World Bank projects lowest GDP growth in 36 years: Should Bangladesh be worried?

Sometimes, you need to take a few steps back to start a run. It may be the case for Bangladesh's economy too. The World Bank's latest Macro Poverty Outlook paints a sobering picture for Bangladesh — slashing its FY25 GDP growth forecast to 3.3%, the lowest in 36 years, with rising poverty and shrinking investment. 

The Macro Poverty Outlook (MPO) analyses macroeconomic and poverty trends in 149 countries, released biannually for World Bank-IMF meetings. The World Bank had previously forecasted it to be 4.1% in January. Moreover, extreme poverty is set to rise to 9.3% in FY25, up from 7.7% the previous year, pushing 3 million more people into economic hardship. 

However, there is no reason to panic and write Bangladesh off from the highway of growth just yet. While the news may sound alarming, it reflects necessary corrective measures after years of economic mismanagement rather than a structural collapse. 

Stabilising foreign reserves, a steady exchange rate, and strong remittance inflows signal that the economy is already on the path to recovery. The current slump should be seen as a temporary setback, not a long-term crisis.

Why the slump? 

The last time Bangladesh recorded such sluggish growth was in FY 1988-89, when the economy grew by just 3.11%, according to the data from the Bangladesh Bureau of Statistics (BBS).

The investment downturn is central to the growth slowdown. Gross fixed capital investment is expected to contract by 2.4% this year, a stark reversal from already muted growth in FY24. This is not merely a reaction to global factors; domestic political instability and weak business confidence have played decisive roles. 

Private sector credit growth continued its sluggish growth from the Hasina era, hampered by high-interest rates and a banking sector grappling with rising non-performing loans. Interest rates surged from 9% to 12.5% within a quarter to fix the issues plaguing the banking sector — further squeezing investment and economic activities.

Meanwhile, inflation remains the most immediate threat to macroeconomic stability. Consumer price inflation, standing at 9.3% in February 2025, has eroded real incomes and suppressed consumption, especially among lower-income groups. While the Bangladesh Bank has finally responded with a policy rate hike to 10%, the delayed action in 2022-23 under the previous regime allowed inflation to entrench itself deeply. 

Consequently, nearly 4% of workers lost their jobs, wages for low-skilled workers have fallen by 2%, and extreme poverty is projected to climb from 7.7% to 9.3% — pushing an additional 3 million people into extreme poverty.

A 17.1% fall in exports in FY24 highlighted both global demand weakness and Bangladesh's limited export diversification. Though a 14.5% rebound is projected for FY25, trade disruptions and policy uncertainty, especially regarding the global tariff war and supply chain disruptions, threaten to limit a quick export-led recovery. 

As noted in the World Bank's regional outlook, without bold reforms to open trade and boost competitiveness, medium-term prospects remain fragile.

Despite these challenges, the external sector has shown some resilience. Remittances, growing by 27.6% in the first half of FY25, alongside an 11% rise in exports, have turned the current account into a small surplus of $33 million. 

Foreign exchange reserves, though modest at $20.4 billion (according to BPM6 calculations), would cover three months of imports. It has stabilised after the post-uprising volatility. This offers a cushion against external shocks. 

Foreign direct investment remains anaemic, netting just 0.2% of GDP — a reflection of lingering investor concerns around governance and political stability. However, there is hope that the BIDA Investment Summit would bring some much-needed FDI to the country. 

Labour market conditions have deteriorated sharply. Labour force participation fell to 59.2% from 60.9%, mainly due to declining female participation, and the unemployment rate ticked up to 3.6%. Service sector employment was hardest hit, contracting by 2.6%. 

Dr Selim Raihan, a professor at the Department of Economics, University of Dhaka, and executive director at the South Asian Network on Economic Modeling (SANEM), said, "The World Bank's projection of the lowest GDP growth for Bangladesh in 36 years is a serious concern, reflecting both internal challenges and global economic headwinds. Economic and political uncertainty — such as rising inflation, weakening investor confidence, policy inconsistencies, political instability, and governance issues — are likely contributing factors." 

He added, "While the situation is worrying, it should be viewed as a wake-up call for urgent reforms to stabilise the economy and restore confidence in both domestic and international arenas." 

Why this may be a temporary setback

Yet, despite the bleak short-term outlook, there are reasons not to panic. The contractionary policies currently pursued — higher interest rates, stabilisation of the exchange rate, and control of imports — are necessary corrective actions after years of financial mismanagement. 

Had the fallen Hasina regime not allowed unchecked borrowing through negative real interest rates, Bangladesh might have avoided the extreme reserve losses and inflationary pressures it experienced. 

The fact that the taka has now stabilised and reserves have stopped bleeding is itself a sign that the economy is slowly moving towards stabilisation. Moreover, we had an unprecedented year in 2024, and it was expected that the political turmoil and post-Uprising upheaval would slow the economy down. 

"The economy had been hit by significant external shocks in recent years, which exerted downward pressure on the exchange rate and upward pressure on prices. The appropriate policy response in such situations is to raise interest rates and slow the pace of economic growth. Instead of pursuing this difficult course, the fallen Hasina regime kept interest rates capped below the inflation rate, enabling its cronies to borrow heavily at negative real interest rates, only to syphon off the money abroad," said Jyoti Rahman, Director - International at the Sydney Policy Analysis Centre. 

He added, "Then came the economic disruptions of the July Uprising. Since then, the Bangladesh Bank has been pursuing a policy of macroeconomic stabilisation, which has seen the taka hold steady against the greenback while the stock of reserves remains solid. All things considered, the economic growth projected for FY25 is, in fact, much better than what one might have feared a year ago."

Professor Dr Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), said, "It was expected that there would be a slump in growth this year, since there was a huge disruption in the first quarter of the current fiscal year. Inflation, low investment, contractionary monetary policy, and hiking interest rates in banks — all of these slowed the economy down. There are some uncertainties in the economy, and we are seeing its reaction. But I think it is due to the unprecedented year we have seen, and we are going in the right direction for recovery." 

He is optimistic about the future. 

"Strong remittance inflow, increasing foreign reserves, stable exchange rate, and lifting import restrictions are good signs. Hopefully the economy will be better, and even the World Bank forecasts recovery. So, there is a negative impact on the economy, but I do not think there is any need to panic about the slump," he added. 

Jyoti Rahman too shared his optimism. "Unless there is a significant global or domestic crisis, growth should revert to 6% or thereabouts in FY26. If we can manage a smooth transition to democracy and the elected  government continues to pursue prudent policy, growth could be even higher." 

Indeed, the World Bank projects that Bangladesh's economy will begin to recover from the following fiscal year. Real GDP growth is expected to rise to 4.9% in FY26, supported by critical reforms aimed at stabilising macroeconomic conditions and improving the investment climate. Inflation, currently at 10%, is forecast to ease to 7.7%, boosting household purchasing power and private consumption. 

The external sector is also expected to remain resilient, with strong remittance inflows narrowing the current account deficit and supporting foreign exchange reserves. In the medium term, improvements in governance, export diversification, and human capital investments are projected to drive a gradual strengthening of growth, with real GDP growth forecasted to reach 5.7% by FY27.

It is also crucial to recognise that GDP growth figures in Bangladesh had long been subject to scepticism. 

Professor Dr Mustafizur Rahman said, "There was a tendency to show an inflated figure of GDP growth during the previous regime. The World Bank did not express doubt about it then, nor did they publish their own data. Its current assertion of lower growth rates, backed by transparent methodologies, enhances the credibility of the economic narrative and provides a stronger basis for evidence-based policy formulation." 

Jyoti Rahman gave a fitting analogy for the current state of the Bangladesh economy.

"Bangladesh's current economic condition would be that of an overweight, stressed, 50-year-old smoker — vulnerable to various risks but not in immediate cardiac arrest. The political upheaval of the July Uprising can be likened to a serious fall requiring urgent surgical intervention. The economy is now undergoing a period of necessary 'bed rest', focused on stabilisation and recovery before it can regain its previous momentum."