Bangladesh's New Government Confronts Significant Fiscal Headwinds

Fiscal Landscape Presents Formidable Challenges

Bangladesh's newly formed government is set to inherit a challenging fiscal environment, marked by a historically low tax-to-GDP ratio and an escalating burden of public liabilities. These issues are compounded by various uncosted pledges made by political parties, raising concerns among economists about the nation's financial trajectory. The International Crisis Group has highlighted that the incoming administration must address weak institutions and a sluggish economy, which remains heavily reliant on garment exports and remittances.

Persistent Low Tax-to-GDP Ratio and Revenue Shortfalls

A central concern is Bangladesh's persistently low tax-to-GDP ratio, which remains among the lowest globally and within South Asia. For the fiscal year 2025, this ratio stood at 6.8 percent, a decrease from 7.38 percent in FY2024. The National Board of Revenue (NBR) experienced a significant shortfall, recording Tk 46,000 crore less than its target in revenue collection during the first half of FY2026. This consistent underperformance in revenue mobilization has forced the government to increasingly rely on both external and domestic borrowing to finance its expenditures.

Rising Public Liabilities and Debt Burden

The country's public liabilities have seen a notable increase. Domestic debt rose to BDT 10,202,050 million in 2024, up from BDT 9,443,350 million in 2023. Similarly, external debt climbed to USD 69.65 billion in 2024 from USD 62.41 billion in the previous year, further escalating to $112 billion by September 2025. While the World Bank indicates that the public debt-to-GDP ratio, which reached 35.0 percent, remains sustainable with a low risk of debt distress, the government faces immediate financial obligations. These include clearing over Tk 20,000 crore in unpaid bills for the Bangladesh Power Development Board and injecting another Tk 20,000 crore into Sammilito Islami Bank to stabilize the banking sector. Furthermore, a proposed pay increase for government employees, ranging from 100 to 142 percent, could add an estimated Tk 1.06 lakh crore annually to the public exchequer.

Uncosted Pledges and Economic Outlook

Political parties, including the Bangladesh Nationalist Party (BNP), have put forth various pledges, such as creating 10 million jobs within 18 months and providing financial support to the unemployed. The Awami League's manifesto for the 12th national parliamentary election, announced in December 2024, focused on 'Smart Bangladesh: Visible Development, Increased Employment' and agricultural development. However, economists express concern that many of these promises lack detailed fiscal plans, making their implementation without exacerbating fiscal strain a significant challenge.

The International Monetary Fund (IMF) has adjusted Bangladesh's economic growth forecast downward to 3.8 percent for FY25, though it projects a rebound to 6.7 percent in FY26. Inflation remains elevated, hovering around 11 percent in FY25, with a projected decline to 5 percent in FY26. Foreign exchange reserves, while showing some recovery, are still considered insufficient to comfortably cover rising import bills and external debt obligations. The overall economic landscape is characterized by rising unemployment, declining merchandise exports, and low private-sector credit, underscoring the complex fiscal balancing act awaiting the new government.