International credit rating agency Moody's Investors Service (Moody's) today downgraded Bangladesh's long-term ratings to B1 from Ba3.

This rating action concludes the review for the downgrade initiated in December 2022.

Moody's assessment is that Bangladesh's heightened external vulnerability and liquidity risks are persistent, and that, together with institutional weaknesses uncovered during the ongoing crisis, the sovereign's credit profile is consistent with a B1 rating.

Such type of downgradation means the local businesses will have to pay more to settle their global trades, a Bangladesh Bank official said.

Despite some easing, ongoing dollar scarcity and deterioration in foreign exchange reserves indicate continued pressures on Bangladesh's external position, exacerbating import constraints and as a result energy shortages.

Meanwhile, the government has not yet fully reversed its import control measures and unconventional policies, including a multiple exchange rate regime and interest rate caps, which are creating distortions.

Finally, a very low level of fiscal revenues relative to the size of the economy constrain the government's policy choices and point to weakening debt affordability as higher interest payments result from the taka devaluation and short maturities for domestic debt.

Although Moody's expects external financing to help alleviate pressures on the external and fiscal metrics, external buffers will remain weaker than before the pandemic and higher debt levels will weaken fiscal strength, particularly as Moody's expects fiscal reforms will take years to materialise.