Bangladesh’s Looming Fiscal Crucible, Promises, Pressures, and the Perilous Path Ahead for the Next Government

Bangladesh’s Looming Fiscal Crucible, Promises, Pressures, and the Perilous Path Ahead for the Next Government

In the fervent political climate preceding Bangladesh’s national election, the air is thick with promises. Political parties, vying for the electorate’s favor, have rolled out an ambitious array of commitments: mass job creation for the restless youth, enhanced allocations for the beleaguered health and education sectors, direct support for households, expanded social safety nets, and much-needed price relief for essentials. To a citizenry weathered by prolonged economic hardship—marked by high inflation, currency volatility, and diminished purchasing power—these pledges are a siren song of hope and potential respite. Yet, beneath the surface of these attractive electoral manifestos lies a cavernous and troubling silence: the absence of detailed, fully costed fiscal plans explaining how these expansive promises will be financed. As the nation stands at a critical juncture, the next government, irrespective of its political hue, is poised to inherit not just the mantle of leadership but a daunting fiscal test that will define Bangladesh’s economic trajectory for years to come.

The Chasm Between Aspiration and Fiscal Reality

The campaign promises, while addressing genuine public needs, remain largely in the realm of broad economic aspirations. Critical questions linger unanswered: What is the realistic timeline for implementing these costly schemes? What is the precise additional annual expenditure required? If subsidies or tax cuts are proposed, how much revenue will be forgone? Most importantly, what are the implications for an already strained budget deficit and the soaring public debt? In the absence of detailed proposals embedded within a concrete and realistic medium-term fiscal framework, these commitments risk becoming sources of future public disillusionment or, worse, catalysts for macroeconomic instability.

This lack of fiscal transparency and planning is profoundly problematic. The elected government will immediately confront the Herculean task of creating fiscal space in an economy already stretched to its limits. The macroeconomic landscape presents a narrow survival path, constrained by three formidable pillars: chronically weak revenue mobilisation, rapidly rising public liabilities (both explicit and implicit), and growing contingent obligations. Simultaneously, the demands on the exchequer are immense and multifaceted—from essential development spending and social protection to escalating debt servicing costs and the urgent need for institutional reforms in key sectors like banking and energy. How the incoming administration manages this precarious fiscal balancing act—juggling urgent public demands against harsh revenue realities—will be the paramount economic story of the post-election period.

The Core Weakness: A Historically Low Tax-GDP Ratio

At the heart of Bangladesh’s fiscal vulnerability lies an alarmingly and persistently low tax-GDP ratio, a key indicator of a state’s capacity to fund its own development. Despite years of robust GDP growth, the country’s tax effort has not only stagnated but has recently fallen to a historic low, placing it among the world’s weakest performers. The figures are stark: in FY2024, the tax-to-GDP ratio was a mere 7.38%. Shockingly, preliminary data for FY2025 indicates a further decline to approximately 6.8%. This trend signifies a shrinking share of the formal economy being captured for public purposes.

The operational manifestation of this structural failure is a yawning gap in revenue collection. During the first half (July-December) of the current FY2026, the National Board of Revenue (NBR) recorded a staggering shortfall of Tk 46,000 crore against its target. This is not a one-off event but a symptom of deep-seated, chronic weaknesses within the revenue administration system. For over a decade, ambitious revenue targets set during budget announcements have been repeatedly and spectacularly missed, severely undermining the credibility of the fiscal process. This consistent shortfall has created a vicious cycle: unable to meet expenditure needs through genuine revenue, successive governments have been forced to rely excessively on both external and domestic borrowing. Consequently, fiscal policy has devolved from a strategic tool for long-term development into a reactive mechanism for crisis management and short-term survival, eroding the state’s ability to plan and invest for the future.

Mounting Expenditure Pressures: The Inescapable Bill Comes Due

While revenue collection flounders, expenditure pressures are set to intensify sharply, creating a classic fiscal pincer movement. The government faces a growing list of inescapable financial obligations—legacies of past policies and immediate sectoral crises—that can no longer be postponed.

First, the energy sector presents a massive contingent liability that is now becoming due. The Bangladesh Power Development Board (BPDB) is saddled with unpaid bills exceeding Tk 20,000 crore, largely owed to independent power producers (IPPs). This arrears crisis threatens the viability of the entire power sector, potentially leading to supply disruptions and legal disputes. Clearing this backlog will require a significant one-time fiscal outlay.

Second, the fragile banking sector demands immediate and costly intervention. As part of efforts to prevent systemic collapse and stabilise financial institutions, the government has committed to injecting Tk 20,000 crore into Sammilita Islami Bank. This recapitalisation, while necessary to maintain depositor confidence and financial stability, represents a direct drain on fiscal resources that could have been allocated to development or social sectors.

Third, and potentially most impactful on the recurrent budget, is the challenge posed by the recommendations of the latest pay commission, established by the interim government. The commission has proposed dramatic salary increases for government employees, ranging from 100 to 142 percent. There is a legitimate and compelling case for adjusting public sector wages after years of erosion by high inflation; failing to do so would deepen inequality and cripple morale in essential services. However, the fiscal implications are monumental. Implementing such a hike without a commensurate increase in revenue or drastic cuts elsewhere would massively inflate the wage bill, inevitably crowding out vital development expenditures and exacerbating the fiscal deficit. It presents a painful trade-off between equity for public servants and capital for the nation’s future.

External Vulnerabilities: A Precarious Buffer

These intense domestic fiscal pressures are compounded by lingering external vulnerabilities. The foreign exchange reserve position, while improved from a critical low of $20.49 billion on July 31, 2024, to $28.68 billion as of January 29, 2026, remains precarious. This recovery, though welcome, is insufficient to comfortably meet Bangladesh’s rising import bills for essential commodities (like food and fuel) and intermediate goods for industry, alongside its growing external debt service obligations. The global economic environment remains uncertain, with the potential for higher interest rates and slower growth in key export markets. Any new external shock could quickly deplete reserves, force a sharper contraction in imports, and put renewed downward pressure on the Taka, thereby importing inflation and further complicating fiscal management.

The Path Forward: Imperatives for the Next Government

The agenda for the next government is therefore clear and daunting. Moving from broad aspirations to sustainable implementation requires a fundamental shift in fiscal governance.

1. Honest Dialogue and Prioritization: The government must initiate a candid national conversation about fiscal constraints. It must clearly communicate that not all promises can be fulfilled simultaneously and that hard choices regarding prioritization are inevitable.

2. Comprehensive Tax Reform: This is the non-negotiable centerpiece. Reforms must move beyond tinkering and aim for a systemic overhaul: broadening the tax base by bringing the untapped informal sector and property income into the net, simplifying tax laws and procedures to improve compliance, drastically modernizing the NBR through digitalization and capacity building, and reducing discretionary powers that foster corruption and inefficiency. The goal must be to elevate the tax-GDP ratio to a more sustainable level of at least 12-15% over the medium term.

3. Rationalization of Subsidies and Expenditure: A rigorous audit of existing subsidies—particularly in energy, agriculture, and fertilizers—is needed to ensure they are targeted, efficient, and not fostering market distortions. Expenditure efficiency in mega-projects must be scrutinized to curb waste and cost overruns.

4. Strategic Debt Management: The government must develop a coherent medium-term debt management strategy to smooth repayment profiles, diversify sources of financing, and avoid a bunching-up of debt service obligations that could trigger a crisis.

5. Strengthening Public Financial Management: Implementing an integrated, transparent, and accountable public financial management system is crucial for ensuring that every taka collected is spent effectively and for its intended purpose.

In conclusion, the festive promises of the election campaign are about to collide with the grim arithmetic of the national ledger. The next government in Bangladesh will not have the luxury of a grace period. From day one, it will be engulfed by the triple challenges of boosting revenues, managing inescapable high-cost expenditures, and safeguarding external stability. The choices it makes—whether to embrace tough, structural reforms or resort to short-term populist measures and increased borrowing—will reverberate far beyond its tenure. The nation’s economic resilience, its development ambitions, and the welfare of its millions of citizens hinge on navigating this fiscal crucible with prudence, courage, and a unwavering commitment to long-term stability over short-term political gain. The tough fiscal test is not merely an economic issue; it is the ultimate test of governance for the incoming administration.

Q&A on Bangladesh’s Fiscal Challenges

Q1: Why is the low tax-GDP ratio such a critical problem for Bangladesh, and what does its recent decline signify?
A1: The tax-GDP ratio is a fundamental measure of a government’s ability to fund public services and investments from its own economic resources without excessive borrowing. Bangladesh’s ratio, now at a historic low of around 6.8%, is among the lowest globally, indicating a very narrow revenue base. This decline signifies that economic growth is becoming increasingly “non-revenue generative.” It points to deep structural failures: a large informal sector remaining outside the tax net, widespread tax evasion and avoidance, inefficient and potentially corrupt administration at the NBR, and an over-reliance on indirect taxes like VAT. This chronic weakness forces the government to finance deficits through borrowing, crowding out private investment and increasing debt vulnerability, thereby undermining long-term development and macroeconomic sovereignty.

Q2: What are the “contingent obligations” mentioned, and how do they threaten fiscal stability?
A2: Contingent obligations are potential government liabilities that may become actual debts depending on the outcome of a future event. In Bangladesh’s context, the two most pressing are the massive unpaid bills in the power sector (over Tk 20,000 crore owed to IPPs) and the implicit guarantee for the banking sector, exemplified by the pledged Tk 20,000 crore recapitalization of Sammilita Islami Bank. These are “off-budget” risks that loom over public finances. When these contingencies materialize—as they are now—they demand large, unplanned fiscal outlays. This sudden claim on resources disrupts budget planning, forces cuts in other priority areas like health or education, and can lead to unexpected spikes in the deficit and public debt, posing a significant threat to fiscal stability and predictability.

Q3: The pay commission recommends a 100-142% salary hike for government employees. Why is this a fiscal dilemma rather than a straightforward benefit?
A3: While adjusting public sector salaries for high inflation is ethically and economically justified, the scale of the proposed hike presents a severe fiscal dilemma. The government’s wage bill is already a major recurrent expenditure. Doubling or more than doubling it without a matching increase in revenue would have severe consequences: 1) Crowding Out: It would consume a huge portion of the budget, directly reducing funds available for critical development projects (infrastructure, climate adaptation) and social services. 2) Deficit Expansion: It would dramatically widen the fiscal deficit, necessitating even more borrowing, which increases future debt servicing costs. 3) Inflationary Pressure: Injecting such a large sum into the economy without a corresponding increase in goods and services could fuel demand-pull inflation. The dilemma pits the rightful demand for fair compensation for public servants against the nation’s need for developmental investment and fiscal sustainability.

Q4: Despite recovering to nearly $29 billion, why are Bangladesh’s foreign exchange reserves still considered vulnerable?
A4: The reserve level must be assessed against the country’s import and debt payment needs. A common benchmark is the capacity to cover months of import payments. With monthly imports averaging several billion dollars, $28.68 billion provides a buffer of only a few months. Furthermore, not all reserves are readily usable; a portion is tied up in various funds or as collateral. The vulnerability stems from: 1) High Essential Imports: Persistent need for fuel, food, and industrial raw materials. 2) Debt Servicing Wall: Rising scheduled repayments of external principal and interest in the coming years. 3) Export and Remittance Uncertainty: Global slowdowns can hurt export earnings, and remittance flows can be volatile. Any combination of external shocks (e.g., commodity price spikes, a new global downturn) could quickly deplete this buffer, forcing painful import compression and jeopardizing the value of the Taka.

Q5: What would a “strategic” versus “reactive” fiscal policy look like for the next government?
A5:

• Reactive Fiscal Policy (Current State): This is characterized by firefighting and short-termism. It involves setting unrealistic revenue targets, missing them, then scrambling to finance gaps through ad-hoc borrowing or cutting development spending. It responds to crises (bank collapses, power sector arrears) with emergency, unbudgeted allocations. Policy is driven by immediate pressures, not long-term vision.

• Strategic Fiscal Policy (Needed Shift): This would be proactive, rules-based, and anchored in a credible medium-term framework. It would involve: 1) Realistic Revenue Planning: Setting achievable targets based on reform milestones, not wishful thinking. 2) Integrated Expenditure Framework: Aligning budgets with national development priorities (e.g., climate action, SDGs) and insulating critical social spending. 3) Active Liability Management: Planning debt issuance to smooth repayment profiles and contain costs. 4) Transparent Contingency Planning: Identifying and provisioning for known fiscal risks (like bank or energy sector liabilities). In essence, a strategic policy would use the budget as a steering instrument to shape the future economy, rather than merely reacting to its crises.