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Home World News Asia

Bangladesh’s Interim Government Shrinks Annual Budget for the First Time in History – The Diplomat

June 5, 2025
in Asia
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Bangladesh’s Interim Government Shrinks Annual Budget for the First Time in History
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There were no grand entrances or ceremonial flair; no performative applause from party loyalists or rows of empty chairs meant to signify political boycotts. Just a quiet room, where Salehuddin Ahmed, the finance adviser of Bangladesh’s interim government, delivered the country’s annual budget.

Ahmed delivered his budget for fiscal year (FY) 2025–26 on June 2. It was the first budget under Bangladesh’s interim government, which took charge after the ouster of the Sheikh Hasina regime in August 2024. The contrast from last year’s budget speech couldn’t have been starker. In 2024, then-Finance Minister Abul Hassan Mahmood Ali had presented the national budget in a highly charged atmosphere, although marked by the absence of lawmakers of Bangladesh’s major opposition parties in parliament.

This year’s budget felt less like an annual ritual and more like a reckoning: a sobering assessment of a country under strain, riddled with the economic debris of the kleptocratic Hasina regime and mounting uncertainty about the future. The government held the deficit to 3.6 percent of gross domestic product (GDP), lower than in previous years, signaling a deliberate shift toward frugality and fiscal restraint in line with conditions imposed by the International Monetary Fund (IMF).

Total expenditure is set at 7.9 trillion Bangladeshi takas ($64.67 billion), a reduction of $580 million from the previous year. This is the first time in the country’s history that the current year’s budget is less than the previous year’s. More than the numbers, what sets this budget apart is its tone. It acknowledges that Bangladesh is at a fragile crossroads — facing high inflation, weak revenue collection, and a tense political climate. With national elections approaching, ensuring a free and fair poll is the biggest challenge for the interim government, while the upcoming graduation from Least Developed Country (LDC) status in 2026 poses a major test of the country’s economic readiness.

A significant 13.2 percent cut to the Annual Development Program (ADP) reflects pragmatism. High-impact, ongoing projects are being prioritized over flashy, politically motivated ones. Subsidy reform — particularly in energy — is being phased in, to reduce inefficiencies and corruption.

One of the budget’s brighter spots is its emphasis on social safety nets. In a country where nearly 10 percent inflation continues to erode purchasing power, the government has allocated over 17 percent of total spending in this sector. Moreover, particular attention has been given to women, who make up the majority of the unemployed, and to rural communities struggling with climate shocks and price volatility. The government has also proposed allocating 1.25 billion takas ($10.23 million) to improve the business environment for women entrepreneurs and bolster their economic empowerment.

Yet, the budget also reveals familiar neglect, such as the underfunding of education and health. Education receives just 12 percent of the total budget — only 1.72 percent of GDP — far below UNESCO’s recommended minimums of 4–6 percent of GDP and 15–20 percent of public expenditure. This is a glaring failure in a country where one-fourth of the total population is in the 15-29 age group. Without serious investment in teachers, infrastructure, and curriculum reform, Bangladesh risks producing a generation ill-equipped for a post-LDC, competitive global economy. The health sector fared no better, with only 5.3 percent of the total budget allocation.

Another overlooked area is law enforcement. Despite the collapse of the police force in August last year, when the state failed to maintain public order amid widespread demonstrations, the budget for security forces remains the same as last year. This is worrying, especially as crime rates are reportedly rising.

According to Dr. Fahmida Khatun, executive director of the Dhaka-based Center for Policy Dialogue (CPD), while the budget has taken some positive steps, these appear to be isolated efforts. What is lacking is a comprehensive, structural transformation. “The budget seems to maintain the same existing framework, with only minor adjustments here and there. As such, the proposed measures do not fully reflect the core philosophy of building a society free from inequality,” she told the newspaper Bangladesh Pratidin.

Dr. Zahid Hussain, former lead economist at the World Bank, argued that the interim government’s budget reflects continuity with past strategies rather than meaningful structural reforms. Despite the unusual political context, the same economic and political forces appear to be guiding fiscal policy, leaving little room for transformative change.

In comments to The Daily Star, a Bangladeshi daily, he criticized the lack of a clear roadmap, noting that the government has not outlined what it plans to complete during its tenure or what should be handed over to the next administration.

Transparency International Bangladesh (TIB) criticized the decision to continue allowing the “whitening” of black money in the 2025–26 budget, calling it unconstitutional and a betrayal of the interim government’s anti-corruption commitments. TIB said the move encourages corruption, benefits dishonest individuals, and goes against Article 20(2) of the constitution. It also warned that this provision would deepen inequality, especially in the real estate sector, and urged the government to cancel it immediately.

Moreover, the National Board of Revenue (NBR) has introduced a 10-year revenue strategy with the goal of increasing Bangladesh’s tax-to-GDP ratio to 10.5 percent by FY2034–35. However, a closer look reveals a confusing contradiction: the target for the upcoming fiscal year is 9 percent. This suggests that after reaching 9 percent in FY2026, the ratio is expected to increase by only 1.5 percentage points over the following nine years — an average rise of less than 0.2 percentage per year.

For a country with one of the lowest tax-to-GDP ratios in the world, this cautious approach raises eyebrows. Such a conservative target does not align with the urgency of domestic resource mobilisation needed for LDC graduation, infrastructure development, and reducing dependence on foreign aid and loans.

Structural risks remain deeply entrenched. Inflationary pressures are unlikely to subside quickly, given ongoing supply chain disruptions, continued depreciation of the taka, and the high volume of money printed over the past fiscal years. Moreover, the banking sector, burdened with over 3.5 trillion takas ($27.83 billion) in non-performing loans and weak governance, continues to pose serious risks to economic stability. On the other hand, the political instability, absence of an elected parliament, and uncertainty over electoral timelines continue to cloud both domestic and foreign investor confidence.

While the interim government has taken some steps to restore fiscal order, the path ahead remains fraught. Export diversification remains elusive as U.S. President Donald Trump’s new tariffs are going to hit Bangladesh hard. More than 80 percent of Bangladesh’s total export earnings come from the readymade garment (RMG) sector, and the biggest trade market is the United States. Private investment has also stagnated, and foreign direct investment (FDI) has shown signs of retreat, wary of unrest and energy insecurity. Consequently, simply tweaking tax brackets or cutting subsidies won’t be enough.

Foreign investors, too, are likely to remain hesitant, as the budget lacks clear signals of regulatory reform or assurance of legal protections. The absence of a functioning parliament and a mandated government further erodes investor confidence, with FDI inflows shrinking by 8.8 percent in the last fiscal year. Moreover, Bangladesh’s overlapping and non-transparent tax policies, now compounded by abrupt VAT changes, add to the policy unpredictability that foreign investors frequently cite as a major barrier.

Business reactions to the budget were mixed. Some have welcomed the trade facilitation measures, especially duty-free access for certain goods and incentives for solar energy. Others, particularly from the e-commerce and small and medium enterprise (SME) sectors, have expressed concern over VAT hikes and increased operational costs.

In sum, the FY2025–26 budget lacks a clear long-term development vision and does little to inspire foreign investment. But given that this is the first budget from an unelected interim government, whose primary responsibility is to stabilize the economy and organize a credible national election, the approach is understandably pragmatic. Rather than grand promises, it offers fiscal restraint, cautious reforms, and some social protections.

Yes, the budget misses the mark in encouraging FDI, but in reality, foreign investors remain hesitant not just due to tax or policy frameworks, but because of the absence of an elected parliament, weak contract enforcement, and political uncertainty. Until Bangladesh achieves political stability through democratic legitimacy, no budget alone can restore investor confidence.

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