The proposed FY25 national budget has been formulated under a challenging environment with prolonged and deepening macroeconomic challenges, including persistently high inflation, weak domestic resource mobilisation capacity, continued diminution of foreign reserves, and a widening external debt burden. After grappling with these challenges for the past couple of years, more decisive policy measures have only recently been put in place. These include policy shifts towards addressing inflation through monetary policy tightening with interest rate hikes and a more market-oriented exchange rate regime, along with stringent import control measures that have been in place for quite some time. The critical issue for the FY25 budget is how it will provide a fiscal policy stance to complement the contractionary monetary policy approach.
The dilemma of achieving highgrowth and macroeconomic stability: The policy intent in the finance minister’s budget speech is clear in identifying the challenges, particularly in emphasising the need to contain inflation. There is no denying that Bangladesh has consistently achieved robust GDP growth for a long time. However, in light of the pressing need to address macroeconomic challenges, the strategy of stimulating economic activity through increased public spending presents a complex dilemma. Some of the proposed measures suggest an aim to balance the dual objectives of managing growth and development ambitions while reinforcing stabilisation efforts. However, in the end, it appears that, much like the previous year, the policy approach to these problems remains insufficient and lacks the decisive action needed to address the issues effectively.
n The rate of expansion of the budget itself has been slow: in comparison with 12-14 per cent annual growth, the proposed budget is just about 4.7 per cent larger. This can be seen as a positive factor in putting a restraint on public spending to make the fiscal policy supportive of monetary policy objectives. However, when the comparison is made with the revised budget for FY24, the growth of the proposed budget is about 12 per cent. Therefore, it could be that given the already downwardly adjusted revised budget, it will be exceedingly difficult to finance such a budget, especially when the target given for the National Board of Revenue (NBR) might be considered unreasonably high against the backdrop of a slowing economy.
n Furthermore, the budget deficit—the difference between public spending and government revenue—for the FY24 and FY25 proposed budgets remains largely unchanged at 4.6 per cent of GDP. Therefore, even with a renewed emphasis on addressing rising price levels, there is no policy intent to reduce the budget deficit, which is known to be an important factor in inflation management.
Then, there is the fundamental question of whether it is possible to achieve the high growth rate set for FY25 at 6.75 per cent with the current inflation level of 10 per cent. The proposed budget expects the inflation rate to slow down to 6.5 per cent, but there are concerns that aiming for a high growth rate could actually fuel inflation, with no explanation provided in the budget documents as to why that would not be the case.
n It is, however, important to acknowledge that the post-Covid period coincided with the Russia-Ukraine war, which saw inflationary pressures mounting in numerous countries. RAPID research shows that only 17 countries in the world were grappling with an inflation rate of 10 per cent or above in 2019, while the corresponding number rose to 70 in 2022. Twenty-one countries managed to reduce their inflation, while 49 countries, including Bangladesh, were still struggling with the crisis. Therefore, while it is true that external shocks contributed to inflationary pressure across global economies, many affected countries have effectively tackled the problem within a reasonable period. In 2022, only 16 countries managed a GDP growth of 5 per cent or above despite having an inflation rate of 10 per cent or higher. Among these, countries such as Argentina and Colombia were still recovering from a significant growth collapse in previous years, and most others (such as Botswana, Comoros, Croatia, Jamaica, Kosovo, Rwanda, etc.) have very small economies. For a country like Bangladesh, which has consistently grown even during the pandemic-affected period, sustaining growth amid inflation is likely to be a challenging task.It is worth pointing out that while the 8th Five-Year Plan (8FYP) aimed for an average GDP growth target of 8 per cent, Bangladesh could achieve an average of 6.4 per cent growth during FY21-FY24.
n In fighting inflation, imports usually play an important role by easing the supply of goods into the domestic market. In the context of our current crisis, strict import control measures have been inevitable to avoid unsustainable balance of payments situations. The continued fall in foreign reserves means this particular policy instrument can be used in a limited manner only. Import controls themselves act as a signal for pushing domestic prices upwards. Bangladesh has already been quite an exceptional economy in which its imports have fallen significantly, from $89.7 billion in 2022 to $75.06 billion in 2023, despite solid economic growth above 5 per cent. For the ongoing fiscal year, imports have already fallen by $9.1 billion during July March of FY25. It is an extraordinary situation for an economy to grow with such a depressed import volume. As domestic production also critically relies on imported goods and services, growth slowdown can be accentuated by lower levels of imports. An analysis of global economies shows that in 2021 there were just four countries in the world that achieved positive GDP growth despite having falling imports, with none of these countries having a growth rate higher than 5 per cent. In 2022, there were 11 countries with positive GDP growth but negative import growth, of which just five reported a GDP growth rate above 5 per cent. Therefore, attaining the targeted export growth rate of the FY25 budget may critically depend on the extent to which the foreign reserve situation improves and import control measures can be relaxed since sustaininghigh economic growth (above 5 per cent) with falling imports for consecutive three years may not be feasible.
The consequent falling trade deficit due to restricted imports does not offer any sense of complacency. The weakness in export demand means Bangladesh’s export growth during July 2023—June 2024 remains sluggish, at just 2 per cent against the targeted growth of 11.4 per cent. The lower levels of actual export receipts by the central bank compared to the export shipment figures add to the concern of weak foreign reserves. Furthermore, the unfavourable financial account flow persists, with the deficit widening further to $9.2 billion during the July-March period of FY24 from $2.9 billion in the same period of the previous year.
Domestic resource mobilisation: Restoring economic stability is intrinsically linked to the government’s ability to mobilise sufficient revenue. Despite setting ambitious tax collection targets annually, these goals often remain elusive. With a tax-GDP ratio among the world’s lowest at approximately 8 per cent, Bangladesh faces severely limited fiscal space, constraining public expenditure in vital areas such as health, education, and social protection. Years of underinvestment have led to diminished absorptive capacity in priority sectors like healthcare, which now struggles to utilize incremental budget increases effectively.
Once again, ambitious revenue collection targets have been set for the upcoming fiscal year, amounting to Tk 5.41 trillion (0r Tk 541,000 crore), marking a 13.2 per cent rise from the revised target of FY24. The National Board of Revenue (NBR) is responsible for approximately 89 per cent of total revenue collection. Despite their efforts, the NBR has consistently failed to meet tax collection targets. As of July-April FY24, they have only collected 63 per cent of their revenue target, leading to a failure to meet the revenue target for 12 consecutive years. The NBR’s tax collection target for FY25 is set at 17 per cent higher than the revised target for FY24, although they have only achieved an average annual increase of 12 per cent over the past 10 years. Given the potential shortfall in this year’s target, this gap is expected to widen significantly, possibly exceeding 30 per cent. It is worth noting that revenue targets and collections from non-NBR and non-tax sources have been gradually decreasing, with a 25 per cent and 8 per cent lower target set for FY25 compared to the revised budget of FY24, respectively.
In recent years, the Annual Development Programme (ADP) spending has been fully financed through the budget deficit, relying on both domestic and external borrowing. That is, the actual ADP spending has become more expensive than necessary when interest payments on government borrowing are taken into consideration.Boosting domestic financing through increased tax revenue is thus crucial, as 14 per cent of the government budget is allocated to interest payments.
While external borrowing has been a critical source of financing for the fiscal deficit, the outstanding external debt has surged, recently surpassing US$100 billion. Under normal conditions, the external debt-to-GDP ratio at Bangladesh’s current level would not typically raise alarms. However, given the current strain on foreign reserves and escalating debt service obligations, there are growing concerns about future debt sustainability. The recent considerable depreciation of taka in response to excessive demand for foreign exchange and the dwindling reserve situation has made the repayment of foreign loans costlier. As the price of dollars in taka has risen by more than 20 per cent, the government will have to find considerably higher budgetary resources to repay the foreign debt. With an already very low tax-GDP ratio, the costlier loan repayment will put further pressure on fiscal space. On the other hand, if economic activities are slowing down as a result of import control measures, the scope of expanding tax revenue—given its current dependence on import-based and indirect taxes—could get squeezed further.
Stabilisation policies and protection for the poorest and vulnerable: Stabilisation policy will require demand management to dampen inflationary pressures. Along with contractionary monetary policy, this would involve, among other measures, tightening public spending to reduce reliance on deficit financing, as mentioned above. Additionally, given the reserve crisis, stricter import control measures are necessary, especially for non-essential goods, but these should be carefully implemented to avoid disrupting supply chains within the domestic economy. It would have been better if the budget had provided some direction on how this delicate balance would be struck in the upcoming year.
Reform measures and contractionary policies can have consequences for various population groups. In this respect, social protection programmes can play a crucial role in mitigating the impact of inflation on vulnerable populations and ensuring that the poor and marginalised are not adversely affected by reduced public spending. In fact, reform programmes across global economies these days often combine generous support measures for vulnerable groups. The proposed budget seems to have left significant room for improving social protection coverage.Despite a rise of allocation in 12 per cent in the proposed budget (over the on-going fiscal year’s budget), the share of social protection spending will fall as proportion to GDP from 2.55 per cent in FY24 to 2.43 per cent in FY25.
n Of the total allocation for social protection, 52 per cent will be spent on general subsidies, pension payments, and management purposes. Direct spending on social assistance is just 37 per cent. This composition has been a longstanding feature of our social protection spending, deepening further in recent years.
n Direct social protection allocation (such as allowances for the elderly, persons with disabilities, widows, etc.) for FY25 will be just 1.32 per cent of GDP (as against 2.43 per cent of the total social protection budget).
n Overall, the social protection budget for FY25 is proposed to be Tk 100 billion (or Tk 10,000 crore) greater than the FY24 allocation. Of this increment, Tk 91 billion (91 per cent) will be spent on pension management, and just Tk 9 billion (or 4 per cent of the increment) is allocated for expanding the coverage of such schemes as allowances for the elderly, widows, and persons with disabilities.
n It is extremely difficult to explain why, in a time of high inflation, the allocation for the Open Market Sale (OMS) scheme, through which some selected subsidised food items are sold to the urban poor, is being reduced. The FY25 proposed budget shows the allocation for OMS falling by 63.5 per cent —from Tk 54.91 billion in FY24 to Tk 20.04 billion in FY25.
n It is worth noting that many eligible potential beneficiaries remain outside the coverage of various social protection schemes, thereby sustaining a policy-induced injustice within the system. Of course, this is a longstanding issue and, given the current fiscal space, it cannot be fixed with one year’s budget. Nevertheless, some policy directions addressing this issue would be extremely beneficial.
n Finally, as per the National Social Protection Strategy 2015 (NSSS), the Ministry of Social Welfare will be responsible for all lifecycle-related social protection schemes from 2026. The NSSS, therefore, emphasised strengthening the ministry’s capacity. This year’s budget has increased by 12 per cent (about Tk 13.18 billion), yet further additional allocation will be required for the MoSW to strengthen its human and institutional capacity.
Preparation for LDC graduation and reform priorities: The budget speech acknowledges the significance of Least Developed Country (LDC) graduation and the need for preparatory measures. As Bangladesh exits the LDC group in November 2026, it will lose some existing trade preferences, necessitating reforms to build external competitiveness and diversify exports. Bangladesh’s trade policy has heavily protected import-competing industries through customs duties and para-tariffs, resulting in an average nominal protection rate of 28 per cent, one of the highest globally. This high protection has created an anti-export bias, making the domestic market more attractive than exports and hindering export sector growth, especially in non-garment sectors. Excessive tariff protection has increased consumer costs and created disparities in product quality and standards.
n The government identified tariff rationalisation as a priority, adopting the National Tariff Policy last year. Key approaches include reducing the anti-export bias and creating a level playing field for all exporters, as outlined in the National Trade Policy (NTP). Effective implementation of the NTP will provide the flexibility needed to negotiate market access through free trade agreements (FTAs) with major trade partners. The proposed FY25 budget suggests some tariff rationalisation measures, mainly reducing supplementary duties for several products, but these are inadequate considering the need and scope. It is crucial to prepare a time-bound action plan for implementing the NTP.
n Even after LDC graduation, Bangladesh is expected to receive some preferential market access available to non-LDC developing countries. However, once Bangladesh achieves upper-middle-income status, as it aspires to be one by 2031, all non-preferential market access will cease, requiring reliance on FTAs for tariff concessions. Therefore, it is imperative to prepare for trade negotiations, rationalise tariffs, and reduce dependence on import revenue, which currently accounts for about 28 per cent of government revenue.
n Along with tariff rationalisation, improved macroeconomic management, reducing the cost of doing business, dealing with infrastructural bottlenecks, improving trade logistics, and enhancing the capacity of trade-supporting institutions, etc., will be needed to promote Bangladesh’s future export competitiveness in the aftermath of LDC graduation. Just a little over two years are left before the LDC graduation deadline, and the budget was a great opportunity in setting the due policy directions.
Articulating Policy Directions for Impactful Reforms: Like in previous years, the proposed budget prioritises high GDP growth rates over macroeconomic stability. Given the combination of inflationary pressure and a reserve crisis, there is a pressing need to focus on sound stabilisation policies. A balanced approach is essential, particularly in aligning public spending with monetary policy targets. This involves revisiting ambitious growth targets, rationalising expenditures, and minimising borrowing from the central bank. A focused approach to demand management, along with enhanced social protection for the poor and vulnerable, is critical.
As the budget underscores the importance of preparing for LDC graduation, tariff reforms to enhance external competitiveness and diversify exports become central. Expanding fiscal space requires fundamental reforms in tax policy and administration, prioritising the automation and digitalisation of the NBR, and expanding the tax net.
The period immediately after an election is crucial for implementing significant policy changes. Over time, the drive for necessary reforms may diminish due to shifting public sentiments and priorities. In this context, this year’s budget presents a strategic opportunity to initiate these reforms, making it a focal point for identifying major policy directions. As macroeconomic challenges deepen, decisive measures are imperative to avoid turning this opportunity into a missed one.
Dr Abdur Razzaque is an economist and Chairman of Research and Policy Integration for Development (RAPID). [email protected]
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