Bangladesh

Gradual and fragile recovery in growth

Bangladesh’s economy is gradually recovering after three fiscal years marked by sustained inflation, political and social unrest, in addition to slowing growth. Although the political and social context remains fragile, private consumption (70% of GDP) is expected to benefit in 2026 from household support measures, as well as from strong remittance flows (6% of GDP in 2024), notably from Gulf countries (43% of the total) and the US (16%). Furthermore, inflation slowed in 2025 after spiking to levels not seen in over a decade, driven by a sharp depreciation of the taka and rising energy prices. This easing trend is largely due to a more stable exchange rate, supported by the introduction of a crawling peg regime in May 2024. Adjustments to import taxes also helped contain imported inflation. Although still high, inflation stood at 9% over the first eight months of 2025, i.e., one percentage point lower than for the same period in the previous year. Moderating global energy prices, along with continued purchasing power support measures such as subsidies for fertiliser purchases to reduce agricultural costs, should help ease inflationary pressures.

Exports are also expected to recover after being severely affected in 2023 and 2024 by social unrest that disrupted the country’s industrial activity. Garments account for 80% of the country’s exports and continue to benefit from Bangladesh’s comparative advantage over labour costs. However, this competitiveness, which is supported by a large pool of young workers, is being tested following the introduction in August 2025 of a 20% tariff on exports to the US. Moreover, the anticipated lifting of its “Least Developed Country” status by November 2026, along with the gradual removal of garment sector subsidies required to comply with World Trade Organization rules, underscores the challenges ahead to maintain export competitiveness.

In the event of any depreciation in the taka and softer inflation, the central bank could slightly ease its monetary policy in 2026, after raising interest rates five times during the 2024 calendar year. The decision could support a recovery in private investment. However, political uncertainty and banking system vulnerability are likely to weaken investment growth. Bangladeshi banks are undercapitalised and face a much higher non-performing loan (NPL) ratio than in neighbouring countries. The NPL stood at 24.1% in March 2025, compared to an average of 7.9% for South Asian banks.

Stabilisation of the public deficit and limited pressure on foreign exchange reserves

In its budget for fiscal year 2026 (ending in June 2026), the government proposed a total spending package that was lower than the budget passed the previous year. However, the latest budget is 6.2% higher than actual expenditures, which fell short of projections once the 2025 fiscal year was revised. While public services (24% of total spending) and interest payments (15%) account for the two largest expenditure items, strong emphasis has been placed on education (14%) and transport infrastructure development (9%). On the revenue side, the economic recovery is expected to support tax collection, which would represent 63% of total revenues. The budget anticipates an 8.9% increase in tax revenues which would enable a reduction in the fiscal deficit. Nevertheless, the forecast is based on slightly overoptimistic growth assumptions. As such, a trajectory of deficit stabilisation (as a percentage of GDP) appears more likely. Reflecting the composition of its debt, the government plans to borrow primarily from domestic sources (57% of total deficit financing). External public debt risks, which rose between 2022 and 2024 due to depleted foreign exchange reserves on back of rising import prices and taka depreciation are now easing. Reserves stood at USD 31.4 billion in September 2025, up 26% from the previous year, and cover 4.2 months of imports (based on import volumes from the first half of calendar year 2025).

The current account balance was in very slight positive terrain (USD 149 million) in fiscal year 2025, which was the first time in eight years. Rising secondary income fuelled by expatriate remittances (+26.8% in US dollars) offset the declining trade deficit after an improved export performance (+7.7%). The current account balance is expected to return to a slight deficit in 2026. The normalisation of private consumption, coupled with a softening of import restrictions implemented in 2024 amid a shortage of foreign currency, should support import growth, which will widen the trade deficit. The latter is structural, as Bangladesh is traditionally dependent on imports for goods that are essential to its economy, such as energy, textile fibres and fabrics, in addition to certain foodstuffs (wheat, sugar, etc.). In addition, remittances, although still significant, could be affected by the slowdown in the US, which is an important source. However, the deficit will be financed by international aid and FDI. This will curb pressure on foreign exchange reserves, which are limited.

A tense and uncertain political and social landscape

In response to violent protests, Sheikh Hasina, representative of the Awami League (AL), ended her fifth term as Prime Minister of Bangladesh in August 2024. The protest movement, which was triggered by the cancellation of a reform of the quota system in public employment, spilled over to affect an already tense political and social landscape. The main opposition party, the Bangladesh Nationalist Party (BNP), had boycotted the January 2024 elections. In those elections, the AL won 271 of the 350 parliamentary seats. Turnout was very low - officially 40% compared to 80% in 2018 - although the actual figure may have been even lower. The BNP denounced the election as fraudulent and disputed the results, which exacerbated tensions.

Following the Prime Minister’s resignation, President Mohammed Shahabuddin appointed Muhammad Yunus, winner of the 2006 Nobel Peace Prize, to head an interim government that was tasked with restoring stability and preparing fresh elections to reconstitute Parliament. The latter had been dissolved by the President following Sheikh Hasina's resignation. However, this government faces a tense political climate, marked by dissension between political parties, public mistrust and difficulties in maintaining public order. New protests broke out in October 2025, this time in response to the proposed democratic charter. The charter was subsequently signed by 25 political parties but notably excluded a party recently founded by students who were the leading figures in the 2024 protest movement. The fragile context, along with the prospect of an election in 2026 in which the AL is unlikely to take part, is adding to the uncertainty. Furthermore, the political context is hindering the introduction of economic and governance reforms and is weighing on investor confidence. As a result, although net foreign direct investment (FDI) flows rebounded in fiscal year 2025 (+20% year-on-year), they remain below the level posted in fiscal year 2022, i.e., before the unrest.

On the diplomatic front, the arrival of the interim government marked the beginning of a strategic rebalancing of international relations, which until then had been largely centered around India, the country's second-largest source of imports (12% of the total). Ms. Hasina's years in power had been marked by a rapprochement with New Delhi. Since the fall of the government, relations have deteriorated with India, where the former prime minister has taken refuge. India has restricted imports of clothing, fruit, and processed food from Bangladesh from May 2025. The decision follows a similar measure taken by the Bangladeshi administration on Indian wool products. In an effort to diversify its partnerships, the interim government has turned to other partners, particularly China and Pakistan, and also the EU and the US, which are its main export markets, accounting for 47% and 18%, respectively. In addition to negotiations on a trade agreement with the US to reduce the tariff rate applied to Bangladeshi exports (set at 20% at the time of writing), Muhammad Yunus said he was holding discussions on governance and human rights.

Last updated: October 2025