Bangladesh Growth Slows to 3.9% Amid Middle East Conflict, Poverty Rises

The latest Bangladesh Development Update projects growth to slow to 3.9 per cent in FY26.

A protracted conflict in the Middle East could have significant implications for Bangladesh, including higher inflation, reduced fiscal space from rising energy subsidies, and a weaker current account due to higher import costs, weaker exports, and lower remittances.

With thin foreign exchange buffers, tight fiscal and monetary conditions, and a fragile banking sector, Bangladesh has limited capacity to absorb a prolonged shock and to mitigate its impact on its people, notably the most vulnerable.

However, sustained political stability after the 2026 elections and rapid progress on structural reforms can support a stronger recovery.

The report underscores the need for urgent policy and institutional reforms to restore macroeconomic stability, boost revenues, strengthen the financial sector, and improve the business environment so the country can create jobs and stay on the path to 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," he added.

Inflation remained high at 8.5 per cent in FY26, with both food and non-food inflation elevated. Wages of low-income workers have not kept up with prices, reducing their purchasing power. The national poverty rate increased to 21.4 per cent in 2025 from 18.7 per cent in 2022, adding 1.4 million more poor people in 2025. Prior to the conflict in Middle East, about 1.7 million people were projected to get out of poverty this year, but due to conflict, now only 0.5 million people can exit poverty.

Financial sector vulnerabilities remain high. The non-performing loan ratio stood at 30.6 per cent in December 2025. Capital adequacy fell in aggregate below the regulatory minimum, leaving several banks with limited loss-absorbing capacity, and highlighting the need for prompt and decisive action.

External sector pressures eased in FY25 and the first half of FY26, supported by strong remittances. The adoption of a more flexible exchange rate regime in mid-2025 helped stabilize the Taka and rebuild foreign exchange reserves. However, exports remain vulnerable to external shocks, and foreign direct investment remains low. In FY25, Bangladesh's tax-to-GDP ratio fell below 7 per cent for the first time in 15 years, limiting the country's ability to invest in priority sectors.

While a small group of large, export-oriented firms, such as the ready-made garments sector have driven growth, most of the small and medium enterprises face high regulatory costs, unreliable infrastructure, and limited access to finance. Targeted smart deregulation, stronger competition policy, competitive neutrality for state-owned enterprises, streamlined trade policies, and improved electricity reliability are critical to private-sector led growth and jobs creation.

"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," he added.

The Bangladesh Development Update is a companion piece to the South Asia Economic Update, the World Bank Group's regional report that examines economic prospects and policy priorities across South Asia, also released today.

South Asia's growth is expected to slow to 6.3 per cent in 2026--from 7 per cent in 2025--due to disruptions in global energy markets. Growth is projected to recover to 6.9 per cent in 2027. Despite the near-term slowdown, South Asia continues to grow faster than 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.

"Countries need to implement critical policy reforms to sustain growth, create jobs, and increase resilience to shocks. Cross-cutting policies to improve public infrastructure, remove trade barriers, foster business-friendly environments, and mobilize private capital can diversify sources of growth and also create the jobs that are needed to reduce poverty and share prosperity."

The regional report also includes an in-depth analysis of the region's use of industrial policy--the range of policy tools governments are using to shape what an economy produces, rather than leaving it to markets alone. Governments around the world are increasingly using industrial policy, and in South Asia industrial policies are implemented at roughly twice the rate of other emerging economies. But these measures have delivered mixed results in South Asia.

"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. "While broad-based reforms remain the priority, well-calibrated industrial policies could address specific market failures, including through measures such as industrial parks, skill development programs, market access assistance, and improving export quality standards."

- ANI