Inflation, investor doubts and uncertainty: Can the FY26 budget steady the ship?

With Bangladesh's economy navigating a complex landscape of IMF conditionalities, fiscal constraints, and persistent inflationary pressures, expectations from the upcoming FY26 budget are running high. Meanwhile, investor confidence has also been hit by inflation, low energy supply, political crisis and weakened law and order. As the interim government prepares to unveil its fiscal roadmap, key questions loom: Will the budget reflect a genuine commitment to reform, or will it continue to rely on the familiar path of indirect taxation and temporary fixes? Can policymakers strike a balance between growth, inflation control and IMF compliance without compromising on long-term structural reforms? Economists weigh in.

Budget has to anchor stability, jobs, growth and equity

Dr Selim Jahan

Former Director, Human Development Report Office and Poverty Division, UNDP

The FY26 budget is one by an interim government. Thus, it does not have the benefit to be contextualised or anchored in a longer-term plan (e.g. a five-year plan), as is the case with the budget of longer-term political government. In that sense, the incoming budget cannot be a building block of a continuing longer-term scenario, and hence will not derive its policy direction from a long-term perspective. 

Given this reality and given the economic and institutional constraints, the incoming budget has to focus on short-term policy objectives. In my view, it would be more of a fixing-budget, rather than a visionary one. 

I expect the policy direction of the 2025-26 national budget to be first, ensuring economic stability; second, restoration of economic disciplines including transparency and accountability in public resource management; third, reducing inflation and enhancing economic growth; fourth, focusing on on-going projects and avoiding prestige projects; and fifth, addressing issues of debt servicing and subsidies.

The reform priorities of the budget, in my view, should be more on short-term, feasible and pragmatic measures, rather than on structural changes. For example, there has been talks of recasting the social safety net schemes — reducing the number of programmes by one-third, but increasing the number of beneficiaries. This is doable and can be done within the timeframe of the budget. Similarly, measures like reducing additional costs in projects, stopping corruption and inconsistencies in projects are some of the feasible reforms that the 2025-26 budget can aim for. I do not expect the budget to be aspirational, rather to be pragmatic. 

A true reformist approach to revenue mobilisation and public spending would require structural changes in tax policy and administration, non-tax issues, and public expenditure management. Such reforms are beyond the mandate and scope of an annual national budget. Some of the reformist issues related to tax policy and administration would be addressed by the two new institutional revenue institutions, which will replace the current NBR. 

For example, the policy entity can reform the tax structure and the tax rates of the Bangladesh economy — should there be more dependence on direct tax, what would be the scope of it. The other entity on tax administration would fix the tax management structure to make it more efficient and effective. 

Furthermore, as has already been indicated at the end of last April, public revenue mobilisation has fallen short by 38%. The costs of debt servicing and subsidies would be huge. And there is the IMF pressure to mobilise more revenue through taxes. So, in the short-run, during the current budget, the government has to mobilise resources to meet all the above demands. But the current fiscal space is rather limited. 

The urgency of the situation and the shorter time-frame would drive the government to follow the current trend of revenue mobilisation by relying more on traditional means, such as indirect taxes, e.g. value-added tax (VAT), excise duties. In public spending too, the government will have to juggle through competing demands. It may ultimately end up in public borrowing or even printing money. Fiscal patchwork might be something that the government might resort to. 

The top priorities of the 2025-26 Bangladesh national budget should be five-fold: ensuring economic stability: reducing inflation and enhancing economic growth; creating jobs; prioritising agriculture; and protecting social sector spending. 

Economic stability is a prerequisite for achieving other budget priorities, such as enhancing economic growth. It is also one of the IMF conditionalities. In a way, for quite some time, high inflation has been the defining issue of the Bangladesh economy, with significant implications both for the economy and its people. 

Economic growth is a key to economic stability, human development, and also for reducing inflation. Agriculture is critical not only for the economy — in enhancing economic growth, reducing inflation — but for generating employment and also for job creation. With 27 lakh people remaining jobless in the Bangladesh economy, creating more jobs must be a priority in the budget. 

Employment will enhance economic growth, provide economic stability and help reduce inflation. Protecting human development spending, e.g. expenditures on health, education, social safety net is essential for reducing poverty and inequalities and also creating jobs. 

The trade-offs in the budget may be in a number of areas, for example, between controlling inflation and enhancing growth; between physical infrastructures and social infrastructures, between agriculture and industry. 

For instance, on the first issue, reduction of inflation may require a tighter monetary policy, which may adversely impact investments and thus economic growth. Similarly, it has been reported that in the incoming budget, transport and communication would get 26% of the total development budget, as opposed to a combined health and education allocation of 20%. Thus, physical infrastructure has been given priority over human development. 

Furthermore, development expenditures in the health sector were cut by 13% compared to that of last year, and education by 9%. Human development expenditures need to be protected even if it means somewhat reduction in the physical infrastructure spending. As usual, agriculture seems to remain as a neglected sector in the 2025-26 Bangladesh budget. 

The allocation to agriculture represents less than 5% of the total development expenditure of this budget. In fact, compared to last year, the allocation to the agricultural sector has been slashed significantly, by 18%. Allocations to agriculture must be increased to an adequate level and should not be traded off in favour of industry. 

Restoring economic conditions top priority

K A S Murshid 

Former Director General, Bangladesh Institute of Development Studies

We do need to be realistic. I think that is what the government wanted as well when we saw them hesitate to accept the IMF conditions right away. They wanted time but as we know, the IMF is rather rigid about these things. 

The problem is we turn to the IMF when we are at our weakest. Unfortunately, that gives them a lot of leverage over us — leverage that I feel is disproportionate to the size of their loans. At the same time, getting rejected also gives us a bad name and makes other donors shy away. 

We, ultimately, have to blame ourselves for this state of affairs. We never want to undertake any reforms, and historically, the only time we went forward with reforms was when these were forced upon us by donors. So, in the longer run, the IMF pressure should have a positive impact. This also means that in the short run, our economic struggles will likely further intensify.

Institutional reforms have become necessary but as we have witnessed, every time reforms are suggested, we face intense opposition from those who benefit from the status quo. The interim government needs to find a way to break through such opposition if it is serious about reforms. This will require backing from stakeholders and appropriate public sensitisation and public consultations involving NBR and clients-users.

The main immediate task is economic stabilisation. The banking sector has seen significant improvement — more is required. However, we are bogged down by very basic constraints. Business and investor confidence is weak. We are struggling with energy constraints, worker-protests, and lack of access to bank credit as well as difficulties in opening LCs. Above everything else, we need to restore economic conditions while keeping a close watch on food production. 

I expect the budget to display pragmatism and focus on regaining stability. I do not know how NBR can improve tax collection given the depressed economic climate. I do not think the tax-GDP ratio will go south because the denominator (GDP) is in decline! I would be surprised if NBR can shift away significantly from its over-reliance on indirect taxes. Indeed, I fear that indirect taxes will go up further.

Balancing growth and inflation a major challenge

Dr Fahmida Khatun

Executive Director, Centre for Policy Dialogue

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 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.

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 the tenure of 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 $4.7 billion loan to Bangladesh. However, the government may want to do it in a phased manner, considering the implications for the citizens. 

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. 

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.