Economic outlook is marked by cautious optimism

Food inflation, as well as overall inflation, has continued to fall since November 2024. Food inflation came down to 8.63 per cent in April 2025 from 8.93 per cent in March 2025. Similarly, general inflation came down to 9.17 per cent in April from 9.35 per cent in March.

This outcome is a result of both supply-side and demand-side measures taken by the government. On the demand side, the central bank adopted a tight monetary policy since the second half of FY25, which aimed at containing inflation and stabilising the foreign exchange market.

Apart from this, fiscal policy measures such as reducing tariffs on necessary food items, such as rice and edible oils, also contributed to this fall in inflation. The supply side effect has been facilitated by the availability of seasonal vegetables and crops due to the non-occurrence of floods and other climatic events. Such efforts are essential for achieving the target of inflation within 7-8 per cent by the end of June 2025, as expected by the Bangladesh Bank.

Similar to March, food continues to be the predominant factor in inflation, accounting for 42.2 percent. Its contribution has slightly decreased in April, and so has inflation. As part of non-food inflation, the contribution of housing and utilities (13 per cent), clothing and footwear (9.8 per cent), and transportation (7 per cent) remained the major contributors in April.

In terms of specific categories of food, the contribution of rice increased from 34 per cent in March to 40 per cent in April, indicating the shortage of rice supply in the market. The vegetable item contributed less (11.45 per cent) in April than in the previous month (14.20 per cent). At the disaggregated level, medium rice price contributed the most among all types of rice categories (19.4 per cent) in April. Brinjal, which topped (17.12 per cent) in the last month, falls to third position (11 per cent) as expected. Soybean oil remains a sizeable contributor (8.2 per cent) to food inflation this month. The fall in potato prices helps come down overall food inflation with a share of -13.6 per cent. As far as rural and urban comparison is considered, a noticeable difference is observed in food contribution between rural areas (44.7 per cent) and urban areas (36.5 per cent) in inflation.

In Bangladesh, inflationary pressures in the economy are typically instigated by supply-side issues stemming from interruptions in domestic production and supply, such as floods or natural disasters, alongside escalating global prices of food, fuels, and other critical commodities. This underscores the significance of judicious supply chain management as a crucial method to combat inflation.

In circumstances of persistent inflation, it is essential to implement direct steps to alleviate inflationary pressures rather than relying solely on demand management policies to maintain low inflation levels. To mitigate the impact of food supply shocks amid escalating food costs, it is prudent to sustain a sufficient strategic buffer stock of food, which may be distributed as necessary through various food transfer programs aimed at impoverished and food-insecure households.

Considering the financial strain of subsidies within the government's constrained fiscal capacity, targeted safety net programs, school feeding initiatives, food-for-work schemes, open market sales, and guaranteed employment programs for impoverished and disadvantaged households, particularly during lean seasons, are effective short-term measures to augment food entitlements and stabilise prices. In addition, measures need to be undertaken to create short-term employment opportunities and facilitate access to transfer incomes in rural regions. It is crucial to provide food to the poor at subsidised prices, particularly in urban areas where they lack surplus food at home.

EXTERNAL SECTOR: In April 2025, Bangladesh's external sector showed a mixed performance. While remittance inflows experienced a significant surge, exports saw a drop. These developments impacted the current account balance and the overall macroeconomic environment.

Exports in April were the lowest in the fiscal year, both in terms of value and growth, reaching $3.01 billion with a year-on-year growth of only 0.86 per cent. This decline was attributed to a slowdown in apparel exports due to Eid al-Fitr holidays and uncertainties with respect to the Trump administration's reciprocal tariff policy.

Remittances increased by 35 per cent in April compared to the previous year, indicating a robust growth in this sector. This strong remittance growth helped to offset the decline in exports and contributed to a more stable current account balance. The current account deficit is projected to shrink from 1.4 per cent of gross domestic product (GDP) in FY2024 to 0.9 per cent of GDP in FY2025. This is attributed to the narrowing trade deficit and the rising remittances.

The external sector performance in April 2025 was a mixed bag, with strong remittance inflows counteracting the decline in exports.

REVENUE COLLECTION: The National Board of Revenue (NBR) recently introduced the Medium- and Long-Term Revenue Strategy (MLTRS) for the period of FY2025-26 to FY2034-35 with a target of achieving a tax-to-GDP ratio of 10.5 per cent by FY2034-35. Before implementing the strategy, a review of how and why past reform measures have not succeeded may be necessary. Comparison with low-income countries reveals that Bangladesh's revenue as a percentage of GDP seems considerably lower than its peers. Revenue collection by NBR in this fiscal year up to March FY2025 shows no sign of improvement from last fiscal year, registering just a 2.76 per cent increase. The government's willingness to spend on development programs is largely constrained by lower revenue collection. The recent increase in expenditure may be partly explained by increased public debt.

In order to expedite revenue collection efforts, the interim government led by Professor Dr Muhammad Yunus has made a major structural reform by dissolving the NBR, to be replaced by two distinct entities under the Ministry of Finance: the Revenue Policy Division and the Revenue Management Division. This reform was suggested by the Taskforces created by the Planning Ministry and the Finance Ministry.

The Ordinance was issued on May 12, 2025. This reform aimed at improving the revenue situation of the country by improving informed policy making that lacked in the erstwhile NBR, which was also criticised for conflicts of interest and inefficiencies.

GRADUAL IMPROVEMENTS IN INVESTMENTS, BANK DEPOSITS AND PRIVATE CREDIT: In March 2025, the aggregate deposit growth in the banking system was 8.51 per cent, which was the highest in nine months. This growth was attributed to a resurgence of customer trust and a record inflow of remittances, according to data from the central bank, Bangladesh Bank.

In March 2025, Bangladesh's private sector credit growth rose to 7.57 per cent, up from 6.82 per cent in February. This increase followed a period of declining private sector credit growth, including reaching a 21-year low in February.

A notable shift occurred in public sector borrowing. Government borrowing from commercial banks surged significantly, rising to Tk 985.79 billion by mid-April - a 60 per cent increase year-on-year. This surge was due to sluggish revenue collection and the suspension of direct central bank financing. As a result, the increased reliance on commercial bank borrowing might have crowded out private sector credit access.

EXCHANGE RATES REMAINED STABLE: In April 2025, Bangladesh's exchange rate saw relatively stable movement compared to previous periods, with the Taka showing a little depreciation against the US dollar. Between April 9 and May 8, 2025, the exchange rate fluctuated within a narrow range, hovering between Tk 121.7 and Tk 122.0.

The highest rate in this period was observed on April 10 at Tk 121.99, while the lowest was on April 20 at Tk 121.48, with a standard deviation estimated at 0.13, indicating lower volatility. Although there were minor daily variations, the rate showed relative stability without sharp spikes or drops.

Towards the end of the period, the exchange rate slightly declined, closing at Tk 121.70 on May 8, down from Tk 121.96 on May 7. Overall, this suggests a period of modest volatility in the exchange market, likely to reflect a balanced interplay of economic forces with-out any major disruptions.

The Taka was competitive with the dollar in foreign trade, indicating a degree of stability. The REER (Real Effective Exchange Rate) showed a depreciating trend, and the REER-based nominal exchange rate was at par with the nominal rate in April and followed the same trend in May. Bangladesh Bank has been implementing measures like the crawling peg system to avoid excessive volatility from speculative behaviour of unscrupulous agents since last year. With positive build-up of international reserves, positive growth of exports and remittances, and judicious use of foreign reserves helped stabilise the exchange rates. This stability and equilibrium level of exchange rate signals for gradual movement toward a market-based exchange rate system. However, a cautious and prudent exchange rate management policy must be in place.

STEADY GROWTH IN FOREIGN EXCHANGE RESERVES: A general upward trend in reserves has been observed in the last few months. Gross reserves increased from $25.8 billion in July 2024 to $27.4 billion in April 2025, while BPM6 (Balance of Payments Manual 6) reserves rose from $20.4 billion to $22.0 billion during the same period.

The government, by this time, repaid outstanding bills of LNG, electricity, and oil imports in a substantial amount, indicating a healthy reserve position. There were some monthly fluctuations, most notably a decline in November 2024, followed by a significant recovery in December, suggesting temporary shifts in external inflows or valuation effects. The difference between the gross and BPM6 reserves, typically ranging between $5 to $6 billion, represents non-reserve assets included in the gross figure but excluded under BPM6 standards. Overall, the rising trend in reserves means improved foreign currency inflows, better trade performance, and increased financial stability.

ECONOMIC OUTLOOK: The economic outlook for Bangladesh in May and June 2025 is marked by cautious optimism, with a gradual restoration of macroeconomic stability through various reform measures. Economic recovery is expected to be bolstered by a favourable external sector with positive exports and remittances growth, a stable exchange rate, declining inflationary pressures, and a positive deposit and credit growth in the banking sector. While global growth is expected to remain steady, domestic challenges, including political uncertainty and inflation, are expected to weigh on the economy in the short term. Prudent measures to mitigate the adverse impact of inflation on households and build confidence among investors in the upcoming budget would be key to a strong recovery in the coming fiscal year. 

The piece is slightly abridged version of 'Economic Update & Outlook: May 2025' prepared and published by General Economics Division (GED) of Bangladesh Planning Commission, Government of the People's Republic of Bangladesh. (www. plancomm.gov.bd).

Dr Monzur Hossain is Member, GED, Bangladesh Planning Commission, is the editor and key contributor.

Other members of the GED contributing team includes: Tanvir Bashar and Md. Fahim Afsan Chowdhury are Deptuty Chief,GED; and Nepoleon Dewan, Nasrin Sultana and Arafat Rahman are Senior Assistant Chief, GED. [member.ged@plancomm.gov.bd; monzur71@gmail.com]