Bangladesh’s budget arrives not as a routine fiscal exercise, but as the first decisive test of whether a new government can translate a landslide electoral mandate into a credible economic recovery.
The headwinds are severe: Private sector credit growth has plummeted to a 24-year low of 4.72%; Fitch has downgraded both its GDP growth forecast -- 3.7% for FY26, 3.5% for FY27 -- and the sovereign outlook from stable to negative.
The government has proposed the largest budget in history at a projected Tk 9.30 lakh crore, backed by a Tk 60,000 crore Bangladesh Bank stimulus targeting CMSMEs, closed factories, agriculture, and export diversification.
Externally, the Iran war strains energy costs and remittances. The Agreement on Reciprocal Trade (ART) with the United States, signed in February 2026, reduces tariffs to 19% but imposes binding obligations: Bangladesh may not sign trade agreements with non-market economies, must align its export controls with US standards, and must liberalize digital trade.
On this backdrop, the priorities should be grounded in fiscal credibility, structural reform, and measurable delivery targets.
First: Manage inflation and establish fiscal credibility
Headline inflation has eased marginally from its peak, but food inflation remains well above 8% and non-food inflation stubbornly above 9%. People and analysts alike demand relief, yet curbing inflation too sharply risks strangling the recovery.
As economies rebound, consumer demand typically recovers faster than production, generating upward price pressure and the government’s planned monetary injection to revive the private sector compounds this risk. But where significant spare productive capacity exists, for example, idle factories, unemployed labour, excess inventory, stimulus can close the output gap without necessarily triggering demand-pull inflation.
The Bangladesh Bank stimulus is premised on exactly this logic: Bangladesh’s economy operates well below its productive potential, and reviving real activity need not reignite inflation if supply-side bottlenecks in energy and credit are simultaneously addressed. The objective is to manage inflation, not eliminate it.
Alongside this, the budget must establish fiscal discipline. The government should resist indiscriminate subsidy expansion and instead target direct transfers to the poorest households. With tax-to-GDP at just 6.8% in FY2025, the BNP’s pledge to raise it to 15% by 2035 must begin with a credible roadmap: Expanding the direct tax base, digitizing collection, and closing exemptions that benefit politically connected-elites.
Without fiscal space, no other priority can be funded. The planned wealth tax warrants caution. Evidence from comparable economies suggests it can deter the private and foreign investment the recovery depends upon.
Critically, Bangladesh is bound by IMF conditionalities under its ECF/EFF/RSF program (approximately $5.4 billion combined) requiring tax revenue benchmarks, full exchange rate flexibility, and banking sector reform. Failure to meet these targets risks program suspension with cascading consequences for external financing. The FY2027 budget must be read as a companion to the IMF program, not in isolation from it.
Second: Fix the banks
The banking sector of Bangladesh is becoming a global case study in institutional failure. Non-performing loans have reached 30 to 36% of total disbursed credit, the highest NPL ratio of any country in the world.
Besides, 22 banks holding nearly half of sector assets are undercapitalized, with a provisioning shortfall of approximately $28.5bn. The interim government’s Bank Resolution Ordinance of May 2025 was a necessary first step, but legislation without enforcement is decoration.
The budget must fund completion of the asset quality review of all scheduled banks by the end of FY2026-27 with results published publicly. The budget should provide for a recapitalisation framework insulated from political interference, and signal zero tolerance for regulatory forbearance.
It should aim for concrete targets -- state-owned banks to reduce NPL ratios to below 10% by FY2029; private banks to below 5%. Private investment has already fallen to 22.48% of GDP, its lowest in over a decade. The budget should be aimed for restoring credit confidence.
Third: Prepare for LDC graduation
Bangladesh has applied for a three-year deferral of its LDC graduation, originally due in November 2026. The deferral buys time but with the November 2029 window and the ART’s market-access conditions making export diversification a matter of economic survival, it does not substitute for preparation.
The FY2027 budget must allocate specifically to support compliance infrastructure around labour rights and environmental standards that GSP+ demands, invest in product diversification beyond basic apparel into higher-value textiles, pharmaceuticals, and light manufacturing, and create a dedicated export competitiveness fund to support SME exporters through the transition.
Concrete allocations should include: (i) a Tk 500 crore GSP+ compliance fund covering ILO convention ratification, factory auditing, and environmental monitoring; (ii) a Tk 2,000 crore export diversification facility with sectoral disbursement targets; and (iii) a mandate for at least three export-oriented clusters in pharmaceuticals, light engineering, and technical textiles to secure anchor investments before the extended preparatory period closes in November 2029. Special purpose vehicles with transparent governance and performance-linked funding should drive these clusters.
Fourth: Protect the vulnerable through targeted social investment
The recovery process will disproportionately burden the poor. The government’s Family Card, Farmer’s Card, and related schemes signal the right direction but this must be backed by design. These programs must be well-targeted, time-bound, and structured as productive investments in human capital rather than open-ended entitlements.
Conditionalities such as school attendance for education transfers and health screenings for nutrition support are essential to generate measurable returns. Education, health, and agricultural productivity spending must be prioritized. Domestic food prices for rice, edible oil, and sugar remain elevated above international benchmarks, partly due to oligopolistic market structures that the government should disrupt through strategic procurement and competition policy.
Fifth: Signal to investors that Bangladesh is open for business
Political uncertainty suppressed investment throughout FY2025. Foreign exchange reserves have partially recovered with BPM6-method reserves crossing $30 billion by May 2026, against a crisis low of $20 billion in 2023. But it remains vulnerable to external energy shocks.
Maintaining adequate reserve cover ideally above four months of import payments is a macroeconomic prerequisite for the investor confidence this budget must project. A rules-based investment climate characterized by predictable taxation, property rights, streamlined bureaucracy, and an independent judiciary is worth more than any tax holiday.
The FY2027 budget should announce concrete institutional reforms: An independent revenue authority, a public investment management framework, and a credible medium-term fiscal strategy.
The government must also address the ART’s strategic constraints: The prohibition on trade agreements with non-market economies limits Bangladesh’s options with China, while export control alignment and digital trade obligations require domestic legislative changes this budget should provision for.
Bangladesh’s government has a rare opportunity: A strong electoral mandate, an inherited reform agenda, and an international community ready to support success. The FY2026-27 budget is the first real test of whether that opportunity will be seized.
The numbers in this budget will matter far less than the credibility of the commitments behind them and a finance minister who internalizes that distinction will use this budget as a reform contract.
Md Rubaiyath Sarwar is Managing Director, Innovision Consulting.
