New govt to face added fiscal strain, Ramadan price pressures

Highlights:

• Foreign loans boosted debt, delivered limited local governance gains.
• ERD opposes UGDP-II over higher interest, weak economic justification
• Donor-funded LGD projects failed to produce sustainable reforms
• Much funding spent on consultants, workshops, not durable capacity
• RAISE project gave one-time handouts, failed creating sustainable jobs
• ERD urges domestic financing to reduce costly external debt risks

If the national election is held according to the timeline announced by the Election Commission, the new government will face the challenge of managing high Ramadan market prices immediately upon taking office. At the same time, analysts say certain policy decisions and actions taken by the interim government are creating financial and political pressure for the next elected government.

The new government will have to confront multiple challenges, including controlling high inflation, strengthening revenue collection to cover development and operating expenditures, increasing investment to generate new employment, restructuring a banking sector burdened by defaulted loans, and expanding foreign assistance.

Since assuming office, the interim government has increased operating expenditures in several ways. In particular, general and retrospective promotions have been granted within the public administration. Allowances for training, committee responsibilities, and other benefits have been increased. A new pay commission has also been formed, raising expectations among government employees that salaries will be increased, expectations that the next government will now have to address.

In addition, the government has accumulated substantial debt by borrowing at high interest rates to pay electricity subsidies, import fuel oil, and settle various arrears. Spending on social safety net programmes and fertiliser subsidies has also increased.

Infograph: TBS

On the other hand, the interim government has reduced spending under the Annual Development Programme (ADP), leading to a decline in domestic demand. Accelerating ADP spending will be another challenge for the elected government. Overcoming the slowdown in revenue collection will also be a major hurdle.

Since the current government took office, several large industrial factories have shut down, while new investment has failed to materialise. As a result, many workers have lost their jobs, and new employment opportunities have not been created. Consequently, Bangladesh currently has a large unemployed population, and creating jobs for them will be a major challenge for the next government.

Controlling high inflation, overcoming weaknesses in the banking sector, and increasing revenue collection will also be key challenges. Beyond this, stimulating both domestic and foreign investment and expanding external cooperation will pose additional difficulties.

Managing social disorder and religious extremism will also remain a challenge.

Analysts believe improving internal political stability and foreign relations will be difficult. They note that the current government has banned the activities of the Awami League, a major political party in the country. Governing effectively while keeping such a large party banned will not be easy. At the same time, lifting restrictions on the party carries political risks that the government may not be able to take quickly. Maintaining the ban may also complicate foreign relations, as some countries may be reluctant to engage with a government that has banned the Awami League.

Inflation control

According to data from the Bangladesh Bureau of Statistics (BBS), inflation rose slightly in November, reaching 8.29%, up from 8.17% in October. Inflation has fluctuated over recent months but has remained around the 8% level. Inflation is expected to rise further during Ramadan.

Pressure from increased expenditure

After taking office, the current government recorded the lowest development expenditure in several years. In the 2024–25 fiscal year, only 67.85% of the ADP allocation was spent, the lowest level in more than a decade. ADP allocations have also been reduced in the 2025–26 fiscal year, with Tk2,38,695 crore allocated. Even from this reduced allocation, spending has fallen short.

During the first five months of the current fiscal year (July–November), only 11.75% of the ADP allocation was spent, the lowest on record. This has resulted in limited job creation, declining demand for private-sector goods, and negative trends in GDP growth. The next government will face pressure to increase development spending to stimulate employment and private investment. However, experts question where the funding for this increased spending will come from.

Former finance secretary Mahbub Ahmed told The Business Standard that job creation will be the biggest challenge for the elected government. "To address this, GDP growth must be boosted by increasing both public and private investment. Raising public investment will require higher revenue collection, which will not be easy. Increasing private investment will require improving the investment climate and restoring confidence, which in turn requires improving law and order and reducing administrative complexity—both of which are difficult tasks."

He added that increased government spending could fuel inflation, making inflation management another major challenge.

Revenue collection challenges

In the 2024–25 fiscal year, revenue collection fell short by Tk92,626 crore. For the current 2025–26 fiscal year, the government has set a revenue target of Tk4,99,000 crore through the National Board of Revenue (NBR).

In the first five months of the current fiscal year, NBR revenue grew by more than 15% compared with the same period last year, but collections still fell short of the target by Tk24,047 crore. Meanwhile, the government has taken on large volumes of both foreign and domestic debt, including high-interest loans.

Former NBR chairman Abdul Majid told The Business Standard that the elected government will face serious challenges in revenue collection. "The expected progress in revenue reform has not materialised. The NBR has been dissolved and split into two divisions, but it remains unclear when and how these divisions will begin operations. Bangladesh, therefore, continues to suffer from a low tax base and an opaque tax system, making additional revenue mobilisation difficult."

Overall, the elected government will face growing expenditure pressure and may be forced to rely once again on foreign borrowing.

Additional spending in public administration

The government has formed a pay commission to raise salaries for public servants. While the current government intended to introduce a new pay scale, it has not been able to do so, leaving the responsibility to the next government.

The last pay scale was implemented in 2015, when salaries were increased by 70% to 100%. Ten years later, a similar increase would raise government salary expenditure by nearly Tk84,000 crore, with pension costs also increasing.

Higher public-sector salaries will also create pressure to raise wages in the private sector, particularly in sectors where the government sets minimum wages. Overall wage increases in both sectors are likely to add inflationary pressure, which the next government will have to manage.

Weaknesses in financial institutions

The current government has merged five troubled Islamic banks to form a new entity, United Islamic Bank, injecting Tk20,000 crore in capital from the budget. Ensuring depositor confidence and recovering loans will fall to the next government.

As of September, defaulted loans stood at Tk6,44,515 crore, accounting for 36% of total bank lending. Seventeen banks have default ratios exceeding 50%, pushing them into capital shortages. Several financial institutions and insurance companies are also in distress, making revitalisation of the financial sector a major challenge.

Towfiqul Islam Khan, additional director (research) at CPD, told The Business Standard that the expected positive changes after the change in government have not materialised. There has been no significant improvement in revenue collection or government spending efficiency. 

"The government is borrowing without fully assessing repayment capacity, while simultaneously taking steps that may increase future expenditure. Job creation has stalled, investment has stagnated, and regardless of who takes responsibility for the state next, they will have to confront challenges related to revenue mobilisation, debt repayment, rising expenditure, employment generation, and revitalising investment," he said.