High inflation and reduced employment have worsened family welfare, with industry and service sector workers hit hardest, the World Bank said in its latest Bangladesh Development Update released on Tuesday.
In its twice-yearly-update, the World Bank also view that global and domestic factors in the combined impact have created a challenging macro-fiscal context for Bangladesh and timely reforms could bolster the country鈥檚 economic and institutional resilience.
The report identified that high inflation and shrinking employment opportunities have harmed family welfare, with workers in the industrial and services sectors particularly affected by job losses and wage cuts.
Furthermore, the report highlights a rising income inequality, particularly in urban areas, with the Gini Index increasing from 0.50 in 2010 to 0.53 in 2022.
The World Bank projects that extreme poverty will increase by 0.7 percentage points in 2024, impacting 1.2 million people, while urban income inequality continues to rise.
Bangladesh鈥檚 post-Covid recovery continues to face challenges from high inflation, balance of payments deficit, financial sector vulnerabilities, and shrinking job opportunities for its youth, especially women and educated youths, according to the report.
The development update highlights that global and domestic factors have created a challenging macro-fiscal context for the country. Bangladesh鈥檚 real GDP growth moderated to 5.2 per cent in FY24, primarily due to weak consumption and exports.
It is projected to decelerate to 4.0 per cent in FY25, driven by subdued investment and industrial sector activities, before accelerating to 5.5 per cent in FY26 and returning to a robust growth trajectory thereafter.
Increased political instability, poor corporate governance, and the potential insolvency of some banks could further weaken an already fragile financial sector, hindering economic activity, the World Bank report mentions.
The report says that escalating geopolitical tensions and rising protectionism might push global commodity prices higher and disrupt supply chains, leading to weaker-than-expected growth in key trade partners impacting Bangladesh鈥檚 export growth.
The economic update also mentions substantial challenges the country is facing in job creation, job quality, and addressing skills shortages and mismatches.
The private sector must generate more jobs, but most businesses are small and encounter significant barriers to growth. The informal sector, which accounts for 84.9 per cent of total employment, suffers from low productivity.
To address these challenges, Bangladesh needs a comprehensive policy approach aimed at improving the business environment, attracting foreign investment, promoting export diversification, and upgrading education and technical training systems to better meet employer demands, the World Bank suggests.
The report highlighted urgent and bold reforms to help the country return to a strong, inclusive and sustainable growth path.
The report mentions that the global challenges, including the conflicts in Ukraine and the Middle East, continue to dampen global growth, which is expected to remain below pre-pandemic levels.
Bangladesh has been facing significant domestic challenges, including high inflation, a persistent balance of payments deficit, financial vulnerabilities, and limited job opportunities, particularly for educated youths, the report mentions.
High inflation and reduced employment have worsened family welfare, with industry and service sector workers hit hardest, according to the World Bank.
Despite the overall unemployment rate declining between 2016 and 2022, young people face significantly higher unemployment rates, particularly in urban areas.
The availability of jobs has declined for urban educated youth, and job creation in large industries, like the ready-made garments sector, has stagnated.
Since 2016, while more jobs were created in Dhaka, three divisions鈥擟hattogram, Rajshahi, and Sylhet鈥攆aced significant net employment losses.聽
World Bank country director for Bangladesh and Bhutan Abdoulaye Seck said that in recent years, Bangladesh鈥檚 growth had not translated into job creation for the large number of youths entering the job market every year. Particularly, the educated youth and women faced difficulty in getting jobs to fulfill their aspirations.
鈥楤ut time and again, Bangladesh has shown extraordinary resilience and determination in the face of adversity. I am confident that with urgent and bold reforms to enhance economic and financial governance, improve business environment, Bangladesh can return to a strong and inclusive growth path, with millions of jobs for its youth,鈥� he said.
According to the report, inflation, driven by high food and energy prices, averaged 9.7 per cent in FY24, with a spike in July followed by a moderation in August.
While inflation is expected to remain high in the near term, it may gradually subside in the medium term if supply-side issues stabilise and prudent monetary and fiscal policies are maintained, the report mentions.
The fiscal deficit is estimated to have moderated marginally to 4.5 per cent of GDP in FY24 and is expected to remain within the government鈥檚 target of 4.3 per cent of GDP in FY25, with fiscal space for productive expenditures increasing only gradually.
The implementation of the Annual Development Plan declined to 80.9 per cent in FY24 compared with 85.2 per cent in FY23.
The current account deficit narrowed to $6.5 billion in FY24, thanks to a contraction in imports and robust remittances.
Remittances declined in July due to disruptions but rebounded. The balance of payment deficit also improved.
鈥楶ressure on the external sector is expected to persist in FY25, easing later if global conditions improve and exchange rate flexibility increases,鈥� said Dhruv Sharma, World Bank senior economist and co-author of the report.
In May 2024, Bangladesh Bank implemented a crawling peg exchange rate system as a step towards a market-driven exchange rate system. This led to a narrowing in the gap between the formal and informal exchange rates.
While the banking sector faces tight liquidity conditions and an increase in non-performing loans, the central bank has prioritised restoring discipline and stability in the sector alongside managing inflation.
The report mentions that the interim government has a crucial opportunity to enact significant reforms enabling the country鈥檚 economic and institutional resilience to bolster.
Key priorities include ensuring macroeconomic stability amid high inflation and potential political disruptions, while governance reforms are essential for restoring public trust, it views.
The World Bank hoped that these reforms should focus on enhancing transparency, accountability, and reducing corruption in both public and corporate sectors.
To meet its development needs, Bangladesh must raise its tax-to-GDP ratio from the current low of 7.4 per cent through reforms, including separating tax policymaking from administration, rationalising tax expenditures, adopting a uniform VAT rate, and reducing tariffs, the economic update also suggests.
Additionally, financial sector reforms, which includes enforcing banking regulations, restructuring stressed banks, and improving governance in the state-owned banks, are critical for maintaining stability and fostering private investment, the report adds.