Upcoming National Budget 2026-27: The first big test for the BNP government

Well before its "honeymoon period" could end, the BNP-led government faces its first major test: presenting the national budget to parliament next month.

The new government barely had time to celebrate its electoral victory before facing unforeseen challenges. Sworn in on February 17, the transition was immediately overshadowed by the outbreak of war in the Middle East just eleven days later. This unexpected geopolitical shock rapidly transformed a period of political goodwill into an economic nightmare.

Like many other nations, Bangladesh began experiencing a severe energy crisis that currently threatens an already fragile economy. The government has been forced to struggle for alternative sources of petroleum and LNG, paying massive premiums just to keep the wheels of the economy turning. Consequently, soaring import costs and the need to provide significant subsidies forced the administration to borrow at least $2.5 billion in budgetary support.

Coupled with the highly vulnerable financial system inherited from the 18-month interim period, the new government must now prepare a critical fiscal plan for the next financial year. Formulating this budget requires a delicate balancing act: fulfilling the ambitious election promises made by the ruling party while managing the harsh economic realities of an economy already in a fragile state.

Expanding the tax net and addressing inequality

To ensure the smooth operation of government — building infrastructure, funding education and health services, and supporting the vulnerable — there is no alternative but to increase the revenue stream. The primary obstacle lies with the National Board of Revenue (NBR), which perennially struggles to meet even its own revenue targets. As a result, Bangladesh's tax-to-GDP ratio hovers around a dismal 7%, one of the lowest in Asia, despite the current government's long-term vision to double this to 15%.

This is an unfortunate reality for an economy that has witnessed tremendous growth over the last decade and a half. The central challenge is expanding the tax net to ensure that evaders finally pay their fair share. Currently, the NBR appears to prefer living in its "comfort zone": rather than aggressively bringing new taxpayers into the system, it relies heavily on extracting more revenue from those already within it. For NBR officials, this is simply a more comfortable and less challenging approach.

Furthermore, the government must critically review the existing level of "tax expenditure" — deviations from the standard tax system through exemptions, deductions, and preferential rates intended to achieve specific social and economic objectives. In FY2022-23, revenue lost to tax exemptions amounted to Tk1.7 lakh crore, nearly equalling the total income tax collected (Tk1.8 lakh crore). This lost revenue equated to 2.39% of GDP, down from 3.56% in FY2020-21.

While these exemptions are given to industries and businesses to stimulate growth, there is clear evidence of misuse. For instance, reduced tax rates intended for the poultry and fisheries sectors are frequently exploited by affluent individuals — such as a former mayor of Dhaka South City Corporation who reportedly declared hundreds of crores in income from fisheries — raising serious questions about oversight of such incentives. Although the NBR previously proposed increasing tax rates in these sectors, the deposed Awami League government failed to withdraw the exemptions.

Fiscal instruments must be wielded to effectively address the rising income and wealth gap. To combat this inequality, a "redistributive fiscal model" should be introduced, taxing the wealthy directly and fairly to fund programmes designed not only to support the poor but to create opportunities for upward mobility.

In its election manifesto, the BNP correctly identified that low revenue mobilisation is not merely a "technical" issue, but rather the result of an "inequitable political economy where high-income groups have remained out of the tax net for a long time." The party also recognises that the legitimacy of taxation hinges on fair collection and visible public welfare spending. From a taxpayer's perspective, this calls for evaluating a "tax-service ratio" to measure the effectiveness of the system, rather than relying solely on the traditional tax-to-GDP ratio.

Taming inflation and reviving private investment

Currently, general inflation persistently hovers around 9%. Skyrocketing food prices and rising power and energy bills are taking a heavy toll, deeply hurting the purchasing power of middle- and low-income families and further exacerbating wealth inequality.

Recent experience demonstrates that maintaining high interest rates has done little to curb this inflation. Economic policymakers must recognise that current inflationary pressures are not driven solely by monetary factors; rather, they are heavily fuelled by structural inefficiencies on the ground, including poor market management, high logistics costs, and bureaucratic bottlenecks at ports and customs. Fixing these localised problems must be given special attention.

Simultaneously, the primary focus must shift to boosting private investment, which has plummeted to a multi-year low of 22.03% of GDP. High interest rates coupled with persistent inflation have increased the cost of doing business, creating a sluggish investment climate that directly contributes to slow employment growth, particularly among the youth. The widespread political uncertainties of the recent interim period, massive non-performing loans (NPLs), and chronic bureaucratic hurdles have led both domestic and foreign investors to adopt a "wait-and-see" approach. Aggressive policy measures are required to restore investor confidence — streamlining regulatory frameworks, improving energy supplies, and restoring robust governance in the banking sector.

Exercising prudence to escape the debt trap

The government is currently under immense fiscal pressure as borrowing continues to surge, pushing total government debt to nearly Tk24 trillion as of late 2025. While domestic borrowing remains high, the mounting external debt — which recently breached the $113 billion mark — has become a grave concern.

The burden of servicing this massive external debt is intensifying rapidly. With grace periods on several large-scale infrastructure loans expiring, the government faces hefty, simultaneous principal and interest repayments. Consequently, external debt-servicing costs have more than doubled over the past five years, exceeding $4.1 billion in FY2024-25. Compounded by currency depreciation against the US dollar and elevated global interest rates, this steep repayment trajectory is draining foreign exchange reserves and pushing the debt servicing-to-revenue ratio to 16.5%, perilously close to critical risk thresholds.

To alleviate this burden ahead of FY2026-27, the administration must urgently move away from debt reliance toward robust domestic resource mobilisation. Experts argue that the immediate priority must be widening the persistently low tax net and plugging revenue leakages caused by evasion, rather than repeatedly overburdening the existing taxpayer base.

Alongside aggressive revenue generation, the government needs to enforce strict expenditure reprioritisation. This involves a serious evaluation of the Annual Development Programme (ADP) to eliminate financial waste, curb corruption, and prevent the severe project delays that routinely inflate costs. The BNP government faces the daunting challenge of keeping its pledge to shift away from debt dependency while simultaneously funding manifesto initiatives like "Family Cards," agricultural loan waivers, and a revised civil service pay scale. By pausing non-essential mega-projects, channelling funds strictly into near-complete initiatives that offer immediate economic returns, and exploring options to renegotiate existing foreign loan terms, the government can carve out the fiscal space needed to manage its debt sustainably.

The ultimate test of political will

The upcoming budget cannot merely be a document of big numbers and ambitious promises. Grounded in hard economic data, it must serve as a pragmatic and realistic plan that brings immediate relief to ordinary people while methodically guiding the economy back to a healthy, sustainable path. Ultimately, this budget will signal whether the new government has the political will to implement the tough structural reforms necessary to secure Bangladesh's financial future, or whether it will simply succumb to the complacency of its predecessors.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.