Trade deficit widens 24% as exports fall and capital imports slump

A double-digit drop in capital machinery imports and falling export revenues have driven Bangladesh's trade deficit up by nearly 24 percent to $23.98 billion in FY 2025-26, leaving a historic $35.5 billion remittance surge to single-handedly cushion the external economy from severe distress.

The external trade is presenting a stark, two-way picture. On one hand, a slowdown in industrial raw material and capital machinery imports points to sluggish domestic manufacturing; on the other, export earnings have failed to meet expectations. Consequently, the country's trade imbalance has worsened, driving the foreign trade deficit up by nearly 24 percent.

However, a record surge in foreign remittances has significantly cushioned the pressure on external transactions and played a pivotal role in boosting foreign exchange reserves.

Data from Bangladesh Bank's Economic Indicators and Balance of Payments (BoP) reports, combined with Export Promotion Bureau (EPB) statistics, paint a challenging macroeconomic landscape. Economists attribute this subdued trade momentum in FY 2025-26 to global uncertainties, high interest rates, financial distress among major industrial conglomerates, rising production costs, and a lingering deficit in business confidence.

Trade deficit surges to $23.98 billion

The gap between Bangladesh's imports and exports widened sharply during the first 11 months (July–May) of the fiscal year 2025-26, according to Bangladesh Bank data.

• Total Imports (July–May): $64.02 billion
• Total Exports (July–May): $40.04 billion
• Trade Deficit: $23.98 billion

This represents a 23.73 percent (nearly 24%) increase compared to the $19.38 billion trade deficit recorded during the same period of the previous fiscal year. Economists warn that if export growth remains sluggish, maintaining this import burden could severely strain the external sector over the long term.

In FY 2025-26, import settlements via Letters of Credit (LCs) stood at $70.4 billion, reflecting a negligible growth of 0.09 percent compared to $70.3 billion in the preceding year. Because import settlements serve as a key barometer for industrial activity, this stagnation signals that the manufacturing sector has yet to regain full momentum.

While fresh LC openings increased by 7 percent to $74.7 billion—hinting at potential future recovery—business owners remain cautious regarding major capital commitments.

The most concerning contraction occurred in essential production inputs:

• Industrial Raw Materials: Fell 3.33 percent to $23.18 billion.
• Capital Machinery: Dropped 10.68 percent to just $1.80 billion, highlighting a sharp decline in long-term investment.
• Consumer & Intermediate Goods: Declined by approximately 7 percent each.
• Energy (Exception): Petroleum imports bucked the trend, rising 6.42 percent to $10.68 billion.

Bankers and industrial leaders noted that following recent political shifts, several prominent business groups—including Beximco Group, Nassa Group and Gazi Group—have had factory operations suspended or restricted to just 30 to 40 percent capacity. Coupled with high interest rates and rising debt costs, new investments have ground to a halt.

Exports miss $55 billion target

The domestic manufacturing slowdown directly spilled over into export performance. Total merchandise exports for FY 2025-26 reached approximately $48 billion—a 0.58 percent drop year-on-year, missing the government's target of $55 billion.

The Ready-Made Garment (RMG) sector, which accounts for nearly 80 percent of total exports, generated around $38.7 billion. Exporters attributed the shortfall to:

1. US retaliatory tariffs and intense competition in European markets.
2. Softening global demand and high domestic logistics costs.
3. Persistent energy shortages and high interest rates.

Although June recorded a 26 percent spike in exports, analysts note this was primarily driven by a higher number of working days rather than a genuine surge in international demand or new market penetration.

Record remittances provide critical relief

Amid trade pressures, the remittance sector emerged as the economy's strongest pillar. Bangladesh received a record $35.5 billion in remittances in FY 2025-26, marking a 17.3 percent increase year-on-year.

This robust inflow significantly narrowed the current account deficit and helped generate a $4.16 billion surplus in the financial account, preventing severe balance-of-payments distress.

In response to trade headwinds, the government has initiated steps to launch the country's first Free Trade Zone (FTZ). Bangladesh Bank has already issued comprehensive guidelines allowing duty-free import, storage, processing, repackaging, re-labelling and re-exporting of raw materials on a consignment basis without needing conventional LCs. Business leaders anticipate this move will reduce lead times, optimise working capital and enhance supply chain efficiency.

Commenting on the economic trajectory, Mohiuddin Rubel, Founder & CEO of Bangladesh Apparel Voice and former Director of BGMEA, emphasised the need for structural policy support.

"Exporting is not solely dependent on foreign demand; it is directly tied to domestic production capacity, raw material supply, energy, logistics, and the investment climate. The decline in raw material and capital machinery imports is a clear warning sign for future production. The investments we lack today will manifest as reduced output and exports months down the line," he added.

"Global competition is fierce, with rival nations like Vietnam and India leveraging various Free Trade Agreements while Bangladesh prepares for LDC graduation. To stay competitive, we must reduce the cost of doing business, enhance port efficiency, guarantee uninterrupted energy, and accelerate trade facilitation reforms. The FTZ is a positive initiative, but realising its full potential requires effective policy execution, rapid customs clearances, product diversification and new market entry," said Mohammad Hatem, President of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA).

There is no alternative to reforms to increase competitiveness. Professor Mustafizur Rahman, distinguished fellow of CPD, told UNB, "The coming days will be more difficult due to global conflicts, transition from LDCs and free trade agreements with competing countries."

According to him, Bangladesh's competitiveness must be increased by reducing business costs, improving logistics systems, implementing a National Single Window, facilitating trade, diversifying export products and quickly concluding a Free Trade Agreement (FTA).

Entrepreneurs in the garment sector also say that competing countries like India and Vietnam are getting additional benefits in the European Union market. Therefore, reducing production costs, ensuring energy supply and increasing the efficiency of ports and logistics are the biggest demands of the time.

Masrur Reaz, Chairman and Founder of Policy Exchange Bangladesh and former senior economist of the World Bank Group, told UNB that there is no alternative to product diversification to enhance Bangladesh's export share in global markets.

Bangladesh earns 83 percent of its export revenue from the single Ready-Made Garment (RMG) sector. Whereas Vietnam and other competing countries export a much more diversified range of products, the export volumes of those countries are increasing at the desired pace, he pointed out.

Masrur also emphasised the upgrading of smart technology and the appointment of technically skilled personnel in the manufacturing sector through a long-term policy to increase exports and ensure stability in the domestic economy.