World Bank Sounds Alarm Over Bangladesh Slowdown

The World Bank has sounded a fresh alarm over Bangladesh’s faltering economy, warning that deep-rooted structural weaknesses, mounting financial-sector vulnerabilities and persistent energy bottlenecks are threatening investment, job creation and a return to stronger growth.

In its latest Bangladesh Development Update, released Tuesday, the global lender projected economic growth at just 3.4 per cent in FY26 and FY27, underscoring the depth of the challenges confronting the economy. 

Growth could recover to 3.9 per cent in FY28 if energy supplies gradually improve and the government accelerates its reform drive, it observes.

The World Bank said weak domestic revenue mobilisation, financial-sector fragility and energy constraints are combining with global uncertainties to suppress private investment and economic activity. 

It called for fast and bold reforms in banking, revenue collection and energy to prevent a prolonged downturn and put Bangladesh back on an inclusive growth path.

“To avert economic downturn and return to an inclusive growth path, driven by private investment, fast and bold reforms are needed in banking sector, domestic revenue mobilisation, and energy sector,” said Jean Pesme, World Bank Division Director for Bangladesh and Bhutan.

“The country needs to respond with urgency and speed up the reforms essential for protecting the poor and creating more and better jobs. The time to act is now,” he added.

Despite the domestic strains, Bangladesh’s external sector has shown resilience, supported by strong remittance inflows and an improvement in foreign exchange reserves, the report said.

The World Bank’s latest assessment was presented at its Dhaka office, with Franziska Ohnsorge, World Bank Chief Economist for South Asia, presenting the South Asia Economic Update. World Bank Senior Economists Dhruv Sharma and Nazmus Sadat Khan jointly presented the Bangladesh Development Update. Pesme chaired the session and also spoke.

The report identifies three immediate priorities for Bangladesh: easing energy constraints, repairing the financial sector and mobilising domestic revenue.

On energy, the World Bank urged Bangladesh to increase domestic gas production, upgrade LNG infrastructure and diversify fuel sources to ease persistent supply constraints. It also recommended greater investment in electricity transmission and distribution to improve reliability and reduce system losses.

The lender called for a faster expansion of renewable energy, energy storage and energy-efficiency measures through transparent and competitive procurement. Greater regional electricity trade and increased private-sector participation should also be encouraged, it said.

The energy crisis has become an increasingly serious impediment to industrial activity and investment, with unreliable supplies and high input costs putting additional pressure on businesses already struggling with weak demand and elevated financing costs.

The financial sector emerged as another major fault line. The World Bank called for the completion of asset-quality reviews and time-bound restructuring of banks based on their viability and appropriate burden-sharing.

It also urged stronger governance and transparency through legal and regulatory reforms, the gradual withdrawal of regulatory forbearance and improvements to the framework for resolving non-performing loans.
The lender further recommended clarifying the use of the deposit protection fund and establishing an emergency liquidity assistance mechanism to strengthen financial stability.

On revenue mobilisation, the World Bank urged Bangladesh to separate tax policymaking from tax administration and accelerate the digitalisation of tax collection through integrated taxpayer databases and identification numbers.

It also called for phasing out poorly targeted tax exemptions and incentives, simplifying VAT by consolidating rates and reducing exemptions, and strengthening the administration of direct and property taxes.

The revenue reforms are particularly critical as Bangladesh continues to struggle with one of the weakest tax-to-GDP ratios among comparable economies, leaving the government with limited fiscal space to finance development, social protection and essential public services.

The report also sounded a warning over gaps in Bangladesh’s social safety net, saying that social protection, energy and agricultural subsidies help shield poor and vulnerable households but about half of the poorest households remain outside social protection programmes.

Better targeting, it said, could substantially improve the impact of existing programmes without necessarily requiring a sharp increase in public spending.
The World Bank highlighted the government’s Dynamic Social Registry, an integrated system designed to support evidence-based targeting and continuous enrolment of beneficiaries, as critical to closing coverage gaps.

It estimated that the Family Card alone could keep an additional 1.58 million people out of poverty. A broader package combining Family Card consolidation with better targeting of existing cash and food programmes could lift an additional 2.85 million people out of poverty, it said.

The lender recommended linking the Dynamic Social Registry with the Family Card and other benefit schemes, including the proposed Farmer Card and subsidy programmes.

Rather than simply cutting subsidies, Bangladesh should shift from broad-based support towards better-targeted and shock-responsive assistance, the report said.

Meanwhile, the broader South Asian economy remains comparatively resilient despite a difficult global environment. Regional growth is projected at 6.9 per cent this year, driven largely by strong domestic demand, before slowing to 6.7 per cent in 2027 as global headwinds intensify.

“South Asia has demonstrated remarkable resilience in a challenging global environment. But the region needs to invest in new drivers of growth to sustain momentum and create more jobs,” said Johannes Zutt, World Bank Vice President for South Asia.

He said South Asian countries must seize the opportunity presented by rapidly expanding global AI value chains by investing in skills, infrastructure and an enabling business environment.

The report also examines how strategic adoption of artificial intelligence could create new sources of growth. While AI adoption is rising across South Asia, the region remains well behind advanced economies, highlighting both a development challenge and a potentially significant opportunity for countries willing to invest in technology, skills and infrastructure.