World Bank downgrades previous forecast as bad loans hit 33.2% of bank lending, energy shortages persist and poverty rises
Bangladesh’s economic growth is set to stagnate at 3.4 percent in FY2026-27, the World Bank warned, as severe energy shortages and a fragile banking sector compound the fallout from global geopolitical shocks.The downgrade from the Washington-based lender’s April estimates underscores a deepening industrial malaise in the South Asian economy. Once heralded as a regional growth engine, the country, whose growth has slowed steadily since FY2022-23, is increasingly hamstrung by a prolonged slump in private investment and rising operational costs. Industrial output grew just 2 percent in FY2025-26, and industry contracted in the third quarter for the first time since the pandemic.
Escalating conflict in the Middle East has exacerbated pre-existing domestic vulnerabilities. Surging energy tariffs and chronic fuel supply disruptions have battered the country’s industrial base, driving up overheads and steadily eroding Bangladesh’s international price competitiveness.Domestic gas output has declined, and imported liquefied natural gas (LNG) now covers about a third of gas demand. Failures at floating LNG import terminals at Maheshkhali cut supplies, forcing many factories to run below capacity or suspend operations and triggering widespread load-shedding. The government also ordered shopping malls to close early to curb peak electricity demand. Petroleum import bills more than doubled in FY2025-26.The outlook is subject to significant downside risks,” said the World Bank in its latest Bangladesh Development Update, released today. Banking sector vulnerabilities, it said, have intensified and pose growing systemic risks.
Non-performing loans reached 33.2 percent of total loans in June, up from 20.2 percent at the end of 2024. The sector’s capital adequacy ratio fell to negative 2.6 percent in December, against a regulatory minimum of 10 percent. Islamic and state-owned commercial banks are the worst hit, with bad-loan ratios of 58.9 percent and 43.2 percent, respectively.
Bangladesh Bank has propped up weak lenders with uncollateralised liquidity support of Tk 760 billion ($6.2 billion). The World Bank says this, along with continued regulatory forbearance, is delaying the repair of balance sheets. Private-sector credit growth has slumped to 4.5 percent, a 33-year low, as banks lend to the government instead.Beyond the banking sector, the cost to households is rising. The World Bank estimates that 10.1 percent of Bangladeshis lived below the $3-a-day international poverty line in FY2025-26, up 1.1 percentage points, leaving about 2.1 million more people in poverty.
Inflation, though easing from 10 percent in FY2024-25, averaged 8.7 percent in FY2025-26 and was 8.3 percent in August. The World Bank projects 8.6 percent for FY2026-27, with electricity tariffs and fuel prices rising again. Real wages for low-paid workers are still falling.
On the policy front, Bangladesh Bank reinstated a 4 percent cap on bank lending spreads in June and cut its policy rate by 50 basis points to 9.5 percent on July 30, its first reduction in six years. The World Bank urges removal of the cap, arguing it could squeeze bank profits and reduce lending to smaller and riskier borrowers.
On the external front, remittances provided a cushion. They rose 17.3 percent in FY2025-26 to a record $35.6 billion, limiting the widening of the current account deficit to 0.3 percent of GDP and helping rebuild foreign exchange reserves to more than $32 billion by August. The taka was broadly stable.
But garment exports, the backbone of the economy, weakened, with overall exports down 0.2 percent. A survey by the United States Fashion Industry Association, cited by the World Bank, shows US buyers’ use of Bangladesh as a sourcing base slipping to around 78 percent from 88 percent a year ago. The World Bank forecasts the current account deficit widening to 0.9 percent of GDP in FY2026-27.
Public finances are under growing strain. Revenue, at an estimated 8.3 percent of GDP, remains weak, with tax revenue stuck at 7-8 percent of GDP for over a decade, among the lowest in the world. National Board of Revenue collections reached only 82.6 percent of the FY2025-26 target.
A new public-sector pay scale, bank recapitalisation, subsidies and rising interest payments are projected to push the fiscal deficit from 3.9 percent of GDP in FY2025-26 to 4.8 percent in FY2026-27. Net borrowing from banks accounted for 81.5 percent of government financing in the first 11 months of FY2025-26, which the World Bank warns could deepen the link between sovereign and banking risks. Public debt is forecast to rise to 45.2 percent of GDP by FY2027-28, with interest payments at 2.6 percent of GDP.
The report’s special focus is on how the government spends money. Bangladesh devotes about 3.5 percent of GDP, or $17.4 billion, annually to energy and fertiliser subsidies and social protection, but much of it, the World Bank argues, is poorly targeted. In 2022, the richest fifth of households took a third of electricity subsidies, though the subsidies weigh far more heavily on poorer households’ incomes, while programmes meant for the poor excluded 62 percent of the poorest fifth of households and included 18 percent of the richest. Based on FY2018-19 data, the largest fifth of landholders receive half of the fertiliser subsidy.
Looking further ahead, the World Bank projects a modest economic recovery to 3.9 percent in FY2027-28. However, this rebound remains contingent on the stabilisation of global commodity markets, an easing of domestic energy constraints, and a renewed policy drive towards structural reform.
