LDC Graduation: Reforms Need to Cope With Challenges

We are preparing to graduate from the Least Developed Country (LDC) category to a developing nation by 2026. This graduation is undeniably a milestone for us. This graduation will encapsulate our decades of structural reforms, social progress and economic ambition. Yet this transition will also usher in serious risk and responsibilities for us. Recently the World Bank in their Bangladesh Development Update” and the Asian Development Bank’s (ADB) in their “Asian Development Outlook (ADO)” report have painted a cautiously optimistic but conditional picture. Our sustainable growth and resilience are within reach, but this can be achieved only through bold and coordinated reforms.

According to the World Bank’s latest projections, our GDP growth is expected to slow to 4.8 percent in FY2026 that is lower than the government’s interim target of 5.5 percent. However, if serious reforms are effectively executed, growth could rebound to 6.3 percent in FY2027. The message is clear; our economic destiny depends heavily on inclusive reform momentum.

The ADB’s September 2025 forecast aligns with this outlook but adds nuance. It estimates 5.0 percent growth in FY2026 which is slightly up from 4.0 percent in FY2025. They forecast this will be achieved with improved domestic demand, moderated inflation and election-related spending. Yet, despite this incremental improvement, the underlying tone of both reports is unique. The message is unambiguous: the future hinges not on celebration but on action.

Our journey to LDC graduation is both a milestone and a stress test. The preferential trade benefits, concessional loans and aid flows that once cushioned our external sector will gradually disappear. Graduation will thus bring pride and pressure — pride in recognition of progress, but pressure to compete on market terms.

The World Bank emphasizes that reforms in revenue mobilization, banking sector governance and energy subsidy rationalization are non-negotiable. These are not mere administrative adjustments rather they are structural necessities. Without reform, projected growth could stall and the post-graduation period might expose vulnerabilities that have long been obscured by external support.

Jean Pesme, the World Bank’s Director for Finance, Competitiveness and Innovation for South Asia, underscores this urgency: “Bold reforms and faster implementation are essential — almost every sector of the economy depends on them.” The reality is that our economic fabric is fraying under the strain of weak institutions, low tax collection and inefficient public spending.

The fiscal deficit continues to widen due to dismal tax revenues — among the lowest in the region.  Besides, default loans have risen and trust in the financial system is eroding. The banking sector has been paralyzed by non-performing loans (NPLs), weak governance and inadequate supervision.
Both state-owned and private banks are dragging the burden of non-performing loans (NPLs) amounting to 540,000 crores. The heavy concentration of bad loans within these banks exposes the fragile financial health and adds to the strain on the sector as a whole.  Weak asset quality, poor credit risk management and political interference have perpetuated a cycle of default and recapitalization. That is draining public resources that could otherwise be channeled into infrastructure or human capital development.

Simultaneously, energy subsidies remain a major fiscal burden. A significant amount on energy subsidies, with the revised budget for fiscal year 2025 was allocated approximately BDT 620 billion for the power sector, though the power allocation is expected to increase as plans to clear arrears are enacted. The World Bank recommends a gradual phase-out, arguing that these subsidies distort incentives, crowd out productive investment and impede the transition to renewable energy. A reallocation of these funds toward productivity like enhancing infrastructure particularly in renewable energy would improve both fiscal health and long-term sustainability.

The economic slowdown is not merely a macroeconomic issue; it is deeply human. Labor force participation has also declined sharply. According to the final report of the Labour Force Survey 2024 by the Bangladesh Bureau of Statistics (BBS), the country’s labour force has decreased by 1.7 million within just one year, with women accounting for the majority of this decline. This decline in labor force is turning the demographic burden. The report shows that the total labour force in 2024 stood at 71.7 million, down from 73.4 million in the previous year. Male participation remained almost unchanged at 48 million. In 2023 their participation was 48.10 million. However, female participation dropped significantly from 25.3 million to 23.7 million during the same period.

The informal sector encompasses street vendors, domestic workers and small-scale artisans. This sector also lacks access to formal safety nets. This sector accounts for approximately 85% of our workforce but it remains highly vulnerable to economic shocks. Weak social protection mechanisms exacerbate inequality and leave millions exposed to poverty traps. Meanwhile, stagnant private investment limits job creation and stifles economic dynamism.

Our export sector which is dominated by ready-made garments (RMG) is facing new headwinds. The ADB warns that recent US tariffs of up to 20 percent on our exports particularly apparel could significantly impact growth. Tariffs on garment exports to the US have risen from 15 percent to 35 percent. Some products like manmade-fiber sweaters are facing duties as high as 52 percent. This escalation is not just an economic inconvenience; it poses a gendered challenge. The ADB notes that these tariffs will “disproportionately affect women workers,” who form the majority of the RMG workforce. At the same time, exports to the European Union face stiffer competition as the country transitions out of preferential access.

We must diversify our export basket, improve productivity and enter new trade agreements that will reduce our dependence on a few markets to remain competitive. The ADB stresses that “future growth will depend on improving the business environment, enhancing competitiveness and ensuring reliable energy supplies.”

After two years of high inflation, the Asian Development Bank (ADB) expects consumer prices to ease falling from 10.0 percent in FY2025 to below double digits in FY2026. This improvement is likely due to tighter monetary policies and better food supply. However, inflation could rise again if weak banks receive excessive liquidity support or if global commodity prices become unstable.

Both the World Bank and the ADB are worried about the total banking system which is in bad shape. The ADB’s recent report points out three big problems i.e old bad loans (called non-performing loans or NPLs), weak management within banks and not enough money to set aside to cover losses. The NPL ratio rose from 12.6 percent in June 2024 to 24.1 percent by March 2025, showing that people are losing trust in banks.  

This banking weakness threatens to choke credit supply, slow private investment and undermine macroeconomic stability. If left unchecked, the ADB warns, “credits could tighten, growth slow and fiscal liabilities rise.” Restoring health to the sector will require credible bank restructuring, enhanced supervision, recapitalization and the establishment of an asset management company to resolve bad loans.

Our economic management faces added difficulties due to weak institutional coordination. Fiscal, monetary and trade policies often operate in silos that leads to fragmented outcomes. To maintain growth above six percent, we need not only strong policies but also better cooperation among our main economic agencies. We must prioritize tax reform to broaden the revenue base, banking reform to restore financial stability and energy reform to create space for green investment. At the same time, we must ensure clear and consistent policy signals to attract both domestic and foreign investors, who value transparency, predictability and rule-based governance.

According to the Asian Development Bank (ADB), these external pressures, combined with domestic weaknesses, could heighten macroeconomic instability. Therefore, building economic resilience requires not only internal reforms but also proactive international engagement — including diversifying trade and mobilizing climate finance.

Although their projections are slightly different, both the World Bank and the Asian Development Bank (ADB) share one clear message: reform is no longer optional rather it is a necessity. Our reform plan should focus on six major areas:

1. Tax reform- We should use digital tools to improve tax collection, track tax evasion in real time and gradually remove unnecessary tax exemptions. These steps will help increase public revenue.

2. Banking Reform-The Bangladesh Bank should have more independence to enforce stricter rules on loan classification. Troubled banks should be encouraged to merge or recapitalize.

3. Energy Transition –We should gradually reduce energy subsidies. It will save public money. The money saved can be used for renewable energy projects such as solar and wind power. This will help reduce import dependency, attract green investment and support sustainable growth.

4. Labor Market Policies – We must create jobs that include more women to make better use of our workforce. We should create ambiences like training programs, childcare support and flexible work options that can help increase female participation.

5. Export Diversification – Our economy depends too much on the ready-made garment (RMG) sector. We should invest in other areas. Better logistics, trade facilitation and new market agreements are essential for success.

6. Institutional Coordination – Strong coordination among fiscal, monetary and trade policy bodies is vital for sound economic management. The Ministry of Finance, Bangladesh Bank and National Board of Revenue need to work together more closely to send consistent policy signals. This will help reduce uncertainty and improve investor confidence.


Amir Mohammed Khosru is a
banker and a columnist.