Bangladesh's macroeconomy remains deeply fragile, battered by a Fitch rating downgrade, stubbornly high inflation, record low private credit growth, and a looming fiscal shortfall, the Policy Research Institute of Bangladesh (PRI) warned on Thursday, calling for sweeping productivity-enhancing reforms ahead of the national budget for fiscal year 2026-27.
Dr Ashikur Rahman, Principal Economist of PRI, revealed the grim picture of the economy while making the keynote presentation at an event to launch the institute's Monthly Macroeconomic Insights titled “Restoring Growth through Productivity Reforms: Pre-Budget Priorities” at the PRI conference room at Banani.
In a fresh blow to investor confidence, Fitch Ratings has revised Bangladesh’s long-term sovereign outlook to “Negative” from “Stable”, while affirming the rating at “B+”, according to the report.
The agency cited rising external vulnerabilities from Middle East exposure, weak reserves, persistently low revenue at around 7.9 percent of GDP, elevated inflation near 9 percent, banking sector fragility with NPLs above 30 percent, and stalled institutional reforms.
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According to the PRI, the GDP growth stood at 3.49 percent in FY25. For FY26, the International Monetary Fund projects a modest recovery to 4.7 percent, while the World Bank, Asian Development Bank, and Fitch estimate more conservative figures of 3.9 percent 4.0 percent, and 3.7 percent respectively, citing fuel price pressures, weak investment, and slowing exports.
Private investment dropped to 22 percent of GDP in FY25, its weakest level in 11 years. Foreign Direct Investment, at just 0.3 percent of GDP, continues to lag far behind regional peers Vietnam, Indonesia, and India, it said.
Inflation re-accelerated above 9 percent in April 2026, driven by higher transport costs and non-food price pressures linked to US-Iran geopolitical tensions.
With the policy rate held at 10 percent, the real policy rate stands at only 0.96 percent, well below the Monetary Policy Committee's own target of 3 percent and among the lowest in South Asia, undermining the central bank's ability to anchor inflation expectations.
The PRI further warned that recent measures by Bangladesh Bank, including special credit windows and relaxed single-borrower lending limits for large corporates, are effectively diluting monetary tightening and sending mixed policy signals.
Private sector credit growth collapsed to a historic low of 4.72 percent in March 2026.
Banks have increasingly shifted into government securities, with net borrowing via treasury bills reaching Tk 132 billion in April alone, a classic crowding-out dynamic squeezing productive lending.
On the fiscal front, the revenue collection by the National Board of Revenue (NBR) reached Tk 3.3 trillion by April FY26, only 65 percent of the revised annual target. To meet the full-year goal, the NBR will need to collect an implausibly high Tk T 1.76 trillion in the final two months alone.
Even under optimistic scenarios of 15-30 percent revenue growth in May-June, the projected shortfall ranges between Tk 782 billion and Tk 895 billion.
Interest payments consumed 21.4 percent of total government expenditure in FY25, up sharply from 14.4 percent in FY10. Subsidies crossed Tk 1 trillion in FY25 and are projected to rise further to Tk 1.16 trillion in FY27, absorbing 12.5 percent of the total budget despite IMF pressure for rationalisation.
ADP implementation remained chronically weak at 36.2 percent in July-March FY26.
After eight consecutive months of decline, goods exports rebounded 33 percent year on year in April to nearly US$ 4 billion, a rare bright spot.
However, cumulative exports in July-April FY26 remained 2 percent below the same period last year, weighed down by a 2.8 percent contraction in RMG shipments and persistent energy shortages.
Remittances stayed above $ 3 billion for the fifth consecutive month in April, reaching $ 3.13 billion, up 13.6 percent year on year. Forex reserves crossed $ 30 billion in April, providing roughly five months of import cover.
However, the PRI cautioned that rising global energy prices could erode these gains.
The PRI presentation laid out six productivity-enhancing reform pillars it considers essential for restoring growth: deregulation and investment climate improvement, energy sector reform, SOE restructuring and selective privatisation, trade policy reform and tariff rationalisation, proactive FDI promotion, and sustained investment in critical infrastructure.
On fiscal reform, the report called for raising the tax-to-GDP ratio to 15-20 percent over 10 years, targeting a 50:50 direct-to-indirect tax ratio by 2035, and capping the personal income tax marginal rate at 25 percent while reducing the corporate tax rate to 15 percent for qualifying firms.
“Sustainable growth will depend less on stimulus and more on productivity, investment, institutions, and efficient use of resources,” the presentation concluded.
The event was chaired by PRI Chairman Dr Zaidi Sattar.
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