Written by The Banking Post
Bangladesh’s economic growth is expected to remain modest at 4.7 percent in FY26, with little chance of improvement next year, as high inflation, weak investment and delays in key financial and fiscal reforms continue to weigh on the economy, the International Monetary Fund (IMF) has warned.
Following its latest Article IV mission, the IMF said tight policy settings, stress in the banking sector, election-related uncertainty and higher US trade tariffs are likely to constrain growth in 2025–26. Unresolved banking problems would further restrict credit, suppress private investment and dampen overall economic activity.
The Fund cautioned against extending significant liquidity support to weak banks, noting that such moves could compress short-term interest rates, raise exchange-rate risk premiums and trigger capital outflows—leading to sharp depreciation and renewed inflationary pressure.
Delays in fiscal and banking reforms would worsen the outlook, raising inflation and heightening macro-financial instability, it said. Growth in FY27 is also projected to remain unchanged, as inflation is expected to stay above the target range in the near term and downside risks persist from slow reform implementation.
Weak revenue mobilisation and large subsidies could squeeze public investment and social spending if the current primary deficit path is maintained to protect debt sustainability. The IMF stressed that its baseline scenario assumes decisive policy action, including value-added tax reform, higher minimum turnover tax, cuts to non-productive spending and firm steps to resolve and restructure weak banks.
On the external front, lower financial inflows—including reduced multilateral disbursements—could slow the rebuilding of foreign exchange reserves. Deep undercapitalisation in banks may also limit their ability to absorb higher government borrowing, pushing up public debt servicing costs.
The IMF warned that negative feedback loops, weaker monetary policy credibility and thin external buffers could further elevate risks to inflation and the exchange rate, undermining growth and stability.
Inflation is projected to average 8.9 percent in FY26 before easing to around 6.0 percent in FY27, provided there is no premature policy easing or fresh supply-side shocks. The Fund said the policy package under its $4.7 billion lending programme is necessary to restore macro-financial stability, support medium-term growth and safeguard debt sustainability.
It also flagged rising public debt-servicing vulnerabilities and the risk of sovereign debt distress if reforms are delayed or reversed, including on exchange-rate policy. Inflation remains above target, foreign reserves have yet to fully recover, and revenue and subsidy reforms have so far delivered limited results, the IMF noted.
To stabilise the economy, the Fund recommended bold fiscal reforms to mobilise revenue, curb non-essential spending and reduce subsidies, alongside a credible, well-governed banking sector restructuring strategy. Maintaining tight monetary policy and consistently implementing the new exchange-rate regime are also seen as critical.
Broader structural reforms—strengthening governance, improving transparency, diversifying exports and aligning legal and central bank governance with international standards—are needed to attract foreign investment and support inclusive growth. Sustaining reform momentum after the elections will be key as Bangladesh prepares for LDC graduation, the IMF said.
