Bangladesh’s interim government has unveiled its budget for the fiscal year 2025-26, maintaining the continuity of previous strategies rather than introducing significant policy changes. While some bold fiscal measures have been implemented in politically challenging times, the budget reveals a deeper issue: the absence of robust structural transformation.
Economic Targets and Fiscal Ambitions: The government has set an ambitious GDP growth target of 5.5% and an inflation rate of 6.5% for the upcoming fiscal year. While these targets are higher than the previous year, their realization hinges on global economic conditions and domestic stability. The revenue target of Tk 564,000 crore is notably higher than in the past, necessitating enhanced domestic and foreign resource mobilization and increased efficiency in tax administration.
The proposed budget deficit stands at Tk 226,000 crore, with a significant portion planned to be sourced from domestic borrowing. This approach raises concerns about potential disruptions in the flow of credit to the private sector, especially if deposit growth does not meet expectations.
Tax Reforms: Incremental Changes amid Structural Constraints: Some structural reforms have been introduced in the tax system, such as a reduction in corporate tax rates and a slight increase in the tax-free income limit. However, these measures have led to an increased tax burden on the lower-middle class. The abolition of the ‘no questions asked’ facility for legalizing undeclared money is a positive step, yet the effectiveness of these reforms remains uncertain due to challenges in implementation and control over tax evasion.
The restructuring of the National Board of Revenue (NBR) into two new divisions-the Revenue Policy Division and the Revenue Management Division-aims to enhance tax administration. While this move is commendable, it faces resistance from officers within the income tax and customs cadres, highlighting potential hurdles in its successful implementation.
Expenditure Patterns: A Focus on Routine Spending: A significant portion of the budget-approximately 80%-is allocated to routine expenditures, including interest payments, salaries, and allowances. This leaves limited room for investment in development projects. Notably, the number of social security programs has been reduced, and the increase in allowances is minimal, insufficient to counteract the effects of real inflation.
While the introduction of a ‘social registry’ is a positive step for future welfare initiatives, its effectiveness will take time to materialize. Moreover, the development budget lacks announcements of major new projects. Existing mega projects, such as the Matarbari Port, Metro Rail, and the Rooppur Nuclear Power Project, remain the primary focus. However, the lack of implementation capacity and weaknesses in the evaluation system may diminish the effectiveness of these development initiatives.
Debt Financing: Balancing Growth and Stability: The proposed budget deficit of Tk 226,000 crore is considered tolerable in proportion to the country’s GDP. However, the increased reliance on domestic borrowing to meet this deficit raises concerns. Of the deficit, Tk 111,000 crore is expected to come from external debt, contingent on the support from development partners and the timely disbursement of promised funds for ongoing projects. The remaining Tk 115,000 crore is planned to be raised from domestic sources, primarily the banking sector. This approach risks crowding out private sector credit, especially if deposit growth does not align with expectations.
The government’s plan to borrow from banks at high interest rates could affect overall interest rates and potentially discourage private investment. This scenario underscores the delicate balance the government must maintain between financing its deficit and ensuring a conducive environment for private sector growth.
Sectoral Allocations: Addressing Immediate Needs: Allocations for sectors such as health, education, and agriculture have been increased, reflecting the government’s focus on addressing immediate socio-economic needs. However, these increases may not be sufficient to meet the growing demands of these sectors. For instance, the allocation for the agriculture sector has decreased compared to previous years, raising concerns about the sector’s development and sustainability.
The government’s decision to drop development projects deemed “economically less important” is a step towards prioritizing essential initiatives. However, the effectiveness of this approach will depend on the transparent identification and evaluation of such projects. The Planning Commission’s data indicates a low implementation rate of development projects, suggesting potential inefficiencies in project execution.
A Budget at Crossroads: In conclusion, while the FY2025-26 budget introduces some commendable measures, it falls short of initiating the structural transformation necessary for sustainable economic growth. The heavy reliance on debt financing, incremental tax reforms, and limited investment in development projects highlight the structural constraints hindering significant progress. Without substantial reforms in tax administration, social security structures, and development project implementation, achieving long-term economic stability remains a formidable challenge.
The government’s focus on balancing revenue contraction with socio-economic responsibilities is commendable. However, this balance must be achieved through comprehensive reforms that address the underlying structural issues. Only through such transformative changes can Bangladesh hope to realize its economic potential and ensure a prosperous future for its citizens.
