Banking woes, energy shortages, low revenue threaten Bangladesh's growth: World Bank

Bangladesh faces a combination of banking sector weakness, energy shortages, low revenue mobilisation, persistent inflation, weakening competitiveness and rising fiscal pressures that could keep economic growth subdued unless structural reforms accelerate, the World Bank said in its latest Bangladesh Development Update released today.

The World Bank projects GDP growth at 3.4% in FY27, unchanged from FY26 and significantly below the 5.6% average recorded over the past decade. It expects growth to recover to 3.9% in FY28, but warns that banking vulnerabilities, energy constraints, a weak business environment and limited fiscal space will continue to weigh on the economy.

Banking sector remains the biggest systemic risk

The most immediate risk is the financial sector. Greater disclosure and stricter alignment with international standards have revealed significantly higher non-performing loans and widespread under-capitalisation.

The systemwide NPL ratio surged to 33.2% in June 2026, from 20.2% in December 2024, while the capital adequacy ratio fell to negative 2.6% in December 2025, far below the regulatory minimum of 10%. NPLs were particularly high among Islamic banks and state-owned commercial banks, at 58.9% and 43.2%, respectively.

The Bangladesh Bank had provided Tk760 billion ($6.2 billion) in uncollateralised liquidity support to weak banks by June. The World Bank warned that continued regulatory forbearance and repeated liquidity support could delay balance-sheet repair and undermine confidence.

The weakness is already affecting the wider economy. Private-sector credit growth fell to a 33-year low of 4.5% in June, limiting financing for productive businesses and investment. The World Bank says decisive, time-bound action on bank restructuring and NPL resolution is urgently needed.

Energy shortages threaten industry and investment

Energy security is another major constraint. Domestic gas production has declined while Bangladesh has become increasingly dependent on imported LNG. The country now relies on imports for about one-third of its gas demand.

Fuel and gas shortages have disrupted industrial production, while transmission and distribution bottlenecks have limited the effective use of power-generation capacity. Factories have operated below capacity or temporarily shut down, while businesses have faced higher costs from power shortages and reliance on diesel generators.

A prolonged deterioration in energy supply, the World Bank warns, could delay the recovery of private investment and industrial activity.

Low revenue leaves the government with little room to respond

Bangladesh's domestic revenue collection remains exceptionally weak. Revenue rose only modestly to an estimated 8.3% of GDP in FY26 from 8% a year earlier, constrained by tax-policy shortcomings, weak compliance and ineffective tax administration.

At the same time, the fiscal deficit widened to 3.9% of GDP in FY26. The World Bank projects it will widen further to 4.8% in FY27 and 4.9% in FY28, while public debt is expected to reach 45.2% of GDP by FY28.

Rising interest payments, subsidies, social spending and bank recapitalisation costs will put further pressure on public finances, leaving less room for productive public investment.

Inflation and poverty are eroding household resilience

Although inflation has eased, it remains high. Average headline inflation declined to 8.7% in FY26 from 10% in FY25, but higher energy costs and supply-side constraints continue to put pressure on prices. Real wage growth for low-paid workers has remained negative, weakening purchasing power.

The consequences are already visible in poverty. National poverty is estimated to have risen to 22.5% in FY26 from 18.7% in 2022, while about 2.1 million more people fell below the $3-a-day international poverty line during FY26. Inequality also increased.

The World Bank warns that poverty reduction will remain slow, with national poverty projected to rise to 22.8% in FY27.

Exports face rising competitive pressure

Bangladesh also faces a more difficult external environment. Overall exports contracted by 0.2% in FY26, while RMG exports to the EU fell 3.3%. In the US market, apparel imports from Bangladesh declined 5.3% in January-June 2026, while imports from Vietnam, Indonesia and Cambodia increased.

The World Bank says buyers are increasingly prioritising flexibility, compliance, supply-chain transparency and resilience—not simply low production costs. This could make it harder for Bangladesh to maintain its traditional competitive advantage.

A poorly targeted safety net is another vulnerability

The country's social protection system is struggling to protect those most exposed to economic shocks. About half of the poorest households remain outside any safety-net programme, while nearly 62 million people live just above the poverty line and remain vulnerable to falling into poverty.

At the same time, subsidies are not always reaching those who need them most. Bangladesh spends about 3.5% of GDP annually on energy and fertiliser subsidies and social protection, but a significant share is poorly targeted. The richest urban quintile alone receives nearly half of electricity subsidy spending.

The World Bank estimates that combining better targeting with consolidation of food subsidies and existing cash programmes could lift an additional 2.85 million people out of poverty, with only a modest increase in spending.

Taken together, the risks point to a common problem: Bangladesh has less room than before to absorb shocks while its underlying structural weaknesses remain unresolved. The World Bank identifies three immediate reform priorities—restoring financial-sector stability, strengthening energy security and governance, and raising domestic revenue to create fiscal space for productive investment.