Big promises, thin revenues: The fiscal dilemma behind the pay hike plan

Bangladesh is facing mounting fiscal strain as sluggish public and private investment, weak domestic business activity and slowing export growth weigh on revenue collection, even as debt servicing and interest payments rise sharply. The government is increasingly struggling to cover basic operating expenses.

Against this backdrop, the National Pay Commission has proposed an up to 142% increase in salaries, allowances and pensions for government employees—an expansion that would require an additional Tk1.06 lakh crore annually.

Economists warn that mobilising such a sum is close to impossible under current economic conditions. Even if the proposals were phased over three fiscal years, the government would still need to find roughly Tk35,000 crore a year—equivalent to nearly three and a half months of the country's total revenue—to sustain the higher pay structure.

The fiscal pressure is further compounded by election-year promises. Major political parties have pledged expanded healthcare access, job creation, education reforms and stronger social safety nets, all of which would require substantial new spending at a time when revenue growth has persistently lagged behind expenditure.

Experts caution that the state lacks the capacity to finance both the pay commission's proposals and broader political commitments without triggering serious macroeconomic risks.

"There is no identifiable source of funding for such an increase," said Zahid Hussain, former lead economist at the World Bank's Dhaka office. "From a financial perspective, implementing the recommendations is nearly impossible."

Former finance secretary Mahbub Ahmed echoed the concern, saying the proposals would need to be reviewed and scaled back to align with fiscal realities, with any implementation spread out over time.

Tk1.06 lakh crore additional burden

On 21 January, the National Pay Commission, headed by former finance secretary Zakir Ahmed Khan, submitted its recommendations to Chief Adviser Muhammad Yunus.

According to a press release from the Chief Adviser's Office, the commission proposed a new 20-tier pay scale for government employees, raising the minimum basic salary from Tk8,250 to Tk20,000 and the maximum from Tk78,000 to Tk1,60,000.

The commission estimated that implementing the revised pay structure for 1.4 million government employees and about 900,000 pensioners would require an additional Tk1.06 lakh crore annually, on top of the current Tk1.31 lakh crore spent on salaries and pensions.

Beyond pay increases, the commission recommended introducing health insurance for government employees, reforming the pension system, restructuring welfare boards, forming a service commission, rationalising allowances, and investing in human resources in health and education.

It also proposed a Tk2,000 monthly allowance for employees with disabled children (up to two children per family) and raising the existing tiffin allowance for employees in grades 11–20 from Tk200 to Tk1,000 per month. These measures would add another Tk2,000 crore, pushing the total additional annual cost to Tk1.08 lakh crore.

Revenue realities

For the current fiscal year, the government has proposed a Tk7.9 lakh crore budget, including Tk5,35,317 crore for operational expenditure and Tk2,45,609 crore for development spending.

Salaries and pensions account for Tk1,36,000 crore—around 22% of operational spending and 17.2% of the total budget.

In the first half of FY2025–26 (July–December), the National Board of Revenue (NBR) collected Tk1,85,229 crore from customs duties, VAT and income tax, averaging Tk30,872 crore per month.

At that pace, covering the proposed pay hike alone would absorb nearly three and a half months of total government revenue.

'Not a one-time cost'

Zahid Hussain stressed that the challenge is not just the size of the increase, but its permanent nature.

"Even if implemented over three years, this would require an additional Tk35,000 crore every year," he said. "This is not a one-off expense—it is operational expenditure that must be sustained indefinitely."

He ruled out borrowing or money creation as viable solutions, noting that borrowing would worsen debt and interest burdens, while printing money would fuel inflation.

"That leaves only two options: raising revenue or cutting other expenditures. But there is little room to save enough elsewhere, and increasing revenue on this scale is extremely difficult in the short term," he said.

Zahid also questioned the justification for a 104% average salary hike, arguing that based on inflation, benefits and staffing growth since 2017, a 20% adjustment would have been more economically defensible.

He added that even if the government argues higher pay is needed to attract competent people into public service, salaries and benefits in the private sector should also be reviewed. Private sector wages have not risen significantly in recent years.

'Highly challenging'

Mahbub Ahmed said overall economic indicators remain weak. Although revenue collection has improved compared to last year, it continues to fall short of targets.

At present, lower demand for development spending has given the government some flexibility. But development needs will inevitably rise, increasing pressure on public finances and placing greater responsibility on the NBR to boost revenue.

Drawing on his experience with the 2015 National Pay Scale, Mahbub noted that pay commission recommendations are rarely implemented in full or at once.

"Back then, the proposed allocations nearly doubled, but implementation was gradual and spread over time," he said.

He added that the current proposals will undergo scrutiny by the secretary committee and other review bodies, where many recommendations are likely to be pared down.

"Only after aligning them with fiscal capacity will implementation proceed—and even then, it will have to be gradual," he said.