Upgraded from Negative to Stable

International rating agency Moody’s Ratings has upgraded the outlook on Bangladesh’s sovereign credit rating from ‘negative’ to ‘stable’, citing reduced political and external economic pressures, a recovery in foreign exchange reserves and sustained record remittance inflows. In its latest assessment released on Tuesday, the international credit rating agency kept Bangladesh’s long-term issuer and senior unsecured ratings unchanged at B2 and its short-term issuer rating at Not Prime.

Moody’s said the risks that had previously prompted it to assign a negative outlook to Bangladesh’s credit rating at the B2 level have now become more balanced. According to the agency, the post-election political transition and a strong popular mandate for the new government have significantly reduced the risk that political uncertainty could disrupt the reform process.

The report also said Bangladesh’s external position has strengthened with higher foreign exchange reserves, a flexible exchange-rate regime and record remittances, which have helped the country manage higher fuel import costs. Continued engagement with the International Monetary Fund (IMF) and other international financial institutions is also providing an important foundation for external financing and reforms. The lender is still discussing the terms of its next loan programme with the Bangladesh government.

Stronger reserves, but slow recovery in growth

Bangladesh’s foreign exchange reserves stood at around $21.4 billion at the end of 2024 and rose to approximately $32.9 billion by mid-2026. This is enough to cover more than four months of import payments. Moody’s attributed the improvement mainly to record remittance inflows through formal banking channels, a flexible exchange-rate regime and the removal of distortions that previously existed in the market.

The agency expects economic growth to recover gradually. Real GDP growth rose from 3.5% in fiscal year 2024-25 to 4.1% in FY2025-26 and is estimated to reach 4.3% in FY2026-27. Growth could subsequently rise to around 4.9% from FY2027-28 as investment and industrial activity return to normal. However, inflation is expected to remain close to 9% before gradually declining.

Banking sector remains a major weakness

Despite the improvement in the overall outlook, Moody’s kept Bangladesh’s core B2 rating unchanged, citing a narrow revenue base, weak debt-servicing capacity and severe vulnerabilities in the banking sector.

The agency said recent reforms have revealed a non-performing loan ratio of around 32.8% across the banking sector. At the same time, around 10% of GDP may be required for bank recapitalisation to maintain adequate capital levels. According to Moody’s, the limited fiscal capacity and the government’s growing reliance on the domestic banking system mean that this substantial recapitalisation requirement could place significant pressure on the government budget.

However, liquidity conditions in the banking sector remained stable during this period. Annual deposit growth stood at around 12% through March 2026, indicating that the sector’s main problem is not a liquidity shortage but rather weak solvency and inadequate capital.

Narrow revenue base increasing pressure

Moody’s noted that Bangladesh has one of the narrowest government revenue bases among the countries it rates, limiting the government’s fiscal flexibility. Although total government debt remains at a manageable level of around 40% of GDP, nearly 30% of government revenue is being spent on interest payments.

The agency expects the government’s overall debt burden to gradually increase over the medium term due to persistent institutional deficits, continued primary deficits and the possibility of additional spending to protect the banking sector. However, continued access to concessional financing would help contain the government’s borrowing costs and refinancing risks.

Energy crisis and LDC graduation pose major risks

According to Moody’s, constraints on energy supplies remain one of the major risks to Bangladesh’s economic growth prospects. A recent accident at an LNG import terminal exposed vulnerabilities in the country’s energy supply system, resulting in severe gas shortages for power generation, industrial production and fertiliser manufacturing.

The agency also warned that Bangladesh’s final graduation from the Least Developed Country (LDC) category in the coming years could put additional pressure on the country’s export capacity and access to concessional financing. The ready-made garment (RMG) sector is expected to remain the main pillar of exports because of Bangladesh’s competitive position. However, sustained structural reforms will be necessary to realise the country’s long-term growth potential.

Engagement with IMF viewed positively

Moody’s also viewed Bangladesh’s continued engagement with the IMF and other international financial institutions positively. According to the agency, such engagement is providing Bangladesh with an important foundation for securing external financing and implementing necessary economic reforms. Meanwhile, discussions between the Bangladesh government and the IMF over the terms of the next loan programme are still underway.

Factors that could lead to an upgrade or downgrade

Moody’s said Bangladesh’s credit rating could be upgraded if the country makes faster-than-expected progress in addressing weaknesses in the banking sector, achieves a significant increase in revenue collection, and improves institutional and policy effectiveness.

Conversely, pressure for a downgrade could emerge if the banking sector’s massive liabilities fall on the government budget, new setbacks occur in economic growth or revenue performance, access to external financing narrows, or political instability returns.