Growth, Trade Deficit and Banking Sector: Three Interconnected Crises

Bangladesh’s economy is grappling with three major crises simultaneously: slowing economic growth, a widening trade deficit and severe weaknesses in the banking sector. The World Bank’s latest report highlights a slowdown in economic activity, while Bangladesh Bank data show rising import expenditure and a growing trade gap. Substantial capital shortfalls at several banks have further exposed the economy’s structural vulnerabilities. These challenges are closely interconnected rather than isolated developments.

Growth outlook deteriorates
The downward trend in economic growth has emerged as a major concern. According to the World Bank’s Bangladesh Development Update, released on October 6, 2026, the country’s economic growth fell to 3.4 per cent in fiscal year 2025-26. The institution expects growth to remain at the same level in FY2026-27.

However, the World Bank’s Global Economic Prospects report, published in June, had projected growth of 4.6 per cent. The latest forecast is 3.1 percentage points below the government’s target of 6.5 per cent.

The International Monetary Fund (IMF), in its October World Economic Outlook, has projected Bangladesh’s growth at 3.2 per cent for FY2026-27. It also expects average inflation to reach 10.9 per cent. If the forecast materialises, annual growth would be the lowest in nearly four decades.

The World Bank has attributed the slowdown to the energy crisis, weaknesses in the banking sector and poor revenue collection. Tax revenue accounts for just 8.3 per cent of gross domestic product (GDP), one of the lowest ratios in the world. In FY2025-26, the fiscal deficit increased from 3.5 per cent to 3.9 per cent of GDP.

According to the World Bank, Bangladesh is the only country in South Asia whose growth forecast has been repeatedly downgraded.

When economic growth remains around 3 per cent while inflation stays close to 10 per cent, declining real incomes significantly increase the risk of poverty. Nearly half of the poorest households remain outside the social safety net.

Trade deficit widens amid rising imports
The imbalance in external trade is adding to the economic pressure. According to Bangladesh Bank, merchandise imports in July of FY2026-27 cost $6.44 billion, up 8.6 per cent from the same month a year earlier. Export earnings during the month stood at $4.35 billion.

Consequently, the trade deficit widened to $2.09 billion from $1.51 billion a year earlier.

Higher demand for industrial raw materials and machinery at the beginning of the new fiscal year may have contributed to the increase in import expenditure. Rising energy costs and higher prices in international markets may also have played a role.

Remittances, however, have so far helped prevent the country’s external accounts from coming under greater pressure. By August 11 of FY2026-27, remittance inflows had risen 23.8 per cent year-on-year to $4.24 billion.

The country’s gross foreign exchange reserves stood at $36.96 billion on August 10, while usable reserves under the IMF’s BPM6 methodology amounted to $32.15 billion.

In July, the current account recorded a surplus of $64 million, while the overall balance of payments showed a deficit of $630 million.

Unless exports and foreign investment increase, relying solely on remittances to shoulder the enormous burden of the trade deficit would expose the economy to considerable risks.

Banking sector faces severe capital shortfalls
The banking sector presents the most acute of the three crises. According to Bangladesh Bank’s latest Financial Stability Report, the banking sector’s capital adequacy ratio (CRAR) had turned negative by the end of 2025.

By March 2026, non-performing loans had surged to Tk 588,704 crore, accounting for 32.26 per cent of total loans.

At the end of June, 24 scheduled banks had failed to maintain the statutory minimum capital requirement. Their combined capital shortfall stood at Tk 155,866 crore.

The affected institutions included four state-owned commercial banks, two specialised banks and 18 private banks. Bangladesh Krishi Bank recorded the largest shortfall, at Tk 29,161 crore.

According to the World Bank, restructuring the banking sector will require funds equivalent to at least 10 per cent of GDP, or approximately Tk 5.5 lakh crore to Tk 6 lakh crore.

However, the FY2026-27 budget reportedly allocated only Tk 40,000 crore to support weak banks and financial institutions.

Former chief economist Mustafa K. Mujeri has argued that recapitalisation is the only option.

Three crises reinforce one another
The three crises are deeply interconnected, forming a vicious cycle that threatens economic stability.

When banks weaken, credit flows contract. In January 2026, private-sector credit growth fell to 6.03 per cent, one of the lowest levels in the past decade. A contraction in credit restricts investment and employment, further undermining economic growth.

Slower growth, in turn, reduces the incomes of businesses and individuals. As borrowers struggle to repay their loans, non-performing loans increase further.

At the same time, weak revenue collection limits the government’s ability to provide adequate financial support to banks. Rising government borrowing from banks also crowds out private-sector borrowers, further restricting access to credit.

Coordinated reforms needed
Bangladesh needs a long-term, coordinated fiscal and monetary policy framework to overcome the three-pronged crisis.

Tax revenue must be increased gradually by reducing tax exemptions and expanding the income tax base. Digitalisation of tax administration has become essential to improving revenue collection.

Instead of providing blanket subsidies in the energy sector, the government should prioritise targeted social protection for vulnerable households.

A clear, conditional, multi-year plan for bank recapitalisation is also necessary. Banks that can be restored to financial health should receive capital support subject to specific conditions, while the others should be merged or resolved through an orderly process. The deposit protection fund must also be strengthened to safeguard depositors.

A banking sector chairman has proposed gradually reducing the government’s dependence on bank borrowing to below 30 per cent.

To contain inflation, the government should maintain a high-interest-rate policy, as recommended by the IMF, while undertaking supply-side reforms in energy and market management.

Introducing a market-based exchange rate and ensuring transparency in foreign exchange reserve management are also crucial. Most importantly, Bangladesh Bank’s operational independence must be guaranteed.

Strict legal action must be taken against loan defaulters, and political interference in bank management must end. Fiscal deficit management, public debt and interest-rate policy should be brought within a coherent medium-term framework.

The World Bank has called for swift and bold reforms in banking, revenue mobilisation and the energy sector to avert a deeper economic downturn.

Such reforms may carry a substantial political cost. However, the ultimate price of failing to implement them will be borne by ordinary citizens and young people seeking employment. (by, Delwar Hossain, Journalist.)