Bangladesh

The Quota-Driven Takeoff and Rural Transformation

Bangladesh entered the 1980s with a GDP of $21.5 billion in 1980, a figure that grew by 55.8 per cent over the decade to reach $33.4 billion by 1989. The ready-made-garment (RMG) sector began its ascent in this period, spurred by the Multi-Fibre Arrangement quota system and low labour costs.

By the end of the 1980s, GDP per capita had risen from $259 to $321, a 24.0 per cent increase. The sector absorbed a growing workforce from rural areas, shifting the economy away from its traditional reliance on jute and agriculture.

Decades of Doubling: From $36 Billion to $351 Billion

Between 1990 and 1999, GDP expanded by 55.2 per cent, from $36.3 billion to $56.4 billion, while GDP per capita rose from $341 to $440, a 29.1 per cent gain. The RMG sector became the dominant export earner, accounting for over 75 per cent of total exports by the late 1990s.

In the 2000s, GDP growth averaged 5.55 per cent per year, and the economy more than doubled in size from $57.5 billion in 2000 to $112.6 billion in 2009, a 95.8 per cent increase. GDP per capita climbed 72.8 per cent over the same period, from $440 to $760. The sector's expansion was supported by preferential trade access and a vast, low-wage labour force.

GDP surged from $126.7 billion in 2010 to $351.2 billion in 2019, a 177.3 per cent increase. GDP per capita rose 153.0 per cent.

The 2010s saw the most rapid expansion. GDP surged from $126.7 billion in 2010 to $351.2 billion in 2019, a 177.3 per cent increase. GDP per capita rose 153.0 per cent, from $847 to $2,142. Annual GDP growth averaged 6.61 per cent, peaking at 7.88 per cent in 2019.

The RMG sector directly employed over 4 million workers, mostly women, and generated more than 80 per cent of export revenue. This period also saw industrial upgrading, with factories investing in safety improvements after the 2013 Rana Plaza collapse. However, the economy remained heavily dependent on a single industry for foreign exchange and employment.

Fragility Exposed: Pandemic Shocks and LDC Graduation

The 2020s have exposed the fragility of the RMG model. GDP growth fell to 3.45 per cent in 2020, the lowest in decades, as global demand collapsed during the pandemic. Although growth recovered to 7.10 per cent in 2021, it slowed to 4.22 per cent in 2024. GDP per capita reached $2,606 in 2024, up 15.3 per cent from 2020, but the pace has moderated.

The sector's concentration leaves Bangladesh vulnerable to shifts in buyer preferences, exchange rate volatility, and rising competition from other low-cost producers. Inflation, as measured by the GDP deflator, averaged 8.42 per cent in the 2010s but has remained elevated in the 2020s.

Bangladesh is scheduled to graduate from Least Developed Country (LDC) status in 2026. This will end preferential trade access, including duty-free entry to the European Union and other markets. The loss of tariff advantages could raise export costs by an estimated 10 to 15 per cent for RMG products.

GDP in 2024 stood at $450.3 billion, and PPP GDP reached $1.68 trillion. The economy must diversify into higher-value manufacturing and services to sustain growth. Without structural change, the export model that drove four decades of expansion may face diminishing returns. The 2020s have seen GDP growth average 5.50 per cent, below the 6.61 per cent of the 2010s.

The Credit-Fuelled Construction Boom and Its Macroeconomic Risks

Bangladesh is scheduled to graduate from Least Developed Country (LDC) status in 2026, a transition driven by sustained economic expansion. GDP per capita rose from USD 846.57 in 2010 to USD 2,606.05 in 2024, reflecting a 208 per cent increase over that period. This income threshold, combined with human asset and economic vulnerability indices, triggers the graduation.

The shift ends decades of preferential trade access, most notably duty-free, quota-free entry to the European Union under the Everything But Arms (EBA) scheme. The European market absorbs roughly 60 per cent of Bangladesh's ready-made garment (RMG) exports, making the change structurally significant.

The loss of duty-free access will impose tariffs of approximately 9 to 12 per cent on RMG exports to the EU, depending on the product category. Bangladesh's total GDP in 2024 stood at USD 450.29 billion, with the RMG sector contributing around 11 per cent of that figure. A tariff increase of this magnitude could reduce price competitiveness against rivals such as Vietnam and Cambodia, which benefit from free trade agreements with the EU.

The World Bank has estimated that export growth could slow by 5 to 7 percentage points annually in the first five years post-graduation, a material risk for an economy where RMG accounts for over 80 per cent of total exports. Other markets, including Canada, Japan, and Australia, also provide LDC-specific duty-free access that will be withdrawn. The United States, which does not offer LDC preferences, already applies an average tariff of 15 per cent on Bangladeshi RMG.

Bangladesh's GDP growth averaged 6.61 per cent during the 2010s, but the removal of trade preferences may compress this rate. The government has pursued bilateral free trade agreements with several partners, though none have been ratified as of early 2025. The transition period, typically three years, provides limited time to renegotiate terms.

A tariff increase of this magnitude could reduce price competitiveness against rivals such as Vietnam and Cambodia, which benefit from free trade agreements with the EU.

RMG Sector Exposure and Structural Constraints

The RMG sector's dominance makes Bangladesh acutely vulnerable to the preference cliff. In 2024, the sector employed roughly 4 million workers, predominantly women, and generated approximately USD 38 billion in export revenue. GDP per capita growth from USD 2,259.60 in 2020 to USD 2,606.05 in 2024 masks the sector's concentration risk.

If tariff costs reduce export volumes by 10 per cent, the direct GDP impact could be around USD 4.5 billion, or 1 per cent of total output. The 2020s GDP growth rate of 4.22 per cent in 2024 already reflects post-pandemic moderation. Productivity constraints compound the tariff challenge. Bangladesh's GDP per capita, at USD 2,606.05 in 2024, remains well below the global average, indicating limited capital deepening.

The GDP deflator averaged 6.88 per cent in 2024, suggesting persistent inflationary pressure that raises production costs. Competitors like Vietnam have invested heavily in automation and backward linkages, while Bangladesh still imports over 80 per cent of its fabric. The loss of preference margins may accelerate margin compression, particularly for low-value, basic garment items where price sensitivity is highest.

Diversification into higher-value segments, such as synthetic fibres and technical textiles, requires significant capital investment. Bangladesh's PPP GDP, at USD 1.68 trillion in 2024, provides a large domestic market but does not directly offset export competitiveness. The 2010s saw GDP growth peak at 7.88 per cent in 2019, driven by RMG expansion and infrastructure spending. Replicating that trajectory without preferential access will require structural reforms in logistics, energy, and customs efficiency. The graduation deadline imposes a fixed timeline for these adjustments.

Policy Responses and Mitigation Strategies

The government has sought to mitigate the impact through bilateral trade negotiations and domestic reforms. A continuity of trade benefits arrangement with the EU is under discussion, but no agreement has been finalised. Bangladesh's GDP growth in the 2020s averaged 5.50 per cent, with a low of 3.45 per cent in 2020 during the pandemic. Maintaining growth above 6 per cent post-graduation will depend on securing new market access.

The country has applied for accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), though membership is not imminent. Domestically, the government has invested in special economic zones and infrastructure under the Delta Plan 2100. The GDP deflator, which fell from 7.14 per cent in 2010 to 3.66 per cent in 2019, rose to 6.88 per cent in 2024, reflecting supply-side constraints and global commodity prices.

Improving energy reliability and reducing port dwell times could lower production costs by an estimated 10 to 15 per cent, partially offsetting tariff losses. The RMG sector's compliance with international labour and environmental standards has improved, but certification costs remain high for smaller factories. The graduation also provides an opportunity to rebalance the economy away from RMG dependency.

Bangladesh's GDP in 1980 was USD 21.46 billion; by 2024 it had grown twenty-one-fold to USD 450.29 billion. That expansion was built on labour-intensive manufacturing. The next phase requires capital-intensive diversification into sectors such as pharmaceuticals, electronics, and IT services. The LDC graduation, while disruptive, forces a necessary transition. Without it, the incentive to reform would remain weak, and the economy would risk stagnation at middle-income status. The data from the 2010s, when growth averaged 6.61 per cent, shows the potential; the 2020s will test whether that potential can be realised under new trade rules.

Remittances as a stabilising force

Bangladesh's external accounts have long depended on remittance inflows to offset a persistent trade deficit. In the 2010s, GDP grew by 177.3 per cent, from $126.7 billion in 2010 to $351.2 billion in 2019, a period of rapid import expansion.

Remittances, which averaged roughly $15 billion annually in the late 2010s, covered over 40 per cent of the merchandise trade gap. This flow supported the current account, allowing the central bank to accumulate foreign exchange reserves. By 2019, reserves stood at approximately $32 billion, equivalent to over seven months of import cover.

Trade deficit dynamics and the widening gap

The trade deficit widened substantially during the 2010s as capital goods and raw material imports surged alongside GDP growth. The GDP deflator averaged 8.4 per cent in that decade, reflecting domestic price pressures that increased import costs. Exports, dominated by ready-made garments, grew more slowly than imports, leaving a structural deficit.

Remittance inflows, which reached a record $18.3 billion in 2019, provided the primary offset. Without these worker transfers, the current account deficit would have exceeded 5 per cent of GDP in several years of the decade.

Pressure on the balance of payments

The 2020s brought renewed strain to Bangladesh's external position. GDP growth averaged 5.5 per cent from 2020 to 2024, down from 6.6 per cent in the 2010s. The trade deficit widened as post-pandemic import demand rebounded, while remittance growth slowed. In 2022, remittance inflows fell to $21 billion, down from a peak of $24.8 billion in 2021, as formal channels faced competition from informal hundi systems.

Foreign exchange reserves declined from $46 billion in August 2021 to under $30 billion by mid-2023, a drop of roughly 35 per cent.

Remittances financed about 70 per cent of the trade deficit in the first half of 2024, up from 55 per cent in 2022.

Remittance resilience and formalisation efforts

Despite recent pressure, remittances remain a critical support for the external balance. In fiscal year 2023-24, inflows recovered to approximately $23 billion, driven by incentives such as a 2.5 per cent cash bonus on remittances sent through official channels. The Bangladesh Bank reported that remittances financed about 70 per cent of the trade deficit in the first half of 2024.

This ratio has improved from 55 per cent in 2022, as import growth moderated. The government has also expanded bilateral labour agreements with Middle Eastern and Southeast Asian countries to sustain worker outflows.

Reserves depletion and import cover

The depletion of foreign reserves has been a central concern for the balance of payments. By December 2023, net reserves fell to $19.2 billion according to IMF definitions, covering only 3.5 months of imports. GDP in 2024 reached $450.3 billion, but the external sector remains vulnerable. The current account deficit narrowed to 0.7 per cent of GDP in fiscal 2023-24, down from 4.0 per cent in fiscal 2021-22, as import compression took effect.

Remittance inflows, alongside subdued import demand, have helped stabilise the external position, but structural risks persist.

Structural vulnerabilities in the remittance model

The reliance on remittances exposes Bangladesh to external shocks in host economies. GDP per capita rose from $2,260 in 2020 to $2,606 in 2024, a 15.3 per cent increase, but this growth is partly dependent on labour migration. Any slowdown in Middle Eastern construction or service sectors could reduce remittance flows.

The trade deficit, which averaged $25 billion annually between 2021 and 2023, requires sustained financing. Without remittances, the balance of payments would face acute pressure, forcing deeper import restrictions or a more rapid depreciation of the taka, which fell by over 20 per cent against the US dollar between 2022 and 2024.

The narrowing window of the demographic dividend

Bangladesh's demographic profile has shifted markedly across the five decades under review. The working-age share of the population has risen steadily, a trend that underpinned GDP growth from 3.4% in 1980 to 7.9% in 2019. By 2024, GDP per capita reached USD 2,606, up from USD 259 in 1980. This expansion reflects a falling dependency ratio, which has reduced the economic burden on each worker.

The 2010s saw the fastest GDP per capita growth of any decade at 153%, a period when the working-age cohort was at its largest relative to dependents. The window for reaping a demographic dividend remains open but narrows as the population ages.

Persistent gender gap in labour force participation

Female labour force participation in Bangladesh has historically been low, constraining the full utilisation of the working-age population. In 2024, the overall labour force participation rate for women was roughly 36%, compared to over 80% for men. This gap has persisted despite strong GDP growth: the economy expanded at an average of 5.5% per year in the 2000s and 6.6% in the 2010s. The GDP deflator averaged 8.4% in the 2010s, indicating that nominal gains were partly eroded by inflation.

Female labour force participation has stagnated at around 36% since 2010, even as GDP per capita doubled from USD 847 to USD 2,142.

Raising female participation to male levels could add several percentage points to potential growth, but structural barriers remain entrenched.

Structural barriers and the path to inclusive growth

Educational gains among young women have improved, yet skill mismatches limit their entry into formal employment. Secondary school enrolment for girls now exceeds that of boys, but the transition to higher education and technical training lags. GDP per capita grew from USD 847 in 2010 to USD 2,142 in 2019, a 153% increase that was accompanied by rising demand for skilled labour in garments and services. The share of women in manufacturing jobs has risen, but most remain in low-productivity roles.

The ready-made garment sector has been the primary engine of female formal employment, absorbing millions of young women since the 1990s. GDP in PPP terms grew from USD 109 billion in 1990 to USD 1,676 billion in 2024, a 15-fold increase. Garment exports account for over 80% of total exports, and women constitute roughly 60% of the sector's workforce. However, the sector's growth has slowed: GDP growth averaged 5.5% in the 2000s and 6.6% in the 2010s, but fell to 4.2% in 2024.

Urbanisation has accelerated, with Dhaka's population exceeding 20 million, but most female migrants work in the informal sector. Informal employment offers no social protection and low wages, limiting the dividend's impact on poverty reduction. GDP per capita in 2024 was USD 2,606, up from USD 2,260 in 2020, a 15.3% increase over four years. Yet the informal sector accounts for roughly 85% of female employment. The GDP deflator rose to 6.9% in 2024, eroding real incomes for informal workers.

Social norms around women's roles outside the home remain a binding constraint, despite legal reforms. The female labour force participation rate has stagnated at around 36% since 2010, even as GDP per capita doubled from USD 847 to USD 2,142. The 2010s saw the highest GDP growth of any decade at 7.9% in 2019, yet female participation did not rise proportionally. Childcare responsibilities, lack of safe transport, and workplace harassment deter entry.

The demographic dividend will peak around 2030, after which the old-age dependency ratio will rise. GDP growth in the 2020s has averaged 5.5%, down from 6.6% in the 2010s, partly reflecting a slowdown in labour force expansion. The PPP GDP reached USD 1,676 billion in 2024, but sustaining this requires higher productivity. Female labour force participation must rise to 50% or more to maintain growth momentum. Without it, Bangladesh risks a middle-income trap where the dividend fades before the economy has diversified.

Infrastructure and energy deficits

Bangladesh's infrastructure has not kept pace with the rapid economic expansion of the 2010s, when GDP grew by 177.3% from $126.7 billion to $351.2 billion. The country's power generation capacity reached approximately 25,000 MW by 2024, yet peak demand often exceeds supply by 1,500 MW during summer months.

Gas supply shortages of around 400 million cubic feet per day constrain industrial output, forcing factories to rely on expensive liquid fuel alternatives. Road density remains low at roughly 21 km per 100 square kilometres, impeding logistics for the ready-made garment sector, which accounts for over 80% of exports.

Energy import dependency and costs

Bangladesh imports about 85% of its primary energy requirements, including crude oil, LNG, and coal. The import bill for fuel and energy rose from $4.5 billion in 2019 to $8.2 billion in 2023, straining the current account. The country's LNG import capacity is limited to two floating terminals, each handling roughly 3.75 million tonnes per annum.

A planned third terminal has been delayed due to foreign exchange shortages. These constraints have forced the government to ration gas supply to industries, reducing capacity utilisation in the fertiliser and textile sectors by an estimated 15-20%.

Foreign exchange reserve depletion

Foreign exchange reserves fell from a peak of $48 billion in August 2021 to approximately $26 billion by mid-2024, covering less than four months of imports. The Bangladesh Bank has intervened heavily, selling over $20 billion in the interbank market since 2022 to defend the taka, which depreciated by roughly 30% against the US dollar between 2021 and 2024.

Foreign exchange reserves fell from a peak of $48 billion in August 2021 to approximately $26 billion by mid-2024, covering less than four months of imports.

Remittance inflows, a key source of FX, grew only 2.5% in fiscal 2023-24 to $24.5 billion, while exports rose 4.8% to $55.6 billion, insufficient to close the trade gap. The current account deficit widened to $8.7 billion in fiscal 2023.

Impact on import capacity

Depleted reserves have forced the government to prioritise essential imports, including food grains and fuel, while restricting non-essential goods. Letters of credit (LC) opening for capital machinery fell by 12% year-on-year in 2023, signalling a slowdown in industrial investment. The central bank imposed a 100% cash margin on LCs for luxury goods, reducing their import volume by an estimated 40%.

This squeeze has delayed infrastructure projects, including the Padma Bridge rail link and the Rooppur nuclear power plant, both of which require significant foreign equipment and financing.

Growth risks from energy and FX constraints

GDP growth slowed from 7.9% in 2019 to 4.2% in 2024, reflecting the combined drag from energy shortages and import compression. The World Bank estimates that power outages cost the economy 1-2% of GDP annually. The manufacturing sector, which contributes roughly 20% of GDP, saw its growth rate drop from 12.1% in 2019 to 5.5% in 2023.

Without resolution of the FX crisis, import-dependent sectors such as textiles, chemicals, and electronics face continued disruption. The IMF's $4.7 billion loan programme, approved in January 2023, has provided some relief, but disbursements are tied to fiscal consolidation and exchange rate reforms.

Policy responses and structural constraints

The government has sought to address the squeeze through a managed float of the taka, a reduction in subsidies, and a push for renewable energy. Solar capacity expanded from 500 MW in 2020 to 1,200 MW in 2024, but still accounts for less than 5% of total generation.

The Bangladesh Bank raised the policy rate from 5.5% in 2022 to 8.5% in 2024 to curb inflation, which averaged 9.7% in fiscal 2023-24. However, the high cost of borrowing has discouraged private investment, which fell by 3.2% in real terms in 2023. The infrastructure deficit remains acute, with an estimated $100 billion needed over the next decade to meet development goals.

Credit Deepening Outpaces Economic Growth

Bangladesh's financial system has undergone significant credit deepening since the 2000s. The ratio of private sector credit to GDP has risen substantially, supported by rapid nominal GDP growth that expanded from $57.5 billion in 2000 to $450.3 billion in 2024.

This credit expansion has financed investment and consumption, contributing to average GDP growth of 5.5% in the 2000s and 6.6% in the 2010s. However, the pace of credit growth has often exceeded GDP growth, raising concerns about asset quality and debt sustainability.

By 2024, Bangladesh's GDP per capita reached $2,606, up from $846 in 2010. The banking sector's loan portfolio has grown in tandem, with credit to the private sector expanding at an annual average of over 10% in recent years. This rapid lending has been concentrated in manufacturing, trade, and construction.

The central bank has periodically tightened prudential norms, but credit growth has remained robust, reflecting strong domestic demand and a limited corporate bond market.

Official NPL ratios have fluctuated between 8% and 12% of total loans over the past decade, well above the 5% threshold considered manageable in emerging markets.

Persistent Non-Performing Loans Undermine Bank Health

Non-performing loans (NPLs) have been a persistent weakness in Bangladesh's banking system. Official NPL ratios have fluctuated between 8% and 12% of total loans over the past decade, well above the 5% threshold considered manageable in emerging markets. The problem is concentrated in state-owned commercial banks, which account for roughly a quarter of banking sector assets.

In 2019, when GDP growth peaked at 7.9%, the NPL ratio was reported at 9.3%, indicating that even during periods of strong economic expansion, asset quality deteriorated. The COVID-19 pandemic exacerbated these strains. In 2020, GDP growth slowed to 3.4%, and the central bank introduced loan moratoriums that temporarily suppressed reported NPLs.

By 2022, as moratoriums were lifted, NPLs rose again. The mean GDP deflator for the 2020s has been 7.1%, but high inflation has eroded borrowers' real repayment capacity. Restructured loans and hidden NPLs remain a concern, with some estimates suggesting true NPL ratios could be double the official figures.

Concentrated Credit and External Pressures Raise Systemic Risk

The combination of rapid credit growth and high NPLs poses risks to financial stability. Bangladesh's banking sector capital adequacy ratio has remained above the regulatory minimum of 10%, but provisioning coverage for NPLs has been low, often below 50%. This means that a sudden deterioration in asset quality could quickly erode capital buffers.

The GDP growth rate averaged 5.5% in the 2020s (through 2024), but the banking sector's return on assets has been below 1% for most state-owned banks, limiting internal capital generation. External vulnerabilities also exist. Bangladesh's external debt has risen, though it remains moderate at around 20% of GDP.

However, the current account deficit widened to 2.1% of GDP in 2023, and foreign exchange reserves fell from $46 billion in 2021 to $27 billion by mid-2024. A depreciation of the taka by 25% against the US dollar since 2022 has increased the local currency value of foreign-currency loans, straining corporate balance sheets. These factors together raise the risk of a systemic banking crisis if economic growth slows sharply.

Credit expansion has not always translated into productive investment. The incremental capital-output ratio (ICOR) in Bangladesh has risen from around 3.5 in the 2000s to over 4.5 in the 2010s, indicating declining efficiency of investment. Much of the credit has been directed to the ready-made garment (RMG) sector, which accounts for over 80% of exports.

This concentration creates sectoral risk: any downturn in global demand for garments could trigger a wave of defaults. In 2024, GDP growth was 4.2%, down from 7.1% in 2023, partly due to weaker export growth. Small and medium enterprises (SMEs), which employ a large share of the workforce, remain underserved. Only about 30% of SME loan applications are approved, compared to over 60% for large corporations.

This credit gap constrains diversification and productivity growth. The financial sector's reliance on collateral-based lending, rather than cash flow analysis, further limits credit to dynamic but asset-poor firms. Without deeper financial intermediation, Bangladesh's potential GDP growth may remain below the 7-8% target envisaged in its development plans.

The Bangladesh Bank has taken steps to address financial sector risks. In 2023, it raised the minimum capital requirement for banks to Tk 5 billion and tightened loan classification rules. However, enforcement has been uneven. The central bank's policy rate was raised from 5.0% in 2022 to 8.5% by mid-2024 to curb inflation, which averaged 7.1% in the 2020s.

Higher interest rates increase the cost of credit and could further elevate NPLs, especially among leveraged borrowers. The government has also injected capital into state-owned banks, but these recapitalisations have been recurrent, suggesting structural governance problems. Looking ahead, Bangladesh's financial stability hinges on improving bank governance, reducing NPLs, and diversifying credit allocation.

The GDP deflator, which averaged 8.4% in the 2010s, has moderated to 6.9% in 2024, but inflation remains above the central bank's comfort zone. A sustained period of high real interest rates could suppress investment and growth. Without deeper reforms, the financial sector may remain a drag on Bangladesh's long-term development, limiting its ability to sustain the rapid income convergence seen over the past two decades.