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Investing.com -- On Thursday, Fitch Ratings affirmed Bangladesh’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ’B+’ with a Stable Outlook. The rating reflects a balance between a moderate level of government debt, access to official external financing, and challenges such as a low government revenue-GDP ratio, significant financial sector weaknesses, and low international reserves.
Bangladesh’s external refinancing risks are mitigated by a manageable external debt repayment profile, progress in reforms to improve macroeconomic stability, and efforts to address banking-sector weaknesses. The country has been part of a 42-month IMF programme since 2023. However, the risks persist due to elevated domestic political uncertainty, high inflation, and global trade policy uncertainties.
The country has seen easing foreign exchange pressures due to a shift to a crawling peg, steady ready-made garment (RMG) export performance, lower commodity prices, and more limited exchange-rate pressures. Remittances have surged by about 28% since last July, and RMG exports have grown by about 10% year on year over the same period. The current account deficit is predicted to narrow to 0.6% of GDP in the fiscal year ended June 2025 (FY25), before widening to 1.7% of GDP in FY26 as imports normalize.
Bangladesh’s international reserves have been stable at around $20 billion-21 billion since August 2024, despite a narrower current account deficit and slightly higher currency flexibility. The reserves are expected to rise slightly, averaging 3.3 months of current external payments over 2025-2026, below the 4.3-month ’B’ median. High external financing needs, forecast at 41% of reserves in 2025, are mitigated by access to external bilateral and multilateral financing.
Bangladesh faces a potential 37% reciprocal tariff rate from the US if a new agreement is not reached after the 90-day pause by the Trump administration. The direct impact of higher tariffs may be limited, as Bangladesh’s exports to the US account for just under 2% of GDP. The EU, accounting for nearly 50% of total RMG exports, remains the key market for RMG and is duty-free. Yet, the economy is still at risk from a broader slowdown in global trade given limited room for counter-cyclical policy response.
GDP growth is forecast to reach 3.5% and 4.0% in FY25 and FY26 respectively, down from 4.2% in FY24 and 5.8% in FY23. The policy rate has been hiked by 150bp to 10% since August 2024 to contain inflation, which is still elevated at 9.1%. Annual average inflation is forecast at 8% in 2026, double of the projected ’B’ median.
The interim government that took office in August 2024, after the Awami League government was ousted, has initiated wide-ranging reforms to improve public institution transparency, the fiscal framework, and governance, and to address banking-sector weaknesses. Elections are likely to be held in the first half of 2026. Policy and reform continuity is uncertain and may affect the progress of the IMF programme.
Fitch expects Bangladesh’s gross government debt to stabilize at about 41% of GDP over the medium term, which is below the ’B’ median of 52%. The fiscal deficit is projected to stabilize at just under 4% of GDP in the next two years as underspending offsets revenue shortfalls. However, potential contingent liabilities from the banking sector, debt of state-owned enterprises, and higher borrowing costs pose risks to the debt trajectory.
The banking sector’s credit metrics - asset quality, capitalization, and governance standards - are weak, especially for public-sector banks. The banking sector’s non-performing loan ratio was 20.2% at the end of December 2024, while that of state-owned banks was about 42.8%. The banking sector could be a contingent liability for the sovereign as weaknesses in the sector are addressed.
Bangladesh has an ESG Relevance Score of ’5’ for both Political Stability and Rights, and the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGIs) have in Fitch’s proprietary Sovereign Rating Model. Bangladesh has a low WBGI ranking in the 23rd percentile, reflecting weak rights for participation in the political process and institutional capacity, uneven application of the rule of law, and a high level of corruption.
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