Bangladesh faces mounting risks to its development financing as global aid shrinks amid donor budget cuts, geopolitical tensions, and impending LDC graduation, demanding urgent shifts toward self-reliance and innovative funding.

Bangladesh, one of the world’s most populous developing nations, stands at a precarious juncture as the multilateral development finance system reaches a historic turning point. Shrinking official development assistance (ODA), rising geopolitical fragmentation, and fiscal pressures in donor countries are threatening the predictability, affordability, and availability of critical funds needed for infrastructure, climate resilience, and poverty reduction.

Experts warn that without bold reforms and domestic resource mobilisation, the country’s ambitious development goals could be derailed just as it prepares for Least Developed Country (LDC) graduation.

Global Multilateral Finance at a Critical Crossroads

The Organisation for Economic Co-operation and Development (OECD) Multilateral Development Finance 2026 Report (MDFR) paints a sobering picture. Multilateral contributions could decline by 23-30 per cent by 2027, marking a sustained reversal rather than a temporary dip. This follows sharp drops in ODA: a 9 per cent fall in 2024 and projected 9-17 per cent cuts in 2025, with some estimates pointing to even steeper 23 per cent global declines between 2024 and 2025 driven by major donors like the US, France, Germany, Japan, and the UK.

In 2024, total multilateral development finance hit a record $296 billion, largely propped up by multilateral development banks (MDBs) leveraging balance sheets. However, tightening donor contributions signal trouble ahead.

Dr Fahmida Khatun, Executive Director of the Centre for Policy Dialogue (CPD), who chaired a recent virtual discussion on the OECD report, emphasised the timing: “The report came at a particularly important time for Bangladesh and South Asia as the global multilateral development finance system had reached ‘a historic turning point.’”

The webinar, jointly organized by CPD and OECD, highlighted risks for South Asian economies reliant on concessional finance.

Bangladesh’s Vulnerability: From Aid Dependency to Debt Risks

Historically, foreign aid has been a cornerstone of Bangladesh’s Annual Development Programme (ADP). In the early post-independence years, ODA financed nearly the entire ADP. While dependency has decreased – with foreign funds now covering a smaller share of GDP and investment – aid remains vital for key projects in infrastructure, health, education, and climate adaptation.

For FY2025-26, the ADP allocation stands at around Tk 2.30 trillion, with a significant portion from foreign loans and grants. As Bangladesh approaches LDC graduation (potentially delayed to 2029 for transition benefits), access to concessional terms will naturally tighten, pushing more financing toward costlier debt.

Dr Rashed Al Mahmud Titumir, Adviser to the Prime Minister on Finance and Planning, addressed the webinar as chief guest: “The report should be viewed not merely as a warning about declining aid but as ‘a call to rethink how development will be financed over the coming decades.’”

This shift comes amid broader challenges. Bangladesh’s economy has shown resilience with strong growth, remittances, and exports (particularly ready-made garments), reducing aid as a percentage of GDP. Yet, vulnerabilities persist: high debt servicing burdens in some scenarios, climate change impacts (as one of the most vulnerable nations), and needs for massive investments in energy, transport, and human capital.

Fragmentation of aid – smaller, more earmarked projects – further complicates matters, with average grant/loan sizes shrinking over decades. Private finance has grown but often bypasses the riskiest sectors where public concessional support is crucial.

Implications for Key Sectors and LDC Transition

Climate finance stands out as a critical gap. Bangladesh requires billions annually for adaptation and mitigation, yet global aid trends show cuts to humanitarian and climate-related flows. MDBs like the World Bank’s IDA are increasingly important but face their own pressures.

LDC graduation brings mixed outcomes. While it signals success – Bangladesh met all criteria and has driven poverty reduction – it means loss of preferential market access, export subsidies, and certain technical assistance. Studies estimate potential annual export earnings losses of up to $17.5 billion without smooth transition strategies.

South Asia faces compounded risks from competition for scarce resources and geopolitical tensions affecting aid allocation.

Pathways Forward: Self-Reliance and Reform

Speakers at the CPD-OECD event called for reforms in the multilateral system: better capitalization of MDBs, innovative financing (blended finance, guarantees to de-risk private investment), enhanced domestic revenue mobilization, and South-South cooperation.

Bangladesh must prioritize:

• Domestic Resource Mobilization: Improving tax-to-GDP ratio, broadening the base, and curbing leakages.
• Private Sector Engagement: Creating an enabling environment for FDI and public-private partnerships (PPPs), already incorporated in ADP planning.
• Debt Sustainability: Prudent borrowing focused on high-return projects.
• Diversification: Boosting non-RMG exports, digital economy, and green industries.
• International Advocacy: Collaborating with other graduating LDCs and emerging economies for extended transition support and reformed global finance architecture.

The OECD report and discussions underscore that while challenges are severe, opportunities exist if Bangladesh acts decisively. MDBs expanding lending despite donor constraints offer a buffer, but long-term resilience depends on reducing external dependency.

A Call to Action Amid Uncertainty

As global aid landscapes shift – exacerbated by conflicts, donor domestic priorities, and economic slowdowns – Bangladesh’s story reflects a broader truth for developing nations: the era of easy concessional finance is waning. Success will hinge on agility, innovation, and inclusive growth.