Originally posted in East Asia Forum on 18 April 2026
In Brief
Bangladesh is set to graduate from least developed country status in November 2026. Yet low growth and high inflation point to a weakened economy facing persistent challenges in investment, banking sector stability, revenue collection and export growth. Without improvements in productivity, diversification and competitiveness, the gradual phase-out of Bangladesh’s trade preferences could bring substantial economic costs. Bangladesh needs coordinated reform in finance, revenue mobilisation and export competitiveness to restore growth, stability and resilience in this new chapter.
Long regarded as a development success story, Bangladesh has lifted millions out of poverty in the past 50 years through steady growth driven by agriculture, export-driven industrialisation, remittances and strong domestic consumption. But in recent years, the economic environment has deteriorated, with slowing growth, persistent inflation, declining investment and growing fiscal and banking vulnerabilities. As Bangladesh approaches graduation from least developed country (LDC) status in November 2026, its economic adjustment will influence its development trajectory for years to come.
GDP growth has been subdued at 3.49 per cent in the fiscal year (FY) 2024–25, having declined steadily since 2022. The global economy is projected to slow, with international institutions forecasting 3.1 per cent growth in 2026 and 3.2 per cent growth in 2027. With a fragile outlook, policymakers face a delicate balance in supporting recovery while preserving macroeconomic stability.
Inflation also remains a pressing concern. Though the general point-to-point inflation eased slightly during 2025, it remains elevated and stood at 8.71 per cent in March 2026 amid high food inflation. With wage growth stagnating, many households continue to face falling real incomes, eroding purchasing power and constraining consumer demand, amplifying concerns about living standards.
Investment conditions remain challenging. Private-sector credit growth fell by 6.03 per cent year-on-year in February 2026, reflecting subdued investor confidence and tight lending conditions amid political uncertainty, regulatory unpredictability and ongoing weaknesses in the banking system. Structural constraints also underpin investment weakness, including energy shortages, skills mismatches and policy uncertainty.
The banking sector continues to slow economic recovery by limiting the effectiveness of monetary policy and restricting credit flows. Years of poor governance, weak oversight and repeated loan rescheduling have led to a substantial accumulation of classified (non-performing) loans. The interim government and the Bangladesh Bank have initiated several banking sector reforms, but their effectiveness depends on the commitment of the newly elected government.
Domestic resource mobilisation has been perennially low, with a 7.85 per cent revenue-to-GDP ratio in the 2024–25 fiscal year highlighting long-standing weaknesses in tax collection and compliance. Revenue growth was only 12.9 per cent between July 2025 and January 2026, far below its target of 34.5 per cent for 2025–26. Meanwhile, growth in public expenditure — particularly development spending — fell sharply. Reduced investment in infrastructure, health and education risks undermining long-term growth potential and social progress, especially as demographic pressures intensify.
While export growth was 8.58 per cent in the 2024–25 fiscal year, it dipped to –2.6 per cent from July to February 2026. Exports remain constrained by weak performance in the ready-made garments (RMG) sector, where heavy reliance exposes the economy to external shocks and shifts in global demand. Import growth signals a gradual revival in industrial activity, but raises concerns about the balance of payments and the need for a continued buildup of foreign exchange reserves.
Remittances have been increasing amid rising overseas employment, promoting external stability. Yet remittance flows remain vulnerable to the global economic situation and labour market restrictions in major destination countries. Market diversification and workers’ skills development are critical to maintaining strong remittance inflows.
Labour market dynamics point to structural challenges for inclusive growth. The labour force contracted by 1.74 million from 2023 to 2024, driven primarily by a 1.64 million drop in female participation — suggesting a reversal of earlier gains in gender inclusion.
Bangladesh’s graduation from LDC status reflects its development achievements, but it also entails the gradual withdrawal of trade preferences that currently support a large share of exports. Without improvements in productivity, diversification and competitiveness, the economy could face significant adjustment costs. Bangladesh’s economic prospects will depend on the government’s capacity to go beyond small tweaks and implement focused, time-specific reforms — most critically in financial sector stability, revenue collection and export competitiveness.
Financial sector stability is crucial for investment. The government needs to complete asset quality reviews for all troubled banks, publish the main findings, enforce quick resolutions and eliminate regulatory forbearance. Enhancing the independence of the central bank and adopting risk-based supervision are vital. Rebuilding trust and targeting credit towards productive investment will also require improving insolvency procedures, collateral recovery processes and credit information systems.
To reform revenue collection, Bangladesh should rationalise and simplify value-added tax, reduce reliance on indirect tax, phase out inefficient subsidies, eliminate tax exemptions and expand the tax base across various sectors. Improving tax administration via digital tools, risk-based audits and better compliance is essential. The interim government separated tax policy from administration, but the new arrangement is not yet functional, so strengthening governance and focusing on productive spending are crucial.
To prepare for LDC graduation, Bangladesh must boost export competitiveness by diversifying its product range and increasing productivity, particularly amid the slowdown in export income and declining RMG performance. This involves upgrading technology, developing skills, meeting global standards and negotiating favourable free trade agreements and comprehensive economic partnerships. Bangladesh must also reduce trade costs by enhancing port operations, modernising customs processes and improving energy reliability, helping emerging sectors beyond apparel succeed in international markets.
The next phase will be critical. Economic conditions are weak, yet with clear policy guidance, stronger institutional accountability and concrete actions, Bangladesh can restore trust, revive growth and guide the nation towards a more resilient and diversified economy.
Fahmida Khatun is Executive Director of the Centre for Policy Dialogue.
