Costly interim policies to put mounting fiscal pressure on next govt
Mounting expenditure commitments threaten future fiscal stability, warn economists
Curbing wasteful spending by slashing populist development projects was a stated economic priority of the interim government as it sought to ease the fiscal strain inherited from the ousted previous regime. That goal was largely achieved through a sharp cut in development expenditure.
What the interim administration failed to rein in, however, was recurrent spending.
Economists warn that a series of expenditure-heavy decisions taken towards the end of the government's tenure including proposed pay hikes, expanded allowances and widened social safety-net coverage, will leave a substantial fiscal burden for the next elected government, expected to take office after the 12 February election.
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They argue that while development spending was curtailed aggressively, operating expenditure has continued to rise at a time when revenue mobilisation remains weak, deepening the long-standing imbalance between income and expenditure.
As a result, the incoming government is likely to face severe pressure to implement politically and socially sensitive commitments without having the fiscal space to finance them.
Rising commitments, weak revenues
According to economists, the next administration will inherit pressure to implement decisions such as a proposed new pay scale for government employees, expanded allowances and beneficiary coverage under social safety-net programmes, a 20% electricity bill rebate for the fisheries sector, and the repayment of dues to customers of Sammilito Islami Bank and several non-bank financial institutions currently under liquidation.
If these commitments cannot be politically managed or fiscally phased, the country's already fragile fiscal balance could deteriorate further, economists warn, with potential consequences for growth, employment and macroeconomic stability.
Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), told The Business Standard that the next elected government would face "massive pressure" if the newly announced expenditure initiatives were implemented in full.
"Resource mobilisation and expenditure management will face new challenges," she said. "Revenue collection has again fallen short, while operating expenditure is increasing at a time when it ideally should have been restrained."
She added that the scope for financing additional expenditure is extremely limited.
"No agency provides loans to pay salaries. Government borrowing from banks has already risen sharply, and further borrowing will crowd out private-sector credit. The options for meeting this extra expenditure are therefore very limited," she said.
Pay Commission: the biggest pressure point
One of the most significant sources of potential fiscal stress is the recommendation of the Pay Commission formed to revise salaries of government employees.
Estimates suggest that implementing the proposed pay structure for employees of ministries, divisions, offices and directorates alone would require additional spending of about Tk1.06 lakh crore. Extending the new scale to the armed forces, autonomous bodies and MPO-listed teachers would push the overall cost even higher.
On 27 January, Power and Energy Adviser Muhammad Fouzul Kabir Khan said the interim government would not implement the Pay Commission's recommendations, leaving the final decision to the next administration.
Economists warn that even postponing the decision does not eliminate the pressure.
Zahid Hussain, former lead economist at the World Bank's Dhaka office, said raising sufficient revenue to support such measures would be extremely difficult.
"These expenditures cannot be financed by borrowing or printing money, as that would fuel inflation," he said. "That leaves only two options: earning more revenue or cutting other spending."
But he added that savings of this magnitude are unlikely to come from other public expenditures. "So revenue mobilisation remains the only option and that is far harder than announcing a new pay scale."
Bangladesh's tax-to-GDP ratio currently stands at around 7%, one of the lowest globally, while government revenue remains insufficient to fully cover operating expenses. Debt-servicing costs are also projected to rise in the coming years, further shrinking fiscal space.
"In this context, introducing a new salary scale without a substantial increase in revenue would severely constrain development spending," economists warn, undermining efforts to boost investment, growth and job creation.
Safety-net expansion before budget
Alongside salary-related pressures, the interim government has expanded several social safety-net programmes during its tenure, increasing both the number of beneficiaries and allowance amounts for old-age pensions, widow and disability allowances, education stipends, healthcare support and other welfare schemes.
It has also decided to add five lakh families to the food-friendly programme, increase allowances for freedom fighters, expand the Vulnerable Group Feeding programme, and introduce a 20% electricity bill rebate for marginal fish, livestock and poultry farmers requiring a Tk100 crore fund.
While economists acknowledge the social importance of these measures, they caution that they will add several thousand crore taka to recurrent expenditure in the next fiscal year.
Fahmida Khatun described the timing of these decisions as unprecedented.
"Such measures are usually taken during budget formulation by an elected government," she said. "The interim government should have limited itself to making recommendations instead of creating invisible pressure on the next administration by announcing these decisions in advance."
Development spending squeezed
The fiscal pressure is compounded by weak development spending.
In FY2024-25, implementation of the Annual Development Programme (ADP) stood at 67.85% — the lowest rate in one and a half decades. In the current fiscal year, despite a reduced allocation, only 17% of the ADP was spent in the first half, the lowest on record.
Economists and planners say the next government will face strong pressure to increase development expenditure to revive growth, employment and private investment, even as revenue income is almost entirely consumed by operating expenses.
Planning Adviser Wahiduddin Mahmud warned on 28 January that no development strategy could succeed with revenue collection stuck at 7–8% of GDP, noting that the revised development budget for the current fiscal year is being financed through loans.
"There are no global examples of countries achieving sustainable development by relying on debt to fund education, health and social security," he said.
Fiscal measures way before budget
With the next budget still five months away, the interim government increased both the number of beneficiaries and the allowance amounts under various social safety net programmes.
Fahmida Khatun described the move as unprecedented, noting that such decisions are typically taken during budget formulation by an elected government.
Expressing concern, the CPD executive director said the interim government should have limited itself to making recommendations for the next administration.
Further fiscal pressure is expected as the fisheries and livestock ministry announced a 20% rebate on electricity bill for marginal fish, livestock and poultry farmers, which would require creation of a Tk100 crore fund.
Since assuming office, the interim government has also increased operating expenditure by accepting various demands following protests by different professional groups and employees.
One such decision involves salary and allowance increases for a large number of MPO-listed teachers.
More than Tk20,000 crore in unpaid electricity bills remain outstanding, a liability that economists say will fall on the next government.
Pressure from weak development spending
In the 2024-25 fiscal year, implementation of the Annual Development Programme (ADP) stood at 67.85% of the allocation, the lowest rate in the past one and a half decades.
In the current fiscal year, despite a reduced ADP allocation, implementation has remained sluggish. The outlay has been slashed to Tk2 lakh crore as only 17% of the development budget was spent in the first half, the lowest on record.
Mobilising resources to finance development spending remains a challenge as the revenue income is almost entirely exhausted in operating expenses.
During the tenure of the interim government, the tax-to-GDP ratio has declined to 7%. In the first five months of the current fiscal year (July to November), the NBR's revenue collection grew by over 15% compared to the same period of the previous fiscal year; nevertheless, collection remained below the projected target.
"No development strategy can succeed with this level (7% to 8% of GDP) of revenue collection," Planning Adviser Wahiduddin Mahmud said at an event on 28 January, adding the revised development budget for the current fiscal is being financed through loans.
Will higher pay curb corruption?
The last public-sector pay scale was announced in 2015, raising salaries by 70% to 100%. A decade later, the current Pay Commission has proposed similar increases, partly justified by claims that higher pay would reduce corruption and improve service delivery.
Transparency International Bangladesh (TIB) executive director Iftekharuzzaman rejected that argument.
"There is no evidence that corruption declined or service quality improved after the 2015 pay hike," he said. "Without strong accountability mechanisms, higher salaries alone do not reduce corruption. In fact, illegal transactions often rise faster than pay."
Zahid Hussain echoed the concern, noting that the idea of "self-financing" salary hikes — where reduced corruption boosts revenue — has little support in Bangladesh's past experience.
"From a fiscal perspective, implementing such recommendations without structural reforms in revenue mobilisation and accountability is nearly impossible," he said.
Taken together, economists warn that the interim government's end-of-term spending decisions have significantly narrowed the fiscal room available to the next administration, underscoring the urgency of revenue reforms and tougher expenditure prioritisation to avoid deeper strain on public finances.
