Desk Report
Oniket Desk Report
Bangladesh faces a structurally embedded fiscal dilemma: a persistent revenue shortfall that compels the government to borrow heavily from the banking system, generating downstream risks for private sector credit, macroeconomic stability, and long-term growth. Recent pre-budget deliberations between economists and revenue authorities have brought this tension into sharp focus, making it an urgent subject for policy scrutiny. We collect data from Bangladesh Bank Bulletin and BBS to draw some important insights in this discussion.
The Crowding-Out Problem
Government borrowing from the banking sector is projected to reach approximately Tk 1 lakh crore in FY2025–26, potentially rising to Tk 1.1–1.3 lakh crore in FY2026–27 if the fiscal deficit remains anchored between 4.5 and 5 percent of GDP. This trajectory is not merely a budgetary concern; it is a structural signal. As the government absorbs an increasingly large share of available lendable funds, commercial banks face diminished capacity to extend credit to the private sector. For an economy that depends on small and medium enterprises as its productive backbone, a sustained credit squeeze carries serious implications for investment, employment, and output growth. The crowding-out effect is not hypothetical, with Tk 88,309 crore already borrowed from the banking system by February of the current fiscal year, the pressure is already materialising.
Revenue Architecture: A Fragile Foundation
The root cause is not expenditure excess alone, but a revenue base that remains dangerously narrow and structurally regressive. Approximately 28 percent of total revenue derives from customs and trade taxes- a figure that diverges significantly from international best practice, where domestic taxation, particularly income and corporate taxes, constitutes the primary revenue pillar. This over-reliance on border levies leaves fiscal receipts highly sensitive to trade volume fluctuations, exchange rate movements, and external demand shocks. The digital economy, one of the fastest-growing segments of Bangladesh’s economic landscape, remains substantially outside the tax net, representing a considerable and largely unmobilised revenue opportunity. Meanwhile, real estate transactions, personal wealth, and high-net-worth individuals continue to be undertaxed, with significant evidence of systemic underreporting.
Compounding Expenditure Pressures
The expenditure side offers limited relief. The upcoming budget must contend with politically sensitive commitments, including civil service pay adjustments, subsidised food distribution programmes, agricultural support mechanisms, and the expansion of social safety nets. Each of these carries strong distributional justifications, yet collectively they erode the fiscal space available for capital expenditure and debt servicing. Superimposed on this domestic pressure is external vulnerability: escalating energy market tensions- particularly in the Middle East, risk elevating oil import costs, widening the current account deficit, and depleting foreign exchange reserves at a moment when reserve adequacy is already a concern for macroeconomic managers.
Policy Implications
In the short term, the priority must be to accelerate domestic revenue mobilisation without contracting aggregate demand. Designing a time-bound framework to bring digital commerce, platform economies, and fintech services under a simplified tax regime would expand the base without burdening the formal sector further. Simultaneously, stronger enforcement against tax evasion in real estate and unreported wealth, with transparent audit mechanisms- could meaningfully reduce the revenue gap. These are not novel proposals; their urgency has become impossible to defer.
Over the medium term, the structural separation of tax policy from tax administration warrants serious institutional attention. Conflating the two functions within a single authority creates incentive distortions and limits the quality of policy design. A dedicated tax policy unit, insulated from collection pressures, would enable evidence-based reform of Bangladesh’s tax architecture, particularly the rationalisation of trade taxes in favour of broader domestic taxation. Closing the compliance gap between registered companies and actual return submissions is another tractable near-term lever.
Ultimately, Bangladesh’s fiscal outlook hinges on whether it can transition from a borrowing-dependent budget model to one grounded in sustainable revenue expansion. The window for this transition, while still open, is narrowing.
