Bangladesh's economy is projected to strengthen in the near term with the easing of inflation, exchange rates reaching stability, and adequacy in reserves, said a central bank report.
However, political programmes in the run-up to the next general election and geopolitical tensions could pose risks, it said.
The Bangladesh Bank (BB) said the economy demonstrated resilience in fiscal year (FY) 2024-25, achieving moderate growth amid significant domestic and global headwinds.
Inflationary pressures eased throughout the second half of FY25, supported by the BB's tight monetary policy, which reduced domestic demand and inflation expectations.
Also, on the external front, steady export performance, substantial remittance inflows, significant inflows of medium- and long-term loans, and a rise in foreign direct investment strengthened the balance of payments conditions in FY25.
"This led to the stabilisation of the exchange rate and the building of comfortable foreign exchange reserves," the BB said in its quarterly report for the April-June period of FY25, published online on Sunday.
The report said the economy reflected a solid performance and signs of macroeconomic stability amidst disruptions linked to the mass uprising in the July-August period of 2024.
The growth of gross domestic product (GDP), the value of final goods and services produced in an economy during a specific period, slowed to 3.97 percent in FY25.
This was due to a weaker performance in agriculture and moderate growth in the services sector, even though the industrial sector showed stronger momentum during the year.
The BB said private consumption expenditure growth decelerated to 4.77 percent in FY25 compared to 5.99 percent in FY24 due to a decrease in real income and purchasing power, along with higher interest rates.
Investment grew by 1.76 percent in FY25, lower than 3.27 percent in FY24, due to higher inflation and rising borrowing costs, along with political developments arising after the July uprising, it added.
The report said private sector credit grew at a historically low rate of 6.5 percent, reflecting subdued business confidence alongside the cumulative impact of the tight monetary stance.
Government consumption expenditure growth also dropped sharply to 3.21 percent from 9.77 percent during the same period, resulting from the interim government's austerity measures.
The BB quarterly report said the external sector demonstrated notable resilience in the fourth quarter of FY25.
It was supported by strong remittance inflows, a stable market-determined exchange rate, higher inflows of medium- and long-term loans, including assistance from development partners, and steady export growth.
"The overall condition of Bangladesh's economy is satisfactory. It has overcome significant challenges and achieved macroeconomic stability, with resilient GDP growth," the report said.
Looking ahead, the expected easing of inflation, strong remittance inflows, and improved foreign exchange reserves are likely to increase private consumption and investment in the coming quarters.
All of these are indicative of a robust economic recovery, the BB said.
"To this end, the industrial and service sectors are expected to gain momentum, supporting Bangladesh's steady economic expansion."
On inflation, it said favourable rainfall, easing global commodity prices, exchange rate stability, and a growing foreign exchange reserve are likely to help contain inflation.
Softer global commodity prices should also help contain price pressures, it said.
The 12-month average inflation is projected to decline to 6.5 percent at the end of FY26, it added.
"Bangladesh Bank is expected to gradually reverse its contractionary monetary policy stance once inflation demonstrates a sustained downward trend," the report said. The central bank may adjust the policy rate if the downward trend in inflation persists.
However, the financial sector continues to face major problems with non-performing loans. This has had an impact on capital adequacy performance and banks' ability to make investments, said the BB.
On the trade front, it said the final reciprocal US tariff for Bangladesh may open up new opportunities for exports to the US, particularly for readymade garments, as low-end garment items remain competitive.
"The ongoing banking sector reforms, including the upcoming bank mergers and acquisitions, are expected to address the challenges of the industry," the BB said.
However, it said, "The political events leading up to the next general election continue to be a cause for concern as they pose a risk to the economy's strong growth trajectory."
The BB said domestic political developments during the period before the next general election remain a concern for investor confidence and the momentum of FDI inflows.