Bangladesh’s economy is facing slowing growth, rising poverty and persistent inflation, alongside a stressed banking sector, weak revenue mobilization and subdued private investment, the World Bank said in its latest update released on Wednesday.
The Bangladesh Development Update projects growth to slow to 3.9% in FY26. The report said ongoing headwinds, including a conflict in the Middle East, could further weigh on the economy by raising inflation, increasing energy subsidies, narrowing fiscal space, and widening the current account deficit due to higher import costs, weaker exports and lower remittances.
With limited foreign exchange buffers, tight fiscal and monetary conditions, and a fragile banking sector, Bangladesh has restricted capacity to absorb prolonged external shocks and protect vulnerable populations, the report warned.
It added that sustained political stability following the 2026 elections and accelerated structural reforms could support a stronger economic recovery. The report called for urgent policy and institutional measures to restore macroeconomic stability, strengthen the financial sector, improve revenue mobilisation and enhance the business environment to support job creation and inclusive growth.
“Resilience has underpinned Bangladesh’s growth story. But, without decisive structural reforms, especially in revenue mobilization, the financial sector and the business environment, this resilience cannot last,” said Jean Pesme, World Bank Division Director for Bangladesh and Bhutan. “Bold and immediate reforms will be essential to returning to a more resilient and inclusive growth path and creating more and better-paid jobs.”
Inflation remained high at 8.5% in FY26, with both food and nonfood inflation elevated. The report noted that wages for low-income workers have not kept pace with rising prices, reducing purchasing power.
The national poverty rate rose to 21.4% in 2025 from 18.7% in 2022, adding 1.4 million people to poverty. Prior to the Middle East conflict, about 1.7 million people were expected to exit poverty in 2025, but that figure has now been revised down to 0.5 million.
Financial sector vulnerabilities remain significant. The non-performing loan ratio stood at 30.6% in December 2025. Capital adequacy has fallen below regulatory minimums in aggregate, leaving several banks with limited capacity to absorb losses and underscoring the need for prompt corrective action.
External sector pressures eased in FY25 and the first half of FY26, supported by strong remittance inflows. A more flexible exchange rate regime introduced in mid-2025 helped stabilise the taka and rebuild foreign exchange reserves. However, exports remain exposed to external shocks, and foreign direct investment continues to be low.
In FY25, Bangladesh’s tax-to-GDP ratio dropped below 7% for the first time in 15 years, limiting fiscal space for investment in priority sectors.
The report noted that while large export-oriented industries, particularly the ready-made garments sector, have driven growth, small and medium enterprises continue to face high regulatory costs, unreliable infrastructure and limited access to finance. It recommended targeted deregulation, stronger competition policy, competitive neutrality for state-owned enterprises, streamlined trade policies and improved electricity reliability to support private-sector-led growth.
“Improving the business environment is central to sustaining growth and absorbing a rapidly expanding workforce,” said Dhruv Sharma, Senior Economist and lead author of the report. “Reducing regulatory uncertainty, offering targeted deregulation, strengthening competition, and easing constraints to firm growth will help unlock private investment and jobs.”
The Bangladesh Development Update accompanies the South Asia Economic Update, the World Bank Group’s regional report on economic prospects and policy priorities in South Asia.
Growth in South Asia is projected to slow to 6.3% in 2026 from 7% in 2025, before recovering to 6.9% in 2027, largely due to disruptions in global energy markets. Despite the slowdown, the region is expected to continue outpacing other emerging-market and developing economies.
“Despite a challenging global environment, South Asia’s growth prospects remain strong,” said Johannes Zutt, World Bank Vice President for South Asia. He emphasised the need for policy reforms to sustain growth, create jobs and strengthen resilience through improved infrastructure, reduced trade barriers, business-friendly environments and increased private capital mobilisation.
The regional report also examined industrial policy across South Asia, noting that governments in the region are implementing such measures at roughly twice the rate of other emerging economies. However, the outcomes have been mixed.
“South Asia's mixed success on industrial policy in part reflects the region’s limited implementation capacity, fiscal space, and market size in some countries,” said Franziska Ohnsorge, World Bank Group Chief Economist for South Asia. She added that while broad-based reforms remain the priority, well-designed industrial policies could help address specific market failures through initiatives such as industrial parks, skills development programmes, market access support and improved export quality standards.
