Take growth forecast downgrades seriously

Economists worry about low growth and high inflation forecast by IMF, World Bank and ADB, calling for urgent policy response

In the current situation, growth in FY27 will be low. Recovery will depend on how quickly energy supply improves, investment returns and inflation eases. The government should restore confidence with predictable policies and faster business approvals.

Fahmida Khatun Distinguished fellow at CPD

The International Monetary Fund (IMF) this week cut its growth forecast for Bangladesh to 3.2 percent for the current fiscal year, close to its 3.4 percent projection for global growth in 2027. If realised, it would be the lowest GDP growth Bangladesh has recorded in 37 years.

The World Bank had earlier cut its forecast for fiscal year 2026-27 to 3.4 percent, and the Asian Development Bank (ADB) in September projected 4 percent growth. Both are well below the government target of 6.5 percent for FY27.

The weakness in growth is not the result of one temporary shock. Private investment has remained stagnant, private-sector credit growth is exceptionally weak, and high interest rates have raised the cost of doing business.

Selim Raihan  Executive director of SANEM

All three agencies expect inflation to stay high after four years of elevated prices. The IMF projects average inflation of 10.9 percent for the current fiscal year.

We are confronting more than a temporary slowdown: Banking distress, energy shortages and weak fiscal capacity are constraining investment, while high inflation continues to erode household purchasing power. The WB assessment reinforces this diagnosis.

Ashikur Rahman  Principal economist of PRI

Economists said the downgrades should be taken seriously. They pointed to weak investment, persistent inflation, energy shortages and weaknesses in the banking sector.

They said high interest rates and rising production costs are holding back growth, while high non-performing loans hurt businesses and low revenue limits how much the government can spend on public investment.

Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue (CPD), a local think tank, said the estimates “point to a prolonged slowdown and a fragile recovery”.

High interest rates and low investment, both public and private, are likely to bring economic growth down. But it is hard to tell the extent. Inflation is weighing more on the poor. The only way to push the growth rate is to boost public investment in the short run.

Kazi Iqbal  Research director of BIDS

Ashikur Rahman, principal economist at the Policy Research Institute of Bangladesh (PRI), said the revisions did not surprise him.

He put growth for FY27 at around 3-4 percent and average inflation at roughly 9-11 percent, calling them “judgement-based estimates”.

Ashikur saw little basis for expecting the 6.5 percent target to be met without a substantial improvement in investment and productive capacity.

Selim Raihan, executive director at the South Asian Network on Economic Modeling (SANEM), said the government’s growth target “now looks increasingly detached from economic realities”.

He expects growth of 3.5-4 percent and average inflation of about 9-10 percent, with upside risks from energy prices, exchange rates and domestic costs.

Kazi Iqbal, research director at the Bangladesh Institute of Development Studies (BIDS), said the economy is under stress and inflation is weighing more heavily on the poor.

He said spending more under the Annual Development Programme (ADP) is the only short-term way to lift growth.

‘RESTORE CONFIDENCE’

CPD Distinguished Fellow Fahmida said recovery in FY27 will depend on how quickly energy supply improves, investment returns and inflation comes under control.

She said, “The government should restore confidence with predictable policies and faster, simpler business approvals.”

The economist added that the government should strengthen banks through transparent loan classification and recovery or resolution of insolvent lenders, while preserving sound borrowers’ access to credit.

“Reliable energy requires better planning, domestic exploration, efficiency and transmission investment. Public funds should support well-prepared projects with clear returns,” said Fahmida.

According to her, revenue reforms can fund productive investment and targeted aid for low-income households.

“These measures will not produce an immediate rebound. But without progress, lower investment, weak job creation, and high inflation may continue to reinforce one another,” she commented.

‘FREE UP CREDIT FOR BUSINESS’

Selim said the broad message of the forecasts is that Bangladesh is experiencing unusually weak growth, made worse by persistently high inflation. If realised, the IMF projection of 10.9 percent inflation would mean another year of serious erosion in household purchasing power.

“Bangladesh is therefore facing an uncomfortable combination: businesses are struggling with weak demand, high financing and energy costs, while households continue to face rising living costs,” he said.

“The weakness in growth is not the result of one temporary shock. Private investment has remained stagnant, private-sector credit growth is exceptionally weak, and high interest rates have raised the cost of doing business,” he said.

“The energy shortage has become a binding constraint for many industries, while uncertainty over gas and electricity supply makes firms reluctant to undertake new investment.”

Selim, also an economics professor at Dhaka University, said weak banks have further damaged lending, while low revenue is forcing the government to borrow heavily from banks, potentially squeezing private-sector credit.   

“Political uncertainty, concerns over law and order, and policy unpredictability are also affecting business confidence.”

“These problems reinforce each other. Weak investment reduces growth and employment; weaker growth constrains revenue; low revenue increases government borrowing; and greater government borrowing can further restrict financing for private investment.”

Selim said the slowdown should not be treated as a cyclical downturn, because it reflects structural and institutional weaknesses built up over many years.

According to him, reviving growth will take more than new credit schemes or investment incentives.

The immediate task, he said, is to win back the confidence of private investors. Businesses need predictable energy supply, greater certainty over taxes and tariffs, better access to finance, improved law and order, and assurance that economic policies will not change abruptly.

He said domestic gas exploration should be accelerated, energy imports diversified and taxes and duties on fuel imports reviewed, so that energy prices can be kept at a tolerable level without creating unsustainable subsidies.

“Revenue reform is equally urgent, but additional revenue should come from broadening the tax base, reducing unjustified exemptions and improving tax administration rather than repeatedly increasing the burden on compliant taxpayers,” added the economist.

‘SEEK SUPPORT OF DEVELOPMENT PARTNER’

PRI Principal Economist Ashikur said his team saw this coming. “Our team warned of the stagflationary risks facing Bangladesh eleven months ago.”

“My assessment is that we are confronting more than a temporary slowdown: banking distress, energy shortages and weak fiscal capacity are constraining investment and production, while persistent inflation continues to erode household purchasing power. The World Bank’s latest assessment reinforces this diagnosis.”

He said weak banks are impairing credit and investor confidence, while energy shortages and high production costs deter investment and inflation squeezes consumption.

Ashikur said global uncertainty is making matters worse but is not the sole cause. The inflation outlook is particularly uncertain because of energy costs and supply pressures, and further external shocks would weaken growth while raising prices.

The central difficulty, he said, is that the banking sector needs financial support on a scale the state is not currently equipped to provide.

“Restoring bank capital, protecting small depositors and restructuring distressed institutions require resources, yet the government already faces severe competing demands on a narrow revenue base. In my assessment, financing the banking-sector clean-up entirely from domestic public resources would risk undermining other essential spending.”

He said emergency lending can help manage immediate funding pressures but cannot replace capital lost through bad loans. “Prolonged central-bank support to weak banks risks adding to inflation and exchange-rate instability. We must therefore distinguish between keeping banks temporarily liquid and restoring their long-term financial viability.”

Bangladesh needs stronger, coordinated support from the IMF, World Bank, ADB and bilateral partners, he said.

“The government should seek concessional budget and balance-of-payments financing, alongside technical assistance for bank restructuring.”

“Such support should create room to repair the financial sector while preserving essential public investment and targeted assistance to vulnerable households, not finance an unconditional bailout of bank owners,” added Ashikur.

He said, “Without strong development-partner support and decisive fiscal and financial-sector reforms, I do not see a credible route out of the stagflationary trap. External financing can give us the resources and time to manage the adjustment; reforms must ensure that we do not return to the same crisis.”

‘SPEED UP PUBLIC SPENDING’

BIDS Research Director Iqbal said high interest rates and low investment, both public and private, are likely to bring economic growth down. But it is hard to tell the extent.

“The only way to push the growth rate is to boost public investment in the short run,” he said, adding that ADP implementation is the key.