Is Bangladesh going to be South Asia’s slowest-growing economy this year?

“Let’s wait and see.”

That was Finance Minister Amir Khosru Mahmud Chowdhury’s terse response on Tuesday when journalists asked him about the World Bank’s latest forecast for Bangladesh.

There is quite a lot to see.

The World Bank now expects Bangladesh’s economy to grow by just 3.4% in fiscal year 2026-27, a 1.2 percentage-point cut from the 4.6% it forecast in April.

If that projection proves correct, Bangladesh will record the lowest growth among the major South Asian economies apart from Afghanistan, an unusual position for a country that spent much of the previous two decades among the region’s faster-growing economies.

The contrast with the rest of South Asia is particularly stark. The World Bank expects India to grow 7.1% in FY27, Bhutan 6.7%, Sri Lanka 4.2%, Pakistan 3.8% and Nepal 3.7%. Afghanistan is projected to grow 3.3%. The Maldives is forecast to grow 4.1% in 2027.

South Asia as a whole is expected to expand 6.9% in 2026 and 6.7% in 2027, retaining its position as the world's fastest-growing region. Excluding India, however, regional growth is considerably weaker, with Bangladesh accounting for an important part of the downgrade.

Bangladesh is therefore not simply slowing alongside its neighbours. Its domestic problems are producing a considerably weaker recovery.

The World Bank estimates the economy grew only 3.4% in FY26, the third consecutive year of deceleration, after growth of 5.8% in FY23, 4.2% in FY24 and 3.5% in FY25.

At 3.4%, this year's forecast is even below the 3.45% growth recorded in FY20, when the Covid-19 pandemic disrupted economic activity.

That is also a long way from the government's own expectations.

The FY27 budget assumes GDP growth of 6.5%. The World Bank's forecast is barely half that rate. The Asian Development Bank is somewhat less pessimistic but last month cut its own forecast to 4%, from 4.5% in July and 4.7% in April.

The difference is not principally about political stability. The February election removed one source of uncertainty and Bangladesh's foreign-exchange position has improved.

The problem is that the underlying engines of growth — credit, investment, industrial production and household purchasing power — have not recovered with it.

Banks have money, but businesses are not borrowing it

The most immediate problem lies in the financial system.

Bangladesh's banking difficulties are no longer merely a balance-sheet problem. They have begun to affect the supply of capital to the real economy.

Private-sector credit growth fell to just 4.5% in June, the lowest rate in 33 years. Credit to the government, by comparison, expanded 30.4%.

That divergence matters.

Bangladesh's traditional growth model depends heavily on private investment: factories borrowing to expand capacity, manufacturers buying machinery, exporters financing orders and smaller companies obtaining working capital.

When credit to productive businesses barely grows while government borrowing expands rapidly, the financial system becomes less effective at supporting investment.

Borrowing is expensive as well. Bangladesh Bank cut its policy rate by half a percentage point to 9.5% in July — its first reduction in six years — but businesses still face lending rates commonly in the 13-17% range.

The reason banks are reluctant to lend is partly visible on their own balance sheets.

The banking system's non-performing loan ratio reached 33.2% in June, up from 20.2% at the end of 2024. Bad loans accounted for 58.9% of loans at Islamic banks and 43.2% at state-owned commercial banks.

The system-wide capital adequacy ratio, meanwhile, fell to minus 2.6% at the end of 2025, compared with a regulatory minimum of 10%.

Bangladesh Bank had provided 76,000 crore taka — about $6.2 billion — in uncollateralised liquidity support to weak banks by June.

There is potentially more stress beneath those numbers. Relaxed provisioning requirements meant banks had not been required to make provisions equivalent to about $17 billion through March, according to the World Bank.

The result is a banking system simultaneously dealing with bad assets, capital shortages and restructuring while being expected to finance an economic recovery.

That is difficult.

Private investment contracted for a second consecutive year in FY26. In real terms, private investment declined 0.5% and public investment 0.7%. The government's own medium-term projections put private investment at only 21.33% of GDP in FY27, compared with roughly 23-24% several years ago.

The World Bank's conclusion is straightforward: political stability alone has not been sufficient to restart investment.

Energy is constraining the factories that credit cannot finance

The second constraint is physical rather than financial.

Bangladesh's industrial sector grew only about 2% in FY26. Industrial production actually contracted 0.3% in the third quarter, its first quarterly contraction since the pandemic.

Gas and electricity shortages are an important part of the explanation.

Bangladesh was almost self-sufficient in natural gas until 2017. It now imports roughly one-third of its gas requirements, leaving the industry increasingly exposed to international LNG prices, foreign-currency availability and disruptions to import infrastructure.

Factories have consequently operated below capacity, reduced working hours or temporarily stopped production. Some have cut jobs.

The problem has become more acute as international LNG prices increased. Power Minister Iqbal Hasan Mahmud said last month that high LNG costs were hurting industrial growth while increasing the government's subsidy burden.

For a manufacturer considering a new factory, this creates two simultaneous obstacles: borrowing money is expensive and difficult, while securing reliable energy for the resulting production is uncertain.

That helps explain why the return of political stability has not produced the investment rebound initially expected by international lenders.

It also feeds inflation.

Average inflation eased from 10% in FY25 to 8.7% in FY26, but remained far above levels associated with Bangladesh's earlier high-growth period. The World Bank expects inflation at about 8.6% this year, compared with Bangladesh Bank's 7.5% target.

Retail electricity prices have increased by about 16.7%, while higher fuel and transport costs continue to work their way through the economy.

For households, persistent inflation means weaker real consumption.

Real wages among lower-income workers have again turned negative. The World Bank estimates national poverty increased from 18.7% in 2022 to 22.5% in FY26. At the international $3-a-day poverty line, another 21 lakh people fell into poverty during the last fiscal year.

This matters for GDP because household consumption is one of the principal sources of domestic demand. When prices rise faster than wages, households have less purchasing power even if nominal incomes increase.

Exports are providing less of an offset.

Real exports of goods and services fell 4.8% in FY26, while overall merchandise exports contracted 0.2%. Ready-made garment exports to the European Union fell 3.3%. US apparel imports from Bangladesh declined 5.3% during January-June 2026 even as imports from Vietnam, Indonesia and Cambodia increased.

The World Bank expects weak European demand and greater competition for garment market share to constrain exports further.

That leaves Bangladesh with weakness in three places at once: investment, industrial production and parts of external demand.

The government has less room to compensate

Governments can normally respond to weak private demand by investing more themselves.

Bangladesh has limited capacity to do so.

Domestic revenue amounted to only an estimated 8.3% of GDP in FY26, up marginally from 8% the previous year. That remains exceptionally low by international standards and leaves the state with little fiscal space.

At the same time, demands on that revenue are increasing.

The fiscal deficit rose to 3.9% of GDP last year. The World Bank expects it to reach 4.8% this year and 4.9% in FY28. Public debt is projected to reach 45.2% of GDP by FY28.

The debt stock itself remains relatively moderate. The problem is Bangladesh's ability to service it from an unusually small revenue base.

Interest payments already consume close to 30% of government revenue, according to Moody's.

The government must simultaneously pay subsidies, fund social programmes, service debt, finance development projects and potentially contribute substantial sums to recapitalise distressed banks.

Moody's estimates restoring regulatory capital adequacy in the banking system could eventually require recapitalisation equivalent to roughly 10% of GDP.

That creates an uncomfortable fiscal equation.

Money spent supporting banks, financing energy subsidies or servicing debt is money unavailable for infrastructure and other productivity-enhancing investment.

Development spending is already suffering.

Implementation of the Annual Development Programme fell to historically weak levels in FY26 amid reviews of infrastructure projects, caution over approving new ones and weak implementation capacity. By April, only 40.7% of the revised ADP had been implemented.

The economy therefore cannot easily rely on the state to replace weak private investment.

The sovereign credit ratings reflect precisely this mixture of improvement and vulnerability.

Moody's last month changed Bangladesh's outlook to stable from negative, while maintaining its B2 sovereign rating. It cited reduced political uncertainty, record remittances and the recovery in foreign-exchange reserves, which had risen to around $32.9 billion by mid-2026 from roughly $21.4 billion at the end of 2024.

But Moody's did not upgrade the rating itself. It continues to cite the narrow revenue base, poor debt affordability and banking-sector vulnerabilities as major constraints.

Ratings improve, but structural risks remain

The other two major agencies are more cautious.

S&P Global Ratings maintains Bangladesh at B+, but in July changed its outlook to negative from stable, pointing to banking-sector weakness, fiscal constraints, volatile energy markets and uncertain global trade conditions.

Fitch also rates Bangladesh B+ with a negative outlook, having changed the outlook from stable in May because of heightened macroeconomic and external-financing risks associated with the Middle East conflict and Bangladesh's exposure to energy imports and remittance flows.

Taken together, the ratings tell a more nuanced story than one of economic crisis.

Bangladesh's external position has improved substantially. Remittances are strong. Foreign-exchange reserves have recovered. Exchange-rate flexibility has removed some of the distortions that previously depleted reserves, while political uncertainty has eased after the election.

Those improvements reduce the immediate risk of a balance-of-payments crisis.

They do not, however, automatically produce growth.

The constraint has increasingly moved inside the domestic economy: banks that cannot efficiently extend credit, businesses reluctant to invest, factories struggling for energy, consumers dealing with high prices and a government with little revenue available to stimulate activity.

That distinction helps explain why the World Bank has become considerably more pessimistic even as some headline indicators have improved.

As recently as October 2025, the World Bank expected Bangladesh to grow 6.3% in FY27. In April this year, it expected 4.6%. It now expects 3.4%.

The government, meanwhile, is still targeting 6.5%.

For that target to be approached, the economy would need a much stronger rebound in private investment and credit, improved energy availability, faster development spending and stronger exports than are currently visible.

The World Bank expects some improvement, but not quickly. Its forecast has growth rising only to 3.9% in FY28.

So when Khosru says “let’s see”, the disagreement is ultimately testable.

The numbers to watch are not merely the final GDP estimate. They are private-sector credit, bad loans, industrial output, gas and electricity supply, investment, exports and revenue collection.

At present, most of them point in the same direction — towards a recovery that is taking considerably longer than expected.

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