World Bank urges fiscal reforms to sustain Bangladesh's growth

The latest Bangladesh Development Update highlights the recent economic developments and outlook for the medium term, with a special focus on financial sector stability. After a fall in real GDP growth to 4.2 per cent in FY24 from 5.8 per cent in FY23, economic activity slowed further in FY25. The economy continues to face significant challenges, including investment moderation, elevated inflation and vulnerabilities within the financial sector. However, external sector pressures have apparently eased, with robust growth in remittance inflows and exports bolstering the current account balance in FY25.

Real GDP growth is projected to further moderate to 3.3 per cent in FY25 due to declining private and public investment. Political uncertainty and rising costs associated with borrowing and inputs are expected to constrain private investment growth and keep industrial growth subdued. Public investment will decline as the government reduces capital expenditure in FY25. The fiscal deficit is expected to remain under 5 per cent of GDP in the medium term, with capital expenditure increasing only gradually. Inflation is likely to remain elevated in the near term.

“Multiple shocks over the past decade have left South Asian countries with limited buffers to withstand an increasingly challenging global environment,” said Martin Raiser, World Bank vice president for South Asia. “The region needs targeted reforms to strengthen economic resilience and unlock faster growth and job creation. Now is the time to open to trade, modernise agricultural sectors, and boost private sector dynamism.”

“Bangladesh will need bold and urgent reforms to bolster the financial sector, facilitate trade, and enhance domestic revenue mobilisation,” Gayle Martin, World Bank interim country director for Bangladesh, said in a press release.

Real GDP is expected to rise gradually in the medium term, if backed by critical reforms. Inflation is expected to gradually subside in the medium term on the back of tight monetary policy, fiscal consolidation and easing import restrictions on key food commodities. Rising trade uncertainties are expected to put pressure on the external sector.

“The risks to the outlook are on the downside as uncertainties related to trade, persistent inflationary pressure, weak demand in Bangladesh's major export markets, and intensifying financial sector vulnerabilities could weigh on growth,” said Dhruv Sharma, World Bank senior economist and co-author of the report.

Fibre2Fashion News Desk (RR)