World Bank: Bangladesh’s Economy Rebounds but Reforms Needed for Sustained Growth

For Bangladesh, the priorities are clear: strengthen fiscal resilience, empower women and youth, and attract private investment to drive innovation and productivity.

Bangladesh’s economy has rebounded strongly in the second half of FY25 after a challenging start to the fiscal year, according to the World Bank’s latest Bangladesh Development Update released today. The report highlights a recovery driven by robust export performance, record remittance inflows, and growing foreign exchange reserves, while warning that deep structural reforms are essential to sustain growth, create jobs, and build economic resilience.

The World Bank projects that Bangladesh’s GDP will grow by 4.0 percent in FY25, before accelerating to 4.8 percent in FY26 and 6.3 percent in FY27, supported by stronger industrial output, stabilized external conditions, and ongoing macroeconomic reforms.

“The economy has shown resilience, but this cannot be taken for granted,” said Jean Pesme, World Bank Division Director for Bangladesh and Bhutan. “To ensure a strong growth path and more and better jobs, Bangladesh needs bold reforms and faster implementation to enhance domestic revenue mobilization, address banking sector vulnerabilities, reduce energy subsidies, plan urbanization, and improve the investment climate.”

Signs of Recovery and Stability

The report notes that external pressures that weighed heavily on Bangladesh in recent years have begun to ease. The adoption of a market-based exchange rate has stabilized the foreign exchange market, boosted reserves, and narrowed the current account deficit. Exports—particularly ready-made garments (RMG), leather goods, and pharmaceuticals—performed strongly in the second half of FY25, benefitting from resilient global demand and improved competitiveness.

Remittance inflows reached an all-time high as migrant workers took advantage of a more flexible exchange rate and expanding overseas labor markets, especially in the Middle East and Southeast Asia.

Meanwhile, inflation moderated, supported by tight monetary policy, a reduction in import duties on essential food items, and strong agricultural output. However, the fiscal deficit widened, reflecting weak tax revenues and increased government spending on subsidies, wages, and interest payments.

“Bangladesh’s fiscal policy remains under strain,” the report cautioned. “Without significant improvements in tax collection and expenditure efficiency, fiscal vulnerabilities could undermine macroeconomic stability.”

Challenges: Poverty, Jobs, and Gender Disparities

Despite macroeconomic improvements, the report warns that Bangladesh’s recovery has not been inclusive. Poverty, which had fallen steadily over two decades, rose between 2023 and 2024, and the country’s labor force participation rate dropped from 60.9 percent to 58.9 percent. The decline was most pronounced among women — of the three million additional working-age people who exited the labor force, 2.4 million were women.

This gender gap, the report notes, highlights persistent barriers to women’s economic participation, including social norms, mobility restrictions, and limited access to childcare and skills training.

“Bangladesh’s long-term prosperity depends on ensuring that women and young people can participate fully in the economy,” the World Bank said. “Without inclusive labor market reforms, the country risks leaving a large portion of its population behind.”

The report also underscores the need to address youth unemployment, as a growing number of young people struggle to find productive jobs. With 2 million new entrants to the workforce each year, Bangladesh must expand opportunities in manufacturing, technology, and services to absorb this labor supply.

The Reform Agenda: Building for the Future

The World Bank calls for a comprehensive reform package to sustain Bangladesh’s growth momentum and ensure fiscal and social stability. Key priorities include:

1. Tax and revenue reform: Expanding the tax base, modernizing tax administration, and improving compliance to boost domestic resource mobilization.

2. Financial sector stability: Addressing non-performing loans, improving bank governance, and strengthening regulatory oversight to restore confidence in the banking sector.

3. Energy subsidy rationalization: Reducing costly fuel and electricity subsidies while protecting low-income households through targeted support.

4. Urban and spatial planning: Developing balanced regional growth strategies to reduce over-dependence on Dhaka and Chattogram, which have become increasingly congested and environmentally strained.

5. Investment climate improvement: Streamlining business regulations, facilitating foreign investment, and investing in logistics and digital infrastructure to attract private capital.

Over the past two decades, Bangladesh has transformed its economic geography. Industrialization and urbanization have concentrated jobs and infrastructure in a few major cities, while rural areas lag behind. The report recommends rethinking spatial development policies to promote equitable growth and employment across all regions.

“Reducing regional disparities is essential to create inclusive job opportunities nationwide,” the report notes.

South Asia’s Growth Context: Opportunities and Headwinds

The Bangladesh Development Update was launched alongside the World Bank’s South Asia Development Update (SADU) — a biannual regional report titled “Jobs, AI, and Trade.” The SADU projects South Asia’s economic growth at a robust 6.6 percent in 2025, but warns of a potential slowdown due to global economic fragility, weak trade integration, and tightening financial conditions.

According to Johannes Zutt, World Bank Vice President for South Asia, the region’s challenge lies in boosting productivity, private investment, and job creation while harnessing the benefits of artificial intelligence (AI) and trade openness.

“South Asia has enormous economic potential and remains the fastest-growing region in the world,” Zutt said. “But countries must proactively address risks to growth by maximizing the benefits of AI and lowering trade barriers, especially for intermediate goods.”

The report notes that South Asia is among the least open regions to global trade and finance. High tariffs and protectionist policies have slowed investment in sectors where jobs are shrinking, while more open sectors — such as services — have driven most of the region’s employment gains in the past decade.

Harnessing AI and Trade for the Future

Franziska Ohnsorge, World Bank Chief Economist for South Asia, said adopting AI technologies and expanding trade integration could be transformative for productivity and job creation.

“Policy measures that help reallocate workers across firms, activities, and regions can channel resources to more productive sectors,” she said. “Increasing trade openness and accelerating AI adoption will be critical for sustaining growth.”

The SADU report highlights that AI can complement human skills in sectors such as manufacturing, logistics, agriculture, and services, helping workers transition from low-productivity to higher-wage employment. However, achieving this potential will require significant investment in digital infrastructure, education, and worker retraining.

Outlook: Reform and Inclusion as the Path Forward

Both reports emphasize that Bangladesh — and South Asia more broadly — stand at a pivotal juncture. Economic growth is returning, but the sustainability of this recovery hinges on decisive policy action, institutional reforms, and inclusive participation.

For Bangladesh, the priorities are clear: strengthen fiscal resilience, empower women and youth, and attract private investment to drive innovation and productivity.

“Bangladesh’s recovery is real, but fragile,” the World Bank concluded. “Maintaining momentum requires courage — the courage to reform, to innovate, and to ensure that growth benefits all citizens.”