Govt to focus on inflation control, financial stability in FY26 budget

With inflation control and financial discipline in focus, the interim government is planning an austerity budget for the next fiscal year with cuts in both development and revenue spending, while seeking to spur investment.

The upcoming fiscal 2025-26 may also see a shift from the traditional concept of GDP growth-centric development to social progress, which will require additional support for income-boosting and safety-net schemes, senior officials at finance and planning ministries said, providing a broader hint of the new administration's budget philosophy.

The current fiscal year's annual development programme (ADP) allocation is around Tk2.78 lakh crore, while the interim government plans to spend nearly Tk1.75 lakh crore. It also intends to allocate the same amount for the ADP in FY26 as the revised allocation for this year.

The FY25 budget projected a 6.75% GDP growth, but finance ministry officials expect a maximum of 5%. They also predict that inflation is also likely to remain in double digits this year.

Economists find that the growth outlook, already lowered by global lenders for the current fiscal year, reflects the real health of the country's economy, but warn that drastic cuts in public expenditure may cause further slowdown.

On 2 December, the finance ministry will host a meeting of the Coordination Council on Fiscal, Monetary, and Exchange Rate Policy to discuss the revised budget for the current fiscal year and the framework for the budget of the upcoming fiscal year.

During the meeting, projections for GDP growth, inflation rates, tax-to-GDP ratio, expenditure-to-GDP ratio, and the balance of payments for external trade will be discussed for both the current and upcoming fiscal years.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, said economic targets must be set based on realistic assessments. The IMF, World Bank, and Asian Development Bank (ADB) have projected GDP growth between 4% and 4.5%. Considering the current economic situation, achieving growth within this range would be quite commendable, he told The Business Standard.

Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said the government has already announced its intention to cancel politically motivated projects, which will reduce development expenditure. However, the combination of high inflation and reduced spending is putting pressure on the economy, and further reductions in government expenditure could lead to stagnation, she warned.

Inflation control top priority

Finance ministry officials indicate that the inflation target set in the current budget is unlikely to be met as the government anticipates ending this fiscal year, too, with double-digit inflation – which has been persisting for over two years.

Inflation reached 10.87% in October, the highest in recent months. Food inflation, in particular, surged to 12.66%. Despite several policy rate hikes by the Bangladesh Bank, inflation could not be brought under control.

A senior official from the Ministry of Finance, speaking on condition of anonymity, told TBS that controlling inflation will be the top priority in next year's budget. To achieve this, the budget will include measures to boost the supply of goods, facilitate production and imports, and provide incentives for the agriculture and industrial sectors.

Reforms to ensure fairness in market operations will also be introduced, along with actionable plans for their implementation. Additionally, the government plans to emphasise income-generating initiatives and allocate special funds for social safety programmes, he added.

Economist Zahid Hussain said setting an inflation target for the next fiscal year will be a challenging task. "If the inflation target is set below 9% or 9.5% for the next fiscal year, it would be unrealistic. However, inflation is likely to ease in the following year."

He said while contractionary monetary policies and stable foreign currency reserves are aiding inflation control, market players often exploit these advantages, leaving ordinary consumers unaffected.

"The good news is that global inflation is easing. However, a drop in international markets does not always translate to lower prices in Bangladesh," he added.

Zahid further highlighted the need to reduce the size of the budget and minimise deficits, as failing to do so would not help to reduce inflation.

Development budget to be downsized

Sources indicate that the development budget for the upcoming fiscal year will be significantly smaller than the current one. Instead of revising it downward later, the interim government plans to set a modest budget from the outset, focusing on improving implementation.

According to the Implementation, Monitoring, and Evaluation Division (IMED) of the planning ministry, only 7.90% of the ADP was implemented in the first four months of the current fiscal year – the lowest in 15 years.

No new mega projects will be undertaken, while priority will be given to sectors such as health, education, power, and energy, as per the sources.

They further added that projects included in the current budget without funding or with minimal allocations are likely to be excluded from next year's budget, particularly those initiated based on political considerations or influenced by lawmakers'preferences.

Economist Fahmida told TBS that inflationary pressure remains high, and contractionary monetary policies have not been effective in controlling it. "Fiscal policy must avoid being expansionary. As a result, implementation of the ADP may slow down," she said.

"Politically motivated projects can be suspended or cancelled, but government spending cannot be cut drastically. Priorities need to shift, with increased allocations for health and education. Additionally, social safety programmes should be expanded to support low-income people," she said.

"Longer lines behind TCB and OMS trucks indicate growing distress among low-income groups. Allocations for these programmes should increase, and new types of essential goods should be included," she added.

Dr Fahmida also noted that significantly downsizing the budget could lead to reduced employment opportunities. "The government should focus on implementing foreign-funded projects," she said.

An official from the planning ministry told TBS that the government is considering launching new projects focused on innovation and human resource development that can be implemented quickly. To this end, various ministries have been instructed to propose plans for such projects.

Zahid Hussain said ADP expenditures must be determined without pushing budget deficits to risky levels.

Govt to increase non-tax revenue

Due to political instability in the country in July-August, many domestic and international contractors halted work on various projects and remained absent for an extended period. As a result, not only did development initiatives stagnate, but revenue collection also showed a declining trend.

Data from the National Board of Revenue (NBR) shows that from July to October, revenue collection amounted to Tk101,344 crore, falling short of the target by Tk30,767 crore, though it is 8% higher than the same period last year. The revenue target for FY25 is Tk480,000 crore, but NBR officials predict a substantial shortfall by the fiscal year's end.

Finance ministry sources indicate that the government has no plans to increase gas and electricity prices. On the contrary, it aims to reduce fuel prices as much as feasible. However, efforts will be made to increase non-tax revenue to bolster government finances.

Zahid Hussain said setting a revenue collection target above Tk4 lakh crore to Tk4.5 lakh crore for the NBR would be impractical.

Ensuring financial stability

Meanwhile, several economic vulnerabilities that were hidden during the previous government have surfaced following the government transition. Non-performing loans in the banking sector have surged significantly, and several banks are now facing liquidity crises. Under the previous government, some economic indicators were artificially inflated or suppressed, obscuring the true state of the economy.

To curb inflation, the Bangladesh Bank has raised interest rates. However, the combination of high interest rates, political uncertainty, and instability has deterred private-sectorinvestment.

A senior official from the finance ministry said the upcoming budget will include steps to ensure stability in the financial sector, particularly through policy measures targeting the banking sector. Efforts will be made to increase loans for small and medium enterprises (SMEs), while the government aims to reduce borrowing from banks.

To encourage investment, the government is also considering offering policy incentives. For instance, it has already granted a 10-year, 100% tax exemption for power generation using renewable energy. Similar policies will be introduced to attract foreign investments, he said.