Economic Recovery Faces Slowdown as S&P Revises BD's Outlook to Negative

Negative Outlook Reflects Rising External Risks, Banking Sector Weakness and Sluggish Investment

Bangladesh's economy is facing mounting challenges on multiple fronts. Inflation remains stubbornly high, real household incomes continue to decline, employment generation is weak, and private investment has yet to regain momentum. At the same time, growing uncertainties in the energy market and the country's external sector are adding fresh pressure, making macroeconomic stability increasingly difficult to sustain.

Against this backdrop, the new government faces a difficult policy dilemma: which challenge should be addressed first? Containing inflation, creating jobs, restoring confidence in the banking sector, or ensuring energy security—all demand urgent attention. Over the past several years, Bangladesh's economy has navigated a series of setbacks. GDP growth has slowed for three consecutive years, while sluggish private investment has constrained the economy's capacity to generate new employment opportunities.

Financial sector vulnerabilities have also intensified. Several banks continue to rely on government liquidity support to remain operational. Meanwhile, inflation has stayed above 8 percent, eroding household purchasing power and disproportionately affecting low-income families. Weaker revenue collection has further limited the government's fiscal space, reducing its ability to stimulate economic activity through higher public spending.

Although remittance inflows have provided some relief to the external sector, export performance remains fragile. At the same time, the ongoing conflict in the Middle East has created fresh risks for the global economy. Higher import costs, weaker export demand, and potential disruptions to overseas employment could widen Bangladesh's current account deficit and place additional pressure on foreign exchange reserves.

The energy sector is also facing renewed uncertainty. If global oil prices continue to rise, pressure on the Bangladeshi taka could intensify, potentially fueling further inflation. Higher fuel prices would also increase government subsidy requirements, placing additional strain on public finances.

Amid these growing economic headwinds, international credit rating agency S&P Global Ratings has revised Bangladesh's long-term sovereign credit outlook from "Stable" to "Negative." However, the agency affirmed the country's 'B+' long-term and 'B' short-term sovereign credit ratings.

In a report released on July 27, S&P said Bangladesh's economic recovery could slow significantly over the next 12 to 18 months, citing persistent weaknesses in the banking sector, geopolitical tensions in the Middle East, volatility in global energy markets, and increasing external vulnerabilities.

According to the report, Bangladesh's average economic growth is expected to remain around 4.5 percent over the next three years. Persistent banking sector weaknesses, energy-related uncertainties, and mounting pressure on the ready-made garment (RMG) export sector are expected to constrain growth. The lingering effects of the 2024 political crisis continue to weigh on the economy, while structural weaknesses in the financial sector have compounded these challenges.

S&P noted that strong remittance inflows, a gradual recovery in garment exports, and financial support from multilateral development partners have helped stabilize the country's external position. The agency also said that successful implementation of fiscal and banking sector reforms under the new International Monetary Fund (IMF) programme could further strengthen Bangladesh's foreign exchange reserves. During FY2025-26, reserves increased by approximately US$6.2 billion to US$32.9 billion, while remittance inflows rose by nearly 19 percent.

Despite these improvements, S&P warned that risks to the current account remain elevated. Government revenue collection continues to hover at only 8-9 percent of GDP, well below international standards. Although reforms at the National Board of Revenue (NBR) and within tax administration are underway, the agency believes meaningful results will take time.

The report expressed particular concern over Bangladesh's banking sector. State-owned and Islamic banks continue to face severe capital shortages and high levels of non-performing loans (NPLs), posing a significant threat to financial stability. The combined NPL ratio of state-owned commercial banks has approached 40 percent, highlighting the need for extensive recapitalization and restructuring. However, S&P noted that the ongoing reform efforts have yet to produce visible improvements.

The agency also warned that volatility in global energy markets continues to keep domestic inflation elevated. Rising fuel and electricity costs have weakened consumers' purchasing power, limiting household spending and slowing demand-driven economic recovery.

Export prospects also remain uncertain. On July 24, the United States announced new tariffs on imports from Bangladesh and several other countries. Under the proposal, most Bangladeshi exports to the U.S. could face a 10 percent tariff. Given that nearly 85 percent of Bangladesh's merchandise exports come from the ready-made garment sector, the new tariff regime could pose significant risks to export earnings.

S&P does not expect Bangladesh's growth momentum to accelerate significantly over the next two to three years. The agency warned that the country's sovereign credit rating could be downgraded if long-term economic growth falls below that of peer economies or if external sector conditions deteriorate further.

What Does a "Negative Outlook" Mean?

A revision of the sovereign outlook from Stable to Negative does not constitute an immediate downgrade of Bangladesh's credit rating. Rather, it serves as a warning that economic risks have increased and that the country's credit rating could be lowered within the next 12 to 18 months if conditions continue to deteriorate.

Potential Economic Implications

A negative sovereign outlook may increase Bangladesh's borrowing costs in international financial markets and weaken investor confidence. Persistent weaknesses in the banking sector, elevated inflation, energy market volatility, and export uncertainty could further slow economic growth. A widening current account deficit would put additional pressure on foreign exchange reserves, while high inflation would continue to erode household purchasing power, dampening domestic consumption and private investment.

Overall, Bangladesh's economy is entering an increasingly complex phase marked by structural weaknesses and rising external risks. Economists argue that restoring macroeconomic stability, rebuilding investor confidence, and accelerating private investment will require a well-coordinated policy response. At the same time, comprehensive structural reforms will be essential to ensure sustainable long-term economic growth.