Fitch Revises Bangladesh Outlook to Negative

The Fitch Ratings logo at their offices at Canary Wharf financial district in London,Britain on 3 March 2016.

Global credit rating agency Fitch Ratings has revised Bangladesh’s economic outlook from “stable” to “negative” while affirming the country’s Long-Term Issuer Default Rating (IDR) at “B+”, citing rising external vulnerabilities, economic uncertainty and slow reform progress.

In a statement issued from Hong Kong on Tuesday, Fitch said the revised outlook reflects increasing macroeconomic and external financing risks, particularly due to Bangladesh’s exposure to the ongoing conflict in the Middle East.

The agency said limited progress in implementing reforms aimed at strengthening the country’s policy framework, public finances and financial sector also contributed to the decision.

Fitch further noted that weak institutional governance continues to reduce Bangladesh’s ability to absorb economic shocks effectively.

Despite the negative outlook, the agency maintained Bangladesh’s sovereign rating at “B+”, pointing to moderate public debt levels and continued access to concessional external financing.

However, Fitch said these strengths are offset by weak external liquidity, governance challenges, persistent problems in the banking sector and weaker structural indicators compared with peer economies.

Risks From Middle East Conflict

According to Fitch, the ongoing Middle East conflict poses significant risks to Bangladesh through higher energy import costs and potential disruptions to remittance inflows.

Nearly half of Bangladesh’s remittances, equivalent to around 3.5 percent of GDP in 2025, originate from Middle Eastern countries. Meanwhile, crude oil and petroleum products account for almost 15 percent of total imports, estimated at around $10 billion this year.

Although strong remittance inflows in FY26 have provided short-term support to external finances, Fitch warned that prolonged instability could create fresh pressure on foreign exchange reserves and the local currency.

The agency also cautioned that widening current account deficits, rising demand for foreign currency and uncertainty surrounding the continuation of the IMF programme could intensify external financing pressures.

Reform Progress Remains Uncertain

Fitch said uncertainty has increased over the administration’s commitment to carrying out key reforms.

The agency noted that several fiscal and banking sector reforms aimed at strengthening governance and improving institutional independence are currently under reconsideration.

It also observed that proposed constitutional reforms, including measures related to prime ministerial term limits and judicial independence, remain stalled.

Revenue Weakness and Inflation Concerns

Low revenue collection continues to be one of Bangladesh’s long-standing fiscal weaknesses. Fitch said government revenue declined to 7.9 percent of GDP in FY25 from 8.3 percent a year earlier.

The agency attributed weak revenue performance to extensive tax exemptions, inefficient tax administration and low tax compliance.

Fitch forecasts Bangladesh’s fiscal deficit could widen to 3.6 percent of GDP by 2027 due to continued budget underperformance.

Inflationary pressure also remains high. Headline inflation eased slightly to 8.71 percent in March 2026 from 9.13 percent in February but remained well above the central bank’s target range of 6.5 to 7 percent for FY26.

The agency said recent increases in fuel prices, including diesel, kerosene, petrol, octane and liquefied petroleum gas (LPG), are likely to add further inflationary pressure.

Fitch expects inflation to remain at around 9 percent in FY27.

Slower Growth and Banking Sector Risks

Fitch projected Bangladesh’s economic growth at 3.7 percent in FY26 and 3.5 percent in FY27, warning that prolonged high energy prices and global uncertainty could weaken growth further.

The agency also reported that ready-made garment exports have come under pressure due to weaker global demand, rising production costs and the diversion of export orders caused by reciprocal tariffs.

Fitch said Bangladesh’s banking sector remains fragile, particularly state-owned banks.

According to the agency, the gross non-performing loan ratio rose to 30.6 percent by the end of December 2025, with most bad loans concentrated in state-owned financial institutions.

It warned that non-performing loans could rise further once temporary regulatory support measures are withdrawn.

Private sector credit growth also slowed sharply to 6 percent in January 2026, down from nearly 10 percent two years earlier, affecting overall investment activity.

Debt Position Still Moderate

Despite the challenges, Fitch expects Bangladesh’s gross government debt to stabilise at around 38 percent of GDP over the medium term, remaining below the median level for countries with a “B” rating.

However, the agency warned that liabilities linked to the banking sector, state-owned enterprises and rising borrowing costs could create future fiscal risks.

Fitch also noted that Bangladesh’s interest-to-revenue ratio reached around 29 percent by the end of 2025, more than double the average for similarly rated countries, increasing pressure on public finances.

The agency added that Bangladesh continues to benefit from external financing from bilateral and multilateral lenders, which is expected to support the country’s debt repayment capacity.