Fitch Ratings has revised Bangladesh’s credit outlook to ‘Negative’ from ‘Stable’, warning that rising external vulnerabilities, weak reforms, persistent banking sector fragility and governance weaknesses were eroding the country’s ability to absorb economic shocks.

In a report published on Wednesday, Fitch Ratings affirmed Bangladesh’s long-term foreign currency issuer default rating at ‘B+’ but downgraded the outlook, signalling increased risks over the medium term.

A sovereign credit rating reflects a country’s ability to repay foreign debt. A negative outlook means the rating agency sees a higher possibility of a future downgrade if economic conditions deteriorate further.

The move could increase Bangladesh’s borrowing costs in international markets and make foreign lenders, investors and global suppliers more cautious in dealing with the country.

Economists said a weaker outlook may complicate negotiations for foreign loans, raise costs for opening letters of credit (LCs) for imports and discourage foreign investment at a time when Bangladesh is already struggling with reserve pressure, high inflation and weak private investment.

Fitch said Bangladesh remained highly exposed to the ongoing Middle East conflict because nearly half of the country’s remittance inflows originate from the region, while petroleum imports account for almost 15 per cent of total imports.

The agency warned that any prolonged disruption in oil supply or remittance flows could sharply weaken Bangladesh’s external sector.

Remittances accounted for 3.5 per cent of GDP in 2025.

The report said that Bangladesh’s foreign exchange reserves stood at $29.5 billion in March 2026, equivalent to around four months of external payments, remaining below the median level for countries with similar ratings.

Fitch also expressed concern over slowing reforms, weak institutional governance and declining policy credibility.

It noted that proposed constitutional reforms, including measures related to judicial independence and limits on prime ministerial terms, had stalled.

The agency highlighted severe weaknesses in the banking sector, where gross non-performing loans reached 30.6 per cent at the end of December 2025, mainly driven by state-owned banks.

It warned that bad loans could rise further once regulatory forbearance measures are withdrawn.

High default loans force banks to keep large provisions against possible losses, reducing their ability to provide fresh loans to businesses and industries.

Fitch noted that private sector credit growth had fallen to 6 per cent in January 2026 from nearly 10 per cent two years earlier, slowing investment activity.

The report projected Bangladesh’s economic growth at 3.7 per cent in FY26 and 3.5 per cent in FY27, citing falling garment exports, weak global demand, higher domestic costs and uncertainty in global trade.

Inflation also remained a major concern.

Consumer inflation eased slightly to 8.71 per cent in March 2026 from 9.13 per cent in February, but remained well above Bangladesh Bank’s target range of 6.5-7 per cent.

Fitch said recent fuel price hikes could intensify inflationary pressure further.

The agency identified Bangladesh’s weak revenue collection as another major vulnerability.

Government revenue fell to only 7.9 per cent of GDP in FY25 from 8.3 per cent a year earlier, limiting the government’s fiscal capacity.

Fitch expected gross government debt to stabilise at about 38 per cent of GDP over the medium term, well below the ‘B’ median.

Potential contingent liabilities from the banking sector, debt of state-owned enterprises, and higher borrowing costs are risks to the debt trajectory.

Fitch also criticised Bangladesh’s governance standards, citing weak institutional quality, corruption concerns and poor regulatory effectiveness.

The country ranked in the 18th percentile in the World Bank’s governance indicators, far below the median for similarly rated economies.