Industrial growth hits decade low. Can it double next year?

Bangladesh’s industrial sector grew by just 2.86 percent in fiscal year 2025-26, marking its slowest expansion in a decade.

The weak performance came despite the economy growing at a faster pace this year. Gross domestic product (GDP) expanded by 4.14 percent, up from 3.49 percent in 2024-25, according to provisional data of the Bangladesh Bureau of Statistics (BBS).

Businesses and economists attributed the industrial slowdown to slowing exports, subdued domestic demand, stubbornly high inflation, energy shortages and financing constraints. Industry accounts for about 37 percent of Bangladesh’s gross domestic product (GDP).

“Many factories and production have been suffering from an energy shortage. We are not getting enough gas,” said Mir Nasir Hossain, former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI).

Many industries are operating at only 30-40 percent of capacity, he said, with ceramics and glass manufacturers particularly affected by acute gas shortages. “As interest rates on loans are too high, debt servicing is a major concern for entrepreneurs,” said Hossain, also managing director of The Mir Group Ltd.

Access to finance has become another major challenge as the banking sector continues to struggle with rising non-performing loans (NPLs) and lending irregularities.

“Those businesses that wanted to do business genuinely did not get loans in many instances. The problem began from then,” said Shams Mahmud, managing director of Shasha Denims.

“Business confidence fell to its lowest during the tenure of the interim government. Energy security was not ensured. The financial sector has been under stress, while weak logistics and customs-related complications have persisted. All these factors have hampered industrial production,” he said.

The Finance Division, in its Medium-Term Macroeconomic Policy Statement, said industrial activity remained subdued, with several quarters recording growth of less than 1 percent because of energy supply constraints, tight financial conditions and weakness in the ready-made garment (RMG) sector.

“In contrast, the services sector has remained comparatively resilient and continues to provide the principal support to aggregate output,” said the Finance Division. Abdur Razzaque, chairman of Research and Policy Integration for Development (RAPID), said the slowdown reflected weakness in both external and domestic demand.

“Manufacturing is the dominant component of industry, and the export-oriented garment sector alone accounts for roughly one-third of manufacturing production. With garment exports losing momentum, the principal engine of manufacturing growth has become subdued,” he said.

He said inflation, which has remained close to 10 percent for much of the past four years, has eroded purchasing power and weakened demand for locally manufactured products.

“These industries expanded strongly over the previous decade, supported by rising incomes and a growing domestic consumer market. Persistent inflation may have disrupted that process.”

Financing conditions have further worsened the situation, Razzaque said, noting that heavy government borrowing from banks risks crowding out private-sector credit.

“In an environment of high interest rates and large NPLs, financially viable banks may find lending to the government both safer and more attractive than financing private investment. This is particularly damaging for smaller and medium-sized manufacturers that have limited access to alternative sources of finance.”

CAN INDUSTRIAL GROWTH REBOUND TO 7%, AND BEYOND

Despite the slowdown, the government has projected industrial growth of 7 percent in fiscal year 2026-27, rising to 7.5 percent in FY28 and 8 percent in FY29.

The Finance Division expects deregulation, higher private investment, stronger exports, improved energy supplies and public infrastructure spending to drive the recovery.

Economists, however, said the target would be difficult to achieve unless major constraints are addressed.

Razzaque said current conditions make a rapid acceleration in industrial growth unlikely, especially amid uncertainty in the global trading environment.

“Industry is being squeezed from both sides: unreliable energy raises the cost of producing, while expensive and scarce credit limits the ability to invest.”

Against that backdrop, he said, the projected acceleration in industrial growth over the next three fiscal years “appears highly ambitious”.

“Such an acceleration would require a strong recovery in exports, domestic demand, private investment, energy availability and credit growth. At present, these conditions are not firmly in place.”

In the July-May period, the country’s exports fell 2.55 percent to $43.79 billion, due to a decline in garment shipments, according to the Export Promotion Bureau.

Razzaque said the new budget provides some benefits to the private sector, but these measures are unlikely, by themselves, to revive the industrial growth engine.

Shams Mahmud said deregulation is a positive initiative, but investors are unlikely to benefit immediately. “Nothing has happened in the last three months that all our problems have been resolved. Energy security has not been ensured. The revenue system has not been automated.”

Nasir shared a similar view. “If we get adequate gas supply, quality electricity and interest rate falls, then growth will pick up,” he commented.

Ashikur Rahman, principal economist at the Policy Research Institute (PRI) of Bangladesh, said achieving industrial growth of 7-8 percent would require lower inflation, exchange-rate stability, adequate foreign currency for imports, reliable energy supplies, and a significant recovery in private and foreign investment.

“The government must also ensure predictable tax and regulatory policies, improve port and customs efficiency, reform the banking sector, and support export diversification and productivity growth,” said the economist.

Without these improvements and stronger global demand, the projections are more aspirational than achievable, he said.

Selim Raihan, executive director of the South Asian Network on Economic Modeling (Sanem), shared a similar assessment.

He said restoring macroeconomic stability, improving access to finance, ensuring uninterrupted energy supplies, attracting more foreign investment and diversifying exports beyond the RMG sector would be critical for sustained industrial expansion.

“Without meaningful progress in these areas, industrial growth is likely to remain below the government’s projected trajectory, making the medium-term targets difficult to achieve,” he added.