Slow reforms may weigh on Bangladesh’s growth: Fitch

Slow reforms may weigh on Bangladesh’s growth: Fitch Bangladesh’s long-term economic growth could slow if the government delays key economic and institutional reforms, Fitch Ratings has cautioned, saying such delays would also leave the economy more vulnerable to external shocks. The global credit rating agency said weak reform momentum was one of the main reasons it revised the Outlook on Bangladesh’s “B+” Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable in May. “We believe slower progress on reforms may limit the economy’s growth potential and weaken its capacity to absorb shocks,” Fitch said in its latest assessment. According to the agency, the government is reviewing or scaling back several reforms introduced under the previous caretaker administration. These include reconsidering a proposal to strengthen the independence of the National Board of Revenue (NBR), watering down measures to improve bank governance under the Bank Resolution Ordinance, and giving lower priority to a proposed Bangladesh Bank ordinance aimed at strengthening the central bank’s independence. Constitutional reforms approved through a referendum, including term limits for the prime minister and measures to strengthen judicial independence, have also stalled. Fitch said slower reform implementation and weak execution could hurt fiscal performance. Although the FY27 budget targets a revenue-to-GDP ratio of 10.2 percent, the highest since 1993, the agency does not expect the goal to be met. The government has set a revenue target of Tk 695,000 crore for FY27, including Tk 604,000 crore to be collected by the NBR. “Given a weak implementation record, we think these revenue targets are unlikely to be achieved,” Fitch said. The agency expects the government to keep spending below budgeted levels, mainly by cutting capital expenditure to contain the fiscal deficit. It said this could further slow medium-term growth. Fitch also expects Bangladesh’s external position to remain fragile because of limited exchange rate flexibility, a widening current account deficit and uncertainty over a new International Monetary Fund (IMF) programme. However, strong remittance inflows and continued financing from bilateral and multilateral development partners should help cushion the economy, it said. Remittances rose to $35.6 billion in FY26 from $30.3 billion a year earlier, while the government sought a new IMF-supported programme in June. The agency said inflationary pressures remain high, partly because of shortages of essential commodities. Although headline inflation eased to 8.71 percent in March 2026 from 9.13 percent in February, it remained well above Bangladesh Bank’s FY26 target range of 6.5-7.0 percent. Fitch said fuel price increases for diesel, kerosene, petrol, octane and liquefied petroleum gas (LPG), which took effect on April 19, are likely to add to inflationary pressures. It expects average inflation to remain around 9 percent in FY27, unchanged from FY26. The agency also highlighted persistent weaknesses in the banking sector, particularly among state-owned banks. Gross non-performing loans stood at 30.6 percent at the end of December 2025 and could rise further once regulatory forbearance measures are withdrawn, increasing contingent liabilities if credit stress intensifies. Private sector credit growth also slowed to 6 percent in January 2026 from nearly 10 percent two years earlier, weighing on investment, it said. Despite these challenges, Fitch said Bangladesh’s relatively low government debt remains a key credit strength. It expects gross government debt to stabilise at around 38 percent of GDP over the medium term, below the median for “B”-rated sovereigns. However, it warned that contingent liabilities from the banking sector, debt owed by state-owned enterprises and higher borrowing costs pose risks to the debt outlook. The government’s interest-to-revenue ratio reached about 29 percent at the end of 2025, more than double the 14 percent median for “B”-rated peers, adding to fiscal pressure. Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said he agreed with Fitch Ratings’ assessment that slow progress on reforms could curb Bangladesh’s growth potential. He said delaying reforms would only increase the cost of implementation while reducing the benefits of other policy measures. Stressing the need for a comprehensive approach, he said reforms should be pursued through parallel and integrated initiatives to strengthen investor confidence and attract both domestic and foreign investment. Asked which reforms should be prioritised, Mustafizur said the immediate focus should be on implementing measures already introduced, including the single-window system, the logistics policy and customs reforms. On the banking sector, he said priority should be given to passing the pending Banking Companies (Amendment) Act and ensuring the independence of Bangladesh Bank. He also called for sustained efforts to reduce loan defaults and strengthen banking sector governance.