Bangladesh made a rapid recovery from the Covid-19 pandemic, supported by prudent macroeconomic policies, but the economy now faces considerable challenges with global uncertainty, rising inflationary pressure, energy shortage, a balance-of-payments deficit, and a revenue shortfall, says the World Bank in its half-yearly update released today.

The Bangladesh Development Update April 2023, entitled “Trade Reform: An Urgent Agenda”, says that accelerating the implementation of structural reforms, including trade reforms and export diversification, will help Bangladesh navigate the current challenges and sustain growth momentum.

Growth in Bangladesh is expected to accelerate over the medium term, as inflationary pressure eases, external conditions improve, and reform implementation gains momentum. Real GDP growth is expected to decelerate to 5.2 percent in FY2023 due to rising inflation, tighter financial conditions, disruptive import restrictions, and global economic uncertainty. In FY2024, growth is expected to pick up to 6.2 percent.

“Russia’s invasion of Ukraine and global uncertainty have impacted countries around the globe.   Bangladesh’s post-pandemic recovery has been disrupted by elevated commodity prices, rising interest rates, and slowing global growth,” said Abdoulaye Seck, World Bank Country Director for Bangladesh and Bhutan. “The World Bank stands ready to support Bangladesh with reforms to accelerate growth and strengthen resilience.”

Higher commodity prices have contributed to inflationary pressure. The balance-of-payments deficit reached $7.2 billion in the first half of FY2023, up from $5.3 billion in FY2022, creating considerable pressure on foreign exchange reserves. A multiple exchange rate system has contributed to the balance of payments pressure, disincentivizing export and remittance inflows. Moving towards a single market-based exchange rate will help restore external balance.

Risks to the outlook remain elevated. Domestic banks faced challenges with tighter liquidity and increasing non-performing loans. The fiscal deficit widened in FY2023, with higher financing from domestic banks. However, the January 2023 joint World Bank-IMF Debt Sustainability Analysis (DSA) assessed that Bangladesh remained at low risk of debt distress.

Improving trade competitiveness for export diversification will be critical to achieving Bangladesh’s aspiration of upper-middle-income status by 2031.

“The ready-made garments sector accounts for about 83 percent of Bangladesh’s exports. The Covid-19 pandemic underscored the risk of overreliance on a single sector,” said Bernard Haven, World Bank Senior Economist and co-author of the report. “Diversifying exports and improving competitiveness will help Bangladesh achieve upper-middle income status by 2031. For this, it will be important for Bangladesh to reduce both tariff and non-tariff barriers. A comprehensive reform program can strengthen regional integration, particularly with South Asia and Southeast Asia.”

The Bangladesh Development Update is a companion piece to the South Asia Economic Focus, a twice-a-year World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges faced by countries. The Spring 2023 edition, titled “Expanding Opportunities: Toward Inclusive Growth”, launched on April 4, 2023, shows that South Asia’s growth prospects have weakened due to tightening financial conditions, with large downside risks in most countries given limited fiscal space and depleting reserves. It also analyzes the high level of inequality of opportunity in the region and offers recommendations to achieve more equitable and inclusive growth.