High inflation and reduced employment have adversely affected family welfare in Bangladesh, particularly impacting workers in the industrial and services sectors, according to the World Bank’s latest Bangladesh Development Update.

The World Bank’s biannual report, released on Tuesday, also said that global and domestic factors have created a challenging macro-fiscal context for Bangladesh, and timely reforms could strengthen the country’s economic and institutional resilience.

The report found that that high inflation and shrinking employment opportunities have harmed family welfare, particularly affecting workers in the industrial and services sectors who have faced job losses and wage cuts.

Bangladesh’s post-COVID recovery continues to be impacted by high inflation, a balance of payments deficit, financial sector vulnerabilities, and increasingly limited job opportunities for its youth, especially women and educated individuals, it said.

Furthermore, the report highlighted that income inequality was rising, particularly in urban areas, with the Gini index increasing from 0.50 to 0.53 between 2010 and 2022.

The World Bank projected that extreme poverty will increase by 0.7 percentage points in 2024, impacting 1.2 million people, while urban income inequality continues to rise.

Despite an overall decline in the unemployment rate between 2016 and 2022, young people face significantly higher unemployment rates, particularly in urban areas. The availability of jobs has diminished for urban educated youth, and job creation in large industries, such as the ready-made garments sector, has stagnated, the report mentioned.

Since 2016, while more jobs were created in Dhaka, three divisions—Chattogram, Rajshahi, and Sylhet—have experienced significant net employment losses, it identified.

According to the update, Bangladesh’s 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.

The World Bank report cautioned that increased political instability, poor corporate governance, and the potential insolvency of some banks could further weaken an already fragile financial sector, hindering economic activity.

Additionally, escalating geopolitical tensions and rising protectionism may push global commodity prices higher and disrupt supply chains, while weaker-than-expected growth in key trade partners could dampen Bangladesh’s export growth.

The outlook indicated that Bangladesh was facing substantial challenges 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, suffered from low productivity, the report read.

To address these challenges, the World Bank suggested 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 report emphasised the urgent and bold reforms to help the country return to a strong, inclusive, and sustainable growth path.

It also noted that 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.

Moreover, Bangladesh is grappling with significant domestic challenges, such as high inflation, a persistent balance of payments deficit, financial vulnerabilities, and limited job opportunities, especially for educated youth, the outlook said.

World Bank Country Director for Bangladesh and Bhutan, Abdoulaye Seck, stated that in recent years, Bangladesh’s economic growth has not translated into job creation for the large number of youths entering the job market annually. Educated youth and women, in particular, have struggled to secure jobs that align with their aspirations.

‘But 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,’ 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 elevated 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, it mentioned.

The fiscal deficit is estimated to have marginally moderated to 4.5 per cent of GDP in FY24 and is expected to remain within the government’s 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, down from 85.2 per cent in FY23.

The current account deficit narrowed to $6.5 billion in FY24, driven by a contraction in imports and robust remittances. Although remittances declined in July due to disruptions, they rebounded subsequently. The balance of payments deficit also improved.

‘Pressure on the external sector is expected to persist in FY25, easing later if global conditions improve and exchange rate flexibility increases,’ 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 move towards a market-driven exchange rate system, resulting in a narrowing of the gap between formal and informal exchange rates.

While the banking sector faces tight liquidity conditions and elevated non-performing loans, the Bangladesh Bank prioritises restoring discipline and stability within the sector while managing inflation.

The report highlighted that the interim government has a crucial opportunity to enact significant reforms that could bolster Bangladesh’s economic and institutional resilience. Key priorities include ensuring macroeconomic stability amid elevated inflation and potential political disruptions, while governance reforms are essential for restoring public trust.

The World Bank expressed hope that these reforms would focus on enhancing transparency, accountability, and reducing corruption in both the 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 such as separating tax policymaking from administration, rationalising tax expenditures, adopting a uniform VAT rate, and reducing tariffs, the report suggested.

Financial sector reforms are essential for ensuring stability and promoting private investment, which involves enforcing banking regulations, restructuring distressed banks, and enhancing governance in state-owned banks, as highlighted in the WB report.