In 2026, Bangladesh and Nepal, located in the South Asia region, will hold general elections in February and March respectively, with reform and development focused on economic growth being the primary issues for the new governments to address. Similarly, the economy of Sri Lanka, also in the region, is experiencing a mild recovery, yet internal and external pressures continue to mount. Overall, the economic recovery trend for smaller South Asian nations in 2026 appears positive, but uncertainties persist.
World Bank data indicates that during the 2025-2026 fiscal year (July 1, 2025, to June 30, 2026), Bangladesh's economic growth rate is projected to reach 4.6%, an increase of 0.9 percentage points from the previous fiscal year. Bangladesh is scheduled to hold its parliamentary election on February 12th; if the new government effectively advances structural reforms, the growth rate could further accelerate to 6.1% in the 2026-2027 fiscal year. In terms of foreign trade, after two consecutive years of contraction, Bangladesh's export value reached $48 billion in the 2025 fiscal year, showing growth compared to the previous year. Exports are still expected to face significant challenges in the 2026 fiscal year, with their trajectory dependent on a potential rebound in global demand and the effectiveness of the new government's reforms.
Regarding inflation, the rate stood at a high of 11% when the interim government took office in August 2024 but had fallen to 8% by December 2025, indicating阶段性 progress in controlling inflation. The central bank maintains a cautiously optimistic outlook for inflation in the 2026 fiscal year. It stated that under its tight monetary policy, the inflation rate would gradually decline towards the policy target of 7%. Foreign exchange reserves grew to $32.57 billion in December 2025, a 30% increase from the $25 billion level in August 2024, sufficient to cover at least three months of import payments. If remittances and exports continue their positive momentum and the new government can effectively advance financial reforms in the 2026 fiscal year, foreign exchange reserves are expected to grow steadily.
Despite the signs of recovery, Bangladesh's economy still faces multiple challenges. Firstly, foreign trade is under pressure. Weak global demand and US tariff hikes have led to a sharp decrease in orders from the United States. Concurrently, a decline in the competitiveness of Bangladeshi export products resulted in total exports falling to $23.99 billion from July to December 2025, a year-on-year decrease of 2.19%. Bangladesh is expected to graduate from the Least Developed Country (LDC) category in November 2026, after which its exports to developed countries will no longer enjoy tariff exemptions. Key exports like textiles could face tariffs exceeding 10%, severely undermining their competitiveness.
Secondly, financial conditions are tightening. The Bangladeshi banking sector was mired in crisis throughout 2025, with the officially reported non-performing loan ratio exceeding 20% and at one point soaring to a historical peak near 36%. Bank capital adequacy ratios plummeted, some state-owned banks became insolvent, and widespread credit aversion in the banking sector led to a severe credit crunch. Finally, debt levels are high. Currently, government debt exceeds 20% of GDP. Research indicates that if the local currency depreciates by 10%, the probability of the government debt ratio exceeding the 40% warning threshold in 2026 would surge from 30% to 56%. Graduation from the LDC category signifies a narrowing of preferential external financing channels, further tightening fiscal space and forcing the government to rely on more expensive commercial financing. Multiple international institutions assess that Bangladesh's debt repayment capacity is being severely impacted by factors including slowing economic growth, the banking crisis, and political uncertainty.
World Bank data suggests that due to political factors and severe social unrest in September 2025, Nepal's economic growth rate for the 2025-2026 fiscal year is projected to plummet to 2.1%. If the general election proceeds as scheduled in March 2026 and a smooth political transition is achieved, the Nepali economy is expected to accelerate its recovery in the 2026-2027 fiscal year, with growth potentially reaching 4.7%. The nationwide unrest that erupted in Nepal in September 2025 severely hit the service sector, particularly tourism, which is a pillar of the national economy, weakened consumer and investor confidence, and brought business activity nearly to a halt.
The focus of international research institutions and investors is now on Nepal's general election scheduled for March. Whether the election can be held peacefully and smoothly, and whether a stable and effective government can be formed swiftly afterwards, will directly determine the potential for accelerating the economic trajectory in the current fiscal year. Due to weak domestic demand, Nepal's inflation rate is expected to remain below 3% in the 2026 fiscal year, persistently lower than the central bank's target and at a relatively moderate level. Regarding the fiscal situation, temporary government expenditures are set to increase for post-unrest socio-economic repair and election preparations, leading to an expanded fiscal deficit in the current fiscal year. However, the current government debt-to-GDP ratio is approximately 45%, a level still considered relatively manageable.
In terms of the balance of payments, remittances and tourism revenue are projected to grow significantly in the 2026 fiscal year, serving as a crucial foundation for supporting household consumption and stabilizing the international accounts. Nepal's foreign exchange reserves have already increased to nearly $20 billion, sufficient to cover 13.5 months of import needs. In 2026, Nepal will continue to face challenges such as weak domestic demand and an unpromising employment situation. In May 2025, the previous government released the "2026 Economic Reform Implementation Action Plan," covering key areas including establishing a bond market, reforming the tax system, repealing obstructive laws, and restructuring inefficient state-owned enterprises.
However, it remains to be seen whether the new government can persistently advance this plan and, through deeper reforms, improve the investment climate, strengthen financial supervision, and promote trade facilitation to lay a solid foundation for sustained and inclusive growth. Uncertainty in global trade policy, particularly the impact of US tariff measures, also poses risks to Nepal's export and investment growth. Furthermore, Nepal's planned graduation from the LDC category in November 2026 means the end of the "grace period," resulting in the loss of benefits like tariff exemptions, international aid, and low-interest loans, which necessitates that Nepal enhance its own competitiveness.
After experiencing stronger-than-expected growth in 2024, Sri Lanka's economic growth rate decelerated to 3.5% in 2025. The Central Bank of Sri Lanka has set a growth target of 4% to 5% for 2026. However, the World Bank remains cautious in its expectations for Sri Lanka's growth, particularly considering internal reforms and the external trade environment; it forecasts a further slowdown to 3.1% in 2026. The severe economic crisis that erupted in 2022 pushed Sri Lanka to the brink of "national bankruptcy." Following over three years of adjustment and recovery, the economy has transitioned from deep recession to mild recovery, but overall, internal and external risks and challenges are still increasing.
Currently, inflation is largely under control, with price stability being one of the most notable achievements of the recovery. The core inflation rate has dramatically fallen from a peak exceeding 50% in September 2022 to 2.7% in December 2025. Moderate inflation provides the central bank with greater policy flexibility in 2026, aiding economic recovery through the maintenance of a relatively accommodative monetary policy while aiming to keep inflation below 5% for the year. Data shows that in the first eleven months of 2025, Sri Lanka's merchandise exports reached $12.02 billion, a year-on-year increase of 9.1%. Exports of apparel and textiles, tea, spices, and services trade grew rapidly. By the end of 2025, official foreign exchange reserves had recovered to over $6.8 billion. The target for 2026 is to raise reserves to at least $7 billion.
However, influenced by factors such as global economic slowdown, a heavy reliance on apparel and textile exports, and market concentration in the US and EU, the International Monetary Fund (IMF) expects Sri Lanka's export growth to decline to around 3.8% in 2026. As of the end of 2025, government debt stood at 96% of GDP. The largest creditor, the IMF, has committed $2.9 billion under an Extended Fund Facility, having disbursed four tranches totaling $1.34 billion to date. Meanwhile, the government has largely completed a bond swap with commercial creditors and signed restructuring agreements with several bilateral creditors, including Japan, India, and France. Nonetheless, debt servicing pressure over the next decade remains immense. Total external debt reached $37.238 billion by the end of September 2025, with annual debt repayments projected to average $2.75 billion until 2027, potentially rising to $3.2-$3.5 billion annually from 2028 onwards, posing long-term challenges to economic recovery and fiscal management.
At the end of 2025, the government launched the National Productivity Master Plan covering 2024-2029. Its core objective is to steer the economy from short-term stabilization towards a productivity-led, export-oriented long-term growth model. The government plans to introduce a comprehensive tariff reform policy around mid-2026, aimed at encouraging export diversification and assisting small and medium-sized enterprises in transitioning towards export-oriented operations. Overall, Sri Lanka's macroeconomy is expected to achieve modest growth in 2026. Controlled inflation, recovering foreign reserves, and enhanced financial system resilience will provide support for economic development, but the positive recovery trend remains contingent on a stable external environment and continuously improving domestic demand.
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