Bangladesh Banking, Fiscal Reforms to Sustain Growth Amid Shocks

Dhaka, April 2, 2024- Bangladesh's economy made a strong turnaround from the COVID-19 pandemic, but the post-pandemic recovery continues to be disrupted by high inflation, a persistent balance of payments deficit, financial sector vulnerabilities, and global economic uncertainty, says the World Bank in its twice-yearly-update.

Released today, the latest Bangladesh Development Update says that urgent monetary reform and a single exchange rate regime will be critical to improve foreign exchange reserves and ease inflation. Greater exchange rate flexibility would help restore balance between demand and supply in the foreign exchange market. Structural reforms will be key to diversify the economy and build resilience over the medium and long term, including measures to raise government revenues to support investments in infrastructure and human capital.

Persistent inflation eroded consumer purchasing power, while investment was dampened by tight liquidity conditions, rising interest rates, import restrictions, and increased input costs stemming from upward revisions in administered energy prices.

Private sector credit growth slowed further in FY24, reflecting a broader slowdown in investment. The non-performing loan (NPL) ratio in the banking sector remains high and understates banking sector stress due to lax definitions and reporting standards, forbearance measures, and weak regulatory enforcement. The Balance of Payments deficit moderated over the first half of FY24 driven by a surplus in the current account.

"Bangladesh's strong macro-economic fundamentals have helped the country overcome many past challenges," said Abdoulaye Seck, World Bank Country Director for Bangladesh and Bhutan. "Faster and bolder fiscal, financial sector, and monetary reforms can help Bangladesh to maintain macroeconomic stability and reaccelerate growth."

The report's companion piece, the latest South Asia Development Update - Jobs for Resilience, also released today, says South Asia is expected to remain the fastest-growing region in the world for the next two years, with growth projected to be 6.0% in 2024 and 6.1% in 2025. Growth in South Asia is expected to be driven mainly by robust growth in India and Bangladesh, and recoveries in Pakistan and Sri Lanka.

But this strong outlook is deceptive, says the report. For most countries, growth is still below pre-pandemic levels and is reliant on public spending. Persistent structural challenges threaten to undermine sustained growth, hindering the region's ability to create jobs and respond to climate shocks. Private investment growth has slowed sharply in all South Asian countries and the region is not creating enough jobs to keep pace with its rapidly increasing working-age population.

"South Asia's growth prospects remain bright in the short run, but fragile fiscal positions and increasing climate shocks are dark clouds on the horizon," said Martin Raiser, World Bank Vice President for South Asia. "To make growth more resilient, countries need to adopt policies to boost private investment and strengthen employment growth."

South Asia's working-age population growth has exceeded that in other developing country regions. The share of the employed working-age population has been declining since 2000 and is low. In 2023, the employment ratio for South Asia was 59%, compared to 70% in other emerging market and developing economy regions. It is the only region where the share of working-age men who are employed fell over the past two decades, and the region with the lowest share of working-age women who are employed.

"South Asia is failing right now to fully capitalize on its demographic dividend. This is a missed opportunity," said Franziska Ohnsorge, World Bank Chief Economist for South Asia. "If the region employed as large a share of the working-age population as other emerging markets and developing economies, its output could be 16% higher."

Country Outlooks

Sources: World Bank Macro Poverty Outlook and World Bank staff calculations.

Note: (e) = estimate; (f) = forecast. GDP measured in average 2010-19 prices and market exchange rates. Pakistan is reported at factor cost. National accounts statistics for Afghanistan are not available. To estimate forecasts for regional aggregates in the calendar year, fiscal year forecasts are converted to the calendar year by taking the average of two consecutive fiscal years for Bangladesh, Bhutan, Nepal, and Pakistan because quarterly GDP forecasts are not available.