign direct investment remains low.
Bangladesh’s tax-to-GDP ratio also fell below 7% in FY2025 for the first time in 15 years, limiting the government’s ability to invest in key sectors.
The report noted that while large export-oriented industries, such as the ready-made garments sector, continue to drive growth, most small and medium enterprises face challenges including regulatory burdens, unreliable infrastructure, and limited access to finance.
It stressed the importance of targeted deregulation, stronger competition policies, improved trade facilitation, and reliable electricity supply to boost private sector-led growth.
“Improving the business environment is crucial to sustaining growth and absorbing a rapidly growing workforce,” said Dhruv Sharma, Senior Economist and lead author of the report.
He added that reducing regulatory uncertainty and easing constraints on businesses would help unlock private investment and create jobs.
The report accompanies the World Bank’s South Asia Economic Update, which projects regional growth to slow to 6.3% in 2026 from 7% in 2025 due to disruptions in global energy markets, before recovering to 6.9% in 2027.
Despite short-term challenges, South Asia is expected to remain the fastest-growing region among emerging and developing economies.
“Despite a difficult global environment, South Asia’s growth prospects remain strong,” said Johannes Zutt, World Bank Vice President for South Asia, urging countries to implement key reforms to sustain growth, build resilience, and reduce poverty.
The regional report also highlights the mixed outcomes of industrial policy in South Asia, noting that while such policies are increasingly used, their effectiveness has been limited by implementation capacity, fiscal constraints, and market size.
World Bank Chief Economist for South Asia Franziska Ohnsorge said that alongside broad reforms, well-designed industrial policies such as industrial parks, skills development, and export quality improvements can help address market gaps and support long-term growth.
