Bangladesh's GDP growth to slow to 5.6% in FY24, improve marginally to 5.7% in FY25: WB

World Bank has projected a relatively slower GDP growth to persist in FY25 at 5.7% in Bangladesh, driven by a modest recovery in private consumption supported by a moderation in inflation. 

"Persistent inflation is expected to weigh on private consumption growth, and shortages of energy and imported inputs combined with rising interest rates and financial sector vulnerabilities are expected to dampen investor sentiment," said the Washington-based lender in its Bangladesh Development Update released today (2 April).

It also said Bangladesh's real GDP growth is projected to remain relatively subdued at 5.6% in FY24, compared to the average annual growth rate of 6.6% over the decade preceding the Covid-19 pandemic.

The report said Bangladesh's post pandemic recovery faces continued headwinds in FY24. Economic conditions worsened in FY23 as inflation increased and the balance of payments deficit widened.

The introduction of a multiple exchange rate regime in September 2022 disincentivized foreign exchange inflows, leading to a financial account deficit.

Foreign exchange rationing measures were implemented to restrict imports, which resulted in shortages of key intermediate goods, capital goods, gas and energy. 

"Real GDP growth slowed significantly to 5.8% in FY23 from 7.1% in FY22 due to weakening private
consumption and investment. Persistent inflation eroded consumer purchasing power," reads the report.

Tight liquidity conditions, rising interest rates, import restrictions, and increasing input costs stemming from upward revisions in the administered energy prices hampered investment activity.

The contribution of net exports to growth increased, led by a sharp contraction in intermediate and capital goods imports. Industrial and services growth moderated on the supply side.

Industrial sector weakness continued in FY24, with a manufacturing-driven 3.7% decline in the index of industrial production (IIP) year-on-year, the World Bank report said.

The report said the decline in foreign exchange reserves has moderated.

"The BoP deficit moderated during the first half of FY24 driven by a surplus in the current account. However, the financial account deficit has widened further. Expanding net outflows on account of net trade credit reflected increased divergence between export shipments and receipts, the slowdown in trade flows and private sector credit," it said.

A decline in Medium and Long Term (MLT) loans added to the financial account deficit. The interbank exchange rate was inadequate to clear the forex market, leading to a severe shortage of dollars.

Continued interventions by BB in the forex market led to a depletion in official gross international reserves from $24.8 billion to $20.8 billion in the first eight months of FY24, the World Bank report said.

"Investment recovery will need support from improved implementation of large public investment projects. On the supply side, this will be reflected in higher industrial growth, even though services growth is expected to remain subdued," says the report. 

Growth is expected to increase gradually over the medium term as monetary, exchange rate, financial and structural reforms are implemented.

The World Bank report said, "Even though political uncertainty has diminished with a new cabinet taking oath after the national elections held in January 2024, downside risks to the outlook are significant.

"Inadequate progress in monetary and exchange rate reforms may result in a further decline in foreign exchange reserves and persistent inflationary pressure," it added.

"Tighter liquidity conditions could exacerbate vulnerabilities in the banking sector. Fiscal risks include a revenue shortfall, potential financial sector fiscal liabilities, and deficit monetisation," said the World Bank report.