Budget FY2026: Balancing growth and inflation major challenge, says Fahmida Khatun

The interim government is set to unveil a Tk790,000 crore national budget for the 2025–26 fiscal year on 2 June, a defining moment for Bangladesh as it navigates mounting economic pressures and charts a course for stability and growth.

The Business Standard spoke to Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD).

Given the economic constraints and IMF conditions, what are your realistic expectations from the FY26 budget in terms of policy direction and reform priorities?

Realistically, the national budget for FY2026 will likely reflect a balancing act. On the one hand, it has to demonstrate enough commitment to reforms to satisfy the conditionalities set by the International Monetary Fund (IMF). On the other hand, the budget needs to navigate the pressing domestic socio-political pressures. Though a dramatic overhaul of the fiscal structure is improbable, I would expect some incremental reforms.

For example, revenue mobilisation should focus on enhancing the efficiency of tax administration, particularly through the introduction of digital systems such as e-invoicing and e-filing, rather than implementing a wholesale restructuring of the National Board of Revenue (NBR). That attempt is already facing strong resistance from the NBR officials. Given that the current government is in place for a transitional period before the national elections, deeper reforms such as broadening the direct tax base and introducing comprehensive income or wealth taxes may not be pursued by the government. 

On the expenditure side, the government has expressed its move towards rationalising non-essential projects under the Annual Development Programme (ADP), while gradually containing subsidies, particularly in the energy sector. I would expect to see more allocations to essential social sectors, such as health and education. However, the available information on budgetary allocations indicates that these sectors may not see a significant boost. The fiscal measures of the budget will have to be coherent with the monetary policy, which is contractionary at present, aiming to control high inflation. The budget should also have clear plans for structural reforms in state-owned enterprises (SOEs) and for improving the fiscal transparency of public expenditures.

Will the FY26 budget adopt a reformist approach to revenue mobilisation and public spending or continue the trend of indirect taxes and patchwork?

Considering the prevailing political dynamics and administrative challenges, the FY2026 budget is unlikely to adopt a bold reformist stance. Instead, it will likely continue the trend of relying heavily on indirect taxes, such as value-added tax (VAT) and customs duties, as these are relatively easier to implement and enforce compared to broadening the base of direct taxes. While the IMF has repeatedly urged Bangladesh to focus on expanding the direct tax base, any changes in this direction will probably be incremental. There might be efforts to modestly increase VAT rates on select items, reduce certain exemptions, and expand the tax net through improved compliance measures.

However, significant steps like a comprehensive restructuring of the direct tax framework are unlikely, especially during an interim government which is not politically elected by the people. On the public spending side, although the government might emphasise the need to prioritise social sector investments and green transition initiatives, actual budget allocations could continue to favour large infrastructure projects. Subsidy rationalisation, particularly in the energy sector, is a commitment of the government to the IMF as part of its USD 4.7 billion loan to Bangladesh. However, the government may want to do it in a phased manner, considering the implications for the citizens. 

What should be the top priorities in the FY26 budget, and what trade-offs do you foresee in balancing growth, inflation control, and IMF compliance?

The FY2026 budget should prioritise macroeconomic stability. The key effort should be to contain inflation, especially in important items, such as food and fuel prices. Controlling inflation will be essential not only for maintaining social stability but also for rebuilding public confidence in the government's economic management. 

As I have mentioned, the government will have to follow a mix of approaches, such as cautious fiscal tightening, rationalising subsidies, and ensuring that monetary policy aligns with the fiscal policy. The budget should also aim to reallocate spending from politically motivated and less productive projects to essential infrastructure, social sectors such as health and education, and climate-resilient investments. However, fiscal constraints will limit the extent of this reallocation. Managing the external sector will also be vital, ensuring that the fiscal framework is in harmony with the flexible exchange rate regime. 

In terms of budget financing, the government should refrain from heavy borrowing from the banking sector, which risks liquidity problems in the banking sector. This is particularly important in a situation when several banks have high non-performing loans (NPLs), and the banking sector is going through several reforms. In terms of debt management, the government will need to exercise caution by limiting excessive foreign commercial borrowing but seek concessional financing where possible. This is crucial for improving debt sustainability.

However, the government will have to navigate several trade-offs while pursuing priorities. Balancing growth and inflation control presents a fundamental challenge— overly tight fiscal and monetary policies aimed at reining in inflation could dampen growth prospects, while expansionary spending to stimulate growth risks exacerbating inflationary pressures and external imbalances. Similarly, the government faces a dilemma between adhering to IMF-backed reforms—which include politically sensitive measures such as subsidy cuts and tax reforms—and the risk of social discontent, especially in a pre-election context. Navigating these trade-offs will require prudent political management and clear communication with the people to maintain credibility and social stability while ensuring compliance with IMF obligations.