Bangladesh GDP projected to grow at 3.4%, second lowest in South Asia

Bangladesh's economy has yet to deliver the rebound expected after the return of political stability, the World Bank warned in its latest "Bangladesh Development Update", sharply downgrading the country's growth forecast for the current fiscal year.

The global lender slashed Bangladesh's FY27 real GDP growth projection by 1.2 percentage points to 3.4%, down from 4.6% estimated in April. The new forecast falls below the 3.45% growth recorded during the FY20 pandemic shock and lags behind the government's 6.5% target.

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The update shows Bangladesh's projected growth is the lowest in South Asia after Afghanistan. By contrast, South Asia's economy is forecasted to grow to 6.7% in 2027.

Asked for a reaction to the report yesterday, Finance Minister Amir Khosru Mahmud Chowdhury offered a brief response: "Wait and see."

Economic activity and investment slowed during the interim government's 18-month tenure due to political uncertainty and law-and-order disruptions. While businesses expected a turnaround following the return of an elected government, the World Bank noted that structural bottlenecks continue to stall recovery about eight months into the new administration.

The update said the downgrade reflects "a more protracted drag from energy shortages, banking sector weakness, subdued credit growth and tighter fiscal constraints than previously anticipated".

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said Bangladesh's economic slowdown is the result of persistent weaknesses in several key drivers of growth.

He added that two priorities should guide the response: preventing existing problems from worsening and gradually addressing those that have already emerged.

Fahmida Khatun, distinguished fellow at the CPD, said weak investment, high business costs, uncertainty, and persistent banking-sector weaknesses are weighing on economic growth.

In response to the issues, she called for continued reforms in the banking sector.

Export growth to remain weak

The World Bank also warned that export growth is expected to remain weak.

"Exports of readymade garments will be slowed in the short term by weak demand in the EU, and in the longer term by increased competition for market share," the report said.

Last month, the Asian Development Bank also cut its FY27 growth forecast for Bangladesh to 4%, from 4.5% projected in July and 4.7% in April. Both the World Bank and ADB forecasts are well below the government's 6.5% GDP growth target for the current fiscal year.

In its new update, the World Bank estimated that Bangladesh's GDP growth slowed to 3.4% in the previous FY26 fiscal year, marking the third consecutive year of deceleration.

'The time to act is now'

Bangladesh's economic growth has slowed since 2023 amid persistent structural constraints and global uncertainty, the World Bank said. Longstanding financial-sector vulnerabilities, weak revenue mobilisation, energy bottlenecks and declining public investment have eroded the economy's resilience and constrained its growth potential.

Jean Pesme, World Bank division director for Bangladesh and Bhutan, said to avert economic downturn and return to an inclusive growth path, fast and bold reforms are needed in the banking sector, domestic revenue mobilisation, and energy sector.

"The country needs to respond with urgency and speed up the reforms essential for protecting the poor and creating more and better jobs. The time to act is now," he said.

Pesme identified the banking sector as a major risk, with the non-performing loan ratio rising to 32.2% in 2026 from around 20% in December 2024.

Weak bank capitalisation is another concern, he said, calling for asset quality reviews to be completed and viable banks to be restructured and recapitalised at fair value.

Private investment has also weakened significantly, with private-sector credit falling to a nearly 30-year low. The weak economic environment and uncertainty are discouraging businesses from investing and expanding, according to Pesme.

Pesme also highlighted weak revenue mobilisation, calling for modernising and digitalising the tax system, broadening the tax base and improving tax-expenditure management.

On energy, he urged stronger transmission and distribution systems, transparent pricing, better governance and greater use of renewable energy.

2.1m more poor in FY26 

Poverty and inequality increased in Bangladesh in FY26 as a prolonged economic slowdown, weak labour demand and persistent inflation eroded household welfare, said the report.

Poverty at the $3-a-day international poverty line rose an estimated 1.1 percentage points to 10.1% in FY26, leaving about 2.1 million more people in poverty than in FY25.

National poverty also rose for the fourth year, reaching 22.5% in 2026, up from 18.7% in 2022. It is projected to rise further to 22.8% in FY27 before edging down to 22.4% in FY28.

The Gini index, a measure of income inequality, increased by 0.9 points to 34.9 in FY26, leaving it 4 points above its 2022 level. The deterioration is expected to continue in the near term. Inequality is projected to widen, with the Gini index expected to reach 35.6 by FY28.

The deterioration is expected to continue, with the index projected to reach 35.6 by FY28.

Targeted support could lift 2.85m out of poverty

Weak labour demand and persistent inflation have reduced household incomes and, leaving many families vulnerable to future economic shocks, the World Bank said. 

Although Bangladesh spends about 3.5% of GDP annually on subsidies and social protection, nearly half of the country's poorest households receive no safety-net support, it said.

Effective deployment of the Family Card alone could protect an estimated 1.58 million people from poverty. Combining it with improved targeting tools and consolidating cash and food assistance could lift an additional 2.85 million people out of poverty, the report added.

Jean Pesme called for a gradual shift from broad-based subsidies towards targeted support to better protect vulnerable households.

Inflation to stay high, wage growth negative 

Inflation in Bangladesh is projected to remain elevated at 8.6% in FY27 before gradually moderating over the medium term, according to the World Bank.

The pace of moderation is expected to remain slow in the short term, weighed down by high domestic energy prices, persistent supply-side constraints and a less restrictive monetary policy stance, the lender said.

Lower global commodity prices, a stable exchange rate and favourable base effects could support a gradual decline in inflation over the medium term. 

Maintaining prudent monetary policy and avoiding inflationary financing to support the banking sector will be critical to keeping inflation under control.

Real wage growth among low-paid workers remained negative in FY26. Non-food inflation above 9% and higher energy and utility costs continued to erode workers' purchasing power.

What economists recommend

Zahid Hussain said banking, energy, trade and logistics, ports, transport and law and order are among the sectors currently holding back economic activity.

However, the energy crisis and high non-performing loans are not new problems, he said. "Therefore, the first task is to stop further deterioration. The banking system, energy supply and other basic business conditions must improve to revive investment."

The economist said weak growth is limiting job creation, which in turn is constraining wage and income growth. Prolonged high inflation is further eroding people's purchasing power.

"Growth is weak, employment is limited, incomes are not rising and inflation remains high. This combination reduces people's real purchasing power," he said.

Reducing poverty requires more than social assistance, he said. It needs addressing fundamental weaknesses in growth, investment, employment, banking and energy supply.

Fahmida Khatun said, "Private-sector investment remains weak as the cost of doing business is high and global geopolitical tensions have increased uncertainty," she said.

Slow implementation of public investment and weaker export demand are also holding back the economy, while prolonged low growth has contributed to persistent poverty, she said.

"Prolonged inflation has eroded people's purchasing power, particularly among low-income households, while wage growth has not been sufficient to offset rising prices," Fahmida said.

To address the issues, she said viable banks should have restructuring plans, professional management and clear deadlines, while non-viable banks should undergo orderly resolution to protect depositors and minimise the cost to taxpayers.

"Loan recovery must improve, and large defaulters shouldn't receive special treatment. Stronger governance, transparent reporting, and accountability for lending decisions are also essential," added the economist.

2nd lowest growth in South Asia

The World Bank, in its "South Asia Economic Update", said the region's growth has proved more resilient than expected despite elevated energy prices.

India is forecast to lead the region, with growth of more than 7% in FY27, supported by robust domestic demand and strong exports despite global headwinds. 

Bhutan is projected to be the region's second-fastest-growing economy, with growth of 6.7%. Sri Lanka's GDP is projected to grow 4.2%, although its recovery remains uneven.

Maldives' economy is expected to grow 2.2% in 2026 as tourism proves more resilient than expected. Its 2027 growth forecast, however, has been cut by 3.1 percentage points to 4.1%.

Pakistan's growth is projected to remain broadly stable at 3.8% in FY27, as elevated commodity and energy prices weigh on services and industry.

Nepal's growth is projected to slow to 3.7%, as flood damage to energy infrastructure weighs on industry, while disruptions to trade, transport and tourism constrain services.

Afghanistan, the region's slowest-growing economy, is projected to grow 3.3% in FY27.