Some thoughts on the budget for FY 2025-26

The preliminary work for drafting the national budget for the upcoming fiscal year (2025-26) has already begun. If everything goes as planned, the proposed budget will be presented for approval on June 5. Since there is no active national parliament at present, the proposed budget for the next fiscal year will be submitted for approval to the advisory council of the interim government. Since Bangladesh gained independence, the national budget has been approved through the parliament every year, except during periods of military rule and the fiscal years 2007-08 and 2008-09.

From a structural perspective, the proposed budget for the upcoming fiscal year is expected to be different in many ways. During political governments, budget formulation often faces challenges. At times, projects are included to appease party leaders, even if they lack practical justification. Similarly, during military rule, budgets often include provisions to satisfy certain interest groups. However, the current interim government is of a completely different nature. If they prioritize national interests over personal gains, it may be possible to develop a balanced budget.

There is a great deal of uncertainty regarding political reforms and the upcoming national elections. Questions remain about how the reforms will be carried out, whether the interim government will be able to implement various reforms, or if they will simply oversee the election and step down. As a result, the political and intellectual circles are more focused on these issues rather than engaging in budget discussions. Normally, budget discussions gain momentum in the third quarter of the fiscal year, but this time the situation is different.

Although economists and relevant stakeholders have not yet started discussing the proposed budget, the initial work for its formulation has already begun. Reports indicate that the interim government aims to draft a realistic and practical budget. A common trend in Bangladesh is that the budget size increases every year, which the government often presents as a sign of economic progress. Key economic indicators, such as GDP growth rate and private sector investment, are often exaggerated, while inflation, unemployment, and poverty rates are understated to create a favorable image. However, since the interim government has no visible political ambitions, it is expected that economic indicators will be presented more accurately this time.

Due to various irregularities and corruption in the previous government, the country’s economy is in a critical state. Given this reality, a massive budget is unlikely to be proposed for the upcoming fiscal year. Instead, efforts will be made to keep it rational and feasible. Sources suggest that the financial size of the budget will not increase significantly, as expanding the budget could create financing challenges.

Notably, Bangladesh relies heavily on domestic revenue sources for budget financing. However, the National Board of Revenue (NBR) has not performed satisfactorily. Revenue collection was disrupted due to mass movements in July and August, followed by post-movement political unrest, making it unlikely that the revenue collection target for the current fiscal year will be met. Corruption among NBR officials and poor internal governance have further hindered revenue growth.

Currently, Bangladesh's tax-to-GDP ratio is 7.50%, the second-lowest in South Asia, with Sri Lanka slightly behind at 7.32%. The upcoming budget should focus on expanding the tax net rather than increasing tax rates. High tax rates often encourage tax evasion, whereas lower tax rates could motivate more people to pay regularly. Existing tax holiday policies should also be reassessed to determine whether they are effectively fostering economic benefits. If a sector fails to meet the intended objectives of tax relief, such benefits should be reconsidered.

Due to difficulties in mobilizing internal funds and securing adequate foreign assistance, a large-scale budget is not being planned. If the budget size is expanded, it would necessitate increased foreign borrowing, but the interim government is reluctant to take excessive external loans. Additionally, there is no certainty regarding the availability of foreign loans.

According to the International Monetary Fund (IMF), global debt now stands at $313 trillion. Bangladesh's external debt has already surpassed $100 billion, and the government is not keen on increasing this burden further. Thus, careful consideration is being given to the budget’s overall size.

The original budget allocation for the current fiscal year (2024-25) was Tk 7.97 trillion, which has been revised to Tk 7.5 trillion. The original budget for 2023-24 was Tk 7.61 trillion, later reduced to Tk 7.14 trillion. The estimated budget size for 2025-26 could be Tk 8.48 trillion.

The GDP growth target for the current fiscal year is 6.8%, which may be reduced to 5.5% in the upcoming budget. The Annual Development Program (ADP) allocation for 2024-25 was Tk 2.65 trillion, which may slightly increase to Tk 2.7 trillion. Salaries and wages in the current budget are Tk 820 billion, expected to rise to Tk 900 billion next year. Debt servicing for external loans is set at Tk 1.13 trillion in the current fiscal year and may increase to Tk 1.2 trillion in the upcoming budget.

The inflation rate for the current fiscal year was projected at 6.5%, but it may be revised to 7% for 2025-26. Over the past three years, inflation has remained above 9.5%, currently standing at 9.32%. However, there is uncertainty about how long this decline will last.

Unlike many countries that effectively controlled inflation post-Ukraine war, Bangladesh has failed to do so. The prevailing assumption that global price hikes are solely responsible for domestic inflation is not entirely accurate. Since Bangladesh imports only 25% of its total goods, the question remains: why are prices rising for domestically produced 75% of goods? The government has little control over market mechanisms, with business syndicates manipulating prices. These syndicates often receive implicit support from the higher authorities, making price control difficult.

During previous governments, budgets were often inflated to showcase development, with unnecessary projects approved for political reasons. However, the interim government is expected to adopt a more pragmatic approach. Delayed project implementation and cost overruns have become chronic issues in Bangladesh’s development programs. Moving forward, contractors who fail to complete projects on time and within budget should bear the consequences rather than passing the burden onto taxpayers. Fines could be imposed on firms responsible for delays and cost overruns.

A major challenge for the next fiscal year will be improving law and order. The interim government has been in power for nearly eight months, yet no significant improvement in security has been observed. In fact, the situation appears to be deteriorating. There is growing reluctance among law enforcement officials to enforce their duties, and even operations like “Devil Hunt” have failed to bring noticeable improvements.

Additionally, state-owned enterprise officials are largely inactive, particularly those who were politically affiliated with the previous government. The banking sector is also facing serious instability. Recently, Bangladesh Bank Governor Dr. Ahsan H. Mansur stated that while efforts are being made to rescue troubled banks, some may not survive. Although his statement reflects reality, it could cause panic within the financial sector.

On a positive note, remittance inflows have shown an increasing trend in recent times. Previously, the largest share of remittances came from six Middle Eastern countries, with the UAE and Saudi Arabia being the top sources. However, recent reports indicate that the United States has now become the largest single remittance-sending country.

Instead of relying on cash incentives to boost remittances, a more effective approach could be adopting a market-driven exchange rate. This would discourage informal “hundi” transactions, thereby increasing legal remittance inflows. Currently, Bangladesh's foreign exchange reserves stand at around $20 billion, and a market-driven exchange rate could further stabilize reserves.

In formulating the Annual Development Program (ADP) for the next fiscal year, careful selection of projects is crucial. Politically motivated projects should be reviewed, and less essential ones should be discontinued. Without political pressure, the government has an opportunity to present a realistic and effective budget that serves national interests. If properly implemented, this could be a much-needed course correction for Bangladesh’s economic future.

M A Khaleq: Retired Banker and Economic Affairs Analyst