Bangladesh’s economic recovery is losing momentum, with weaker investment and employment, persistent inflation, energy shortages and mounting weaknesses in the banking sector creating growing pressure on households and businesses, according to the World Bank’s October 2026 Bangladesh Development Update.
The report, titled Making Subsidies and Social Protection Work Better for the Poor, identifies banking sector stability, energy security, governance and stronger tax revenue mobilisation as key areas requiring reform. It also recommends gradually reducing broad-based subsidies and directing more support towards poorer and vulnerable households.
Growth falls to 3.4 per cent
The World Bank estimates that Bangladesh’s real GDP growth fell to 3.4 per cent in the 2025–26 financial year, down from 5.8 per cent in 2022–23, 4.2 per cent in 2023–24 and 3.5 per cent in 2024–25.
Growth slowed particularly sharply towards the end of the latest financial year. In the third quarter of 2025–26, the economy expanded by only 2.2 per cent, the weakest quarterly growth recorded since the Covid-19 pandemic.
A major factor was the contraction in investment. Private investment fell by 0.5 per cent during the year, while public investment declined by 0.7 per cent. Real exports of goods and services also dropped by 4.8 per cent.
Implementation of the Annual Development Programme fell to historically weak levels, partly because major infrastructure projects were reviewed, approval of new projects became more cautious and implementation capacity remained limited. The reduction in development spending added to the pressure on overall economic activity.
Industry and employment under strain
Industrial growth was around 2 per cent during 2025–26, while industrial output contracted by 0.3 per cent in the third quarter. It was the first quarterly contraction in the industrial sector since the pandemic.
Gas and electricity shortages have left many factories operating below capacity. Some businesses have reduced working hours, suspended production or cut jobs as a result of unreliable energy supplies.
Bangladesh was close to self-sufficient in gas until 2017, but imports now account for around one-third of total demand. Dependence on several major gas fields and the floating LNG terminals at Maheshkhali has also increased the vulnerability of the supply system. Disruptions at a single major facility can affect supplies across wider areas.
The slowdown has also affected the labour market, particularly women. Many women who lost jobs in manufacturing and services have subsequently left the labour force. Female labour-force participation declined from 42.8 per cent in 2022 to 38.4 per cent in 2024. A lack of a newer labour-force survey after 2025 means the most recent situation cannot yet be assessed with full precision.
Inflation eases but remains a burden
Average inflation declined from 10 per cent in 2024–25 to 8.7 per cent in the latest financial year. Point-to-point inflation stood at 8.3 per cent in August.
Despite the moderation, households continue to face significant pressure from high living costs. Higher electricity and energy prices, supply-side disruptions and growth in the money supply have contributed to keeping inflation elevated.
The average retail price of electricity rose by around 16.7 per cent. Wages for lower-income workers have failed to keep pace with rising prices, leaving their real wages negative again in August.
During 2025–26, money supply growth was supported by government borrowing from banks, current expenditure including subsidies and interest payments, remittance inflows and the central bank’s purchases of US dollars. Yet private-sector credit and productive investment did not increase at a comparable pace, raising concerns that additional liquidity could exert greater pressure on prices rather than production.
Poverty rises as household purchasing power weakens
The economic slowdown has also translated into higher poverty. According to the World Bank’s model-based estimate, the proportion of people living below the international poverty line of US$3 a day increased by 1.1 percentage points to 10.1 per cent in 2025–26.
Around 2.1 million additional people are estimated to have fallen below that threshold within a year.
Measured against Bangladesh’s national poverty line, the poverty rate has increased for a fourth consecutive year. It stood at 18.7 per cent in 2022 but is estimated to have risen to around 22.5 per cent in the latest financial year. Income inequality has also widened over the same period.
The report argues that government spending on social protection, electricity and energy support and fertiliser subsidies does not always reach those who need it most. Some relatively well-off households receive benefits, while many of the poorest remain outside formal support programmes.
Banking sector emerges as a major risk
The condition of the banking sector is described as one of the most serious risks facing Bangladesh’s economy.
The non-performing loan ratio rose from 20.2 per cent at the end of December 2024 to 33.2 per cent by June 2026. The situation is particularly severe in Islamic banks, where the ratio reached 58.9 per cent, while state-owned commercial banks recorded a ratio of 43.2 per cent.
The banking sector’s overall capital adequacy ratio fell to negative 2.6 per cent in December 2025, compared with a minimum regulatory requirement of 10 per cent.
The report also raises concerns about relaxed provisioning requirements. By March 2026, banks had been allowed to avoid maintaining provisions equivalent to around US$17 billion. Such measures can delay recognition of the full scale of losses and make it harder to assess the true financial condition of individual institutions.
Unsecured liquidity support from Bangladesh Bank to weaker banks reached Tk76,000 crore in June 2026. Asset-quality reviews of six Islamic banks have been completed, but progress in assessing other banks has remained slow.
The passage of bank resolution and deposit protection legislation has been viewed positively. However, repeated concessions and liquidity assistance to weak banks may delay the recognition of losses and the restructuring needed to restore their financial health.
Private-sector credit hits a 33-year low
Bangladesh Bank reduced its policy interest rate by 0.5 percentage points to 9.5 per cent on 30 July, marking the first policy-rate cut in six years.
The move has yet to translate into stronger private-sector borrowing. Credit growth to individuals and private businesses fell to 4.5 per cent in June, the lowest level in 33 years. Government borrowing, by contrast, grew by 30.4 per cent.
A decision on 29 June capped the difference between deposit and lending rates at 4 per cent for loans other than credit-card and consumer financing. The World Bank warned that such a restriction could make borrowing more difficult for small and higher-risk businesses.
Banks may become more inclined to lend to large companies or the government rather than small and medium-sized enterprises. That could weaken bank profitability and reduce their ability to rebuild capital.
Remittances provide relief as exports weaken
There was some positive news from overseas income. Remittances rose by 17.3 per cent in 2025–26 to a record US$35.6 billion.
However, the current-account deficit widened to around US$1.6 billion. Merchandise exports declined by 0.2 per cent, while imports increased by 10.5 per cent to US$71.1 billion. Petroleum import costs rose by 107 per cent.
Bangladesh has also faced greater pressure in the US apparel market. During the first six months of 2026, total US apparel imports declined by 7.1 per cent, while imports from Bangladesh fell by 5.3 per cent. Imports from Vietnam, Indonesia and Cambodia increased during the same period.
Net foreign direct investment fell by 15 per cent to around US$1.5 billion, equivalent to only 0.3 per cent of GDP. Although reinvested earnings by existing foreign companies increased, new equity investment fell sharply by 70.3 per cent.
The exchange rate remained broadly stable. The average interbank rate during 2025–26 was Tk122.10 per US dollar, rising to around Tk122.90 in August. Bangladesh Bank purchased a net US$6.4 billion from commercial banks during the financial year to manage appreciation pressure on the taka.
Weak revenue leaves government finances under pressure
The report also highlights persistent weaknesses in government revenue collection. In 2025–26, the National Board of Revenue collected 82.6 per cent of its target.
Total government revenue increased from 8 per cent of GDP to 8.3 per cent, with tax revenue accounting for around 7 per cent. A narrow tax base, tax evasion, administrative weaknesses and extensive tax exemptions continue to constrain revenue mobilisation.
Efforts to separate tax policy-making from tax administration have also failed to become fully effective.
At the same time, government expenditure increased from 11.4 per cent of GDP to 12.2 per cent. Current expenditure rose from 8.7 per cent to 9.7 per cent of GDP, while capital expenditure declined from 2.8 per cent to 2.5 per cent.
The potential introduction of a new government pay structure could add further pressure to public finances. If fully implemented, average basic salaries and allowances could rise by around 120 per cent, while pensions could increase by about 70 per cent. The additional cost could amount to around 0.6 per cent of GDP in the 2026–27 financial year.
Against this backdrop, the report points to a difficult policy challenge: Bangladesh needs to protect vulnerable households while restoring economic growth, strengthen banks without delaying the recognition of losses, improve energy security and raise public revenue without placing disproportionate pressure on lower-income people. The pace and quality of these reforms are likely to determine how quickly the economy can regain stronger and more sustainable growth.
