Budgeting through turbulence: What keeps interim government up at night

Bangladesh’s economy enters a new fiscal year weighed down by political turbulence and administrative paralysis—conditions analysts warn could severely undermine the interim government’s ability to deliver a functional national budget.

The 2025-26 financial year comes as the country continues to recover from the economic shock of the COVID-19 pandemic, only to be hit by renewed turmoil following a dramatic political transition.

Some economists argue that even formulating a national budget under such uncertainty is itself a major hurdle

Last July’s mass uprising ended the Awami League’s prolonged rule and brought Nobel laureate Muhammad Yunus to the helm of an interim administration.

They note that the interim administration cannot be easily compared with previous caretaker regimes or the long tenure of Sheikh Hasina’s government.

The present moment is marked by a rare combination of political volatility and bureaucratic inertia, they say—far more pronounced than in past transitions.

While previous governments, particularly under Hasina, presented what were often seen as “ambitious” budgets despite high inflation and revenue shortfalls, the current administration has signalled a more restrained approach.

Government officials have indicated they are unlikely to follow the Awami League's precedence of unveiling expansive, high-ambition budgets despite persistently high inflation and a widening revenue shortfall.

Yet analysts remain sceptical: scaling back ambition alone, they warn, may not be enough to rein in inflation or close fiscal gaps.

There are also concerns that in an attempt to trim spending, the budget could deprioritise critical sectors such as education, healthcare, social protection, and infrastructure—areas vital to public welfare and long-term growth.

There is real fear that in the name of fiscal prudence, vital sectors like education, healthcare, social protection, and infrastructure may be overlooked.

Adding to the strain is the fractured political landscape.

Since the fall of the Awami League, the interim government has struggled to maintain stability

Tensions among political parties have intensified, while internal instability has gripped the civil service. Demands from various quarters have led to growing unrest within the bureaucracy, while divisions among political parties continue to deepen.

Foreign and domestic investment has slowed significantly, and unemployment is on the rise.

With the budget expected to be unveiled under these difficult conditions, economists say the interim government must strike a delicate balance between fiscal discipline and protecting the country’s most vulnerable.

ALIGNING POLICIES

Since the economic crisis began in 2022, many have called for contractionary fiscal and monetary policies.

The Awami League government, however, chose a different route.

It kept interest rates capped at 6 to 9 percent, pushed ahead with mega projects, and printed money to fund development expenditures.

These decisions helped fuel inflation, which has stayed above 9 percent for over two years and at times even reached double digits.

Mirza Azizul Islam, who served as finance advisor during the last caretaker government and oversaw two budgets, recalls a different atmosphere.

“There wasn’t much disagreement then. I felt people across society had a sense of relief and calm,” he said.

The picture now is in more pieces as political parties pull from different directions, making contradictory demands to aggravate the budget-making process, he added.

Economist Selim Raihan echoed the concern, pointing out that the interim government's biggest hurdles are “political uncertainty and bureaucratic stagnation”.

“Bangladesh is at a crucial political crossroads. Even after the July movement reshaped the political scene, stability hasn’t returned,” he said.

Selim warned that in such conditions, the caretaker administration may “struggle” to make major policy or long-term financial decisions. “With a limited tenure, the government may not be able to take effective initiatives on all fronts.

“Growing unrest in the political arena is disrupting administrative functions, which will make development-focused budget execution more difficult.”

He also noted that ongoing protests and work stoppages in government offices, including the Secretariat and the National Board of Revenue, are “slowing down the decision-making process at the bureaucratic level”.

“That will slow development projects, disrupt fund release, and shake investor confidence,” he said. “Revenue may fall short, widening the budget deficit.”

PRESSURE POINTS

A national budget is not just a tally of expected income and expenditure -- it also sets the direction for the economy and offers cues for investment.

It outlines how the fiscal deficit will be financed and reflects whether the government is leaning towards expansion or austerity.

But each of these elements comes with its challenges, says Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD).

On revenue, he said: “One challenge is achieving the projected tax collection. The tax-free income threshold may be raised slightly.

“Some duties may be revised, perhaps rationalised in light of US tariffs or adjusted to meet domestic needs.”

Mustafizur also flagged governance as a key issue, especially in managing expenditure.

“We need to focus on both revenue and development spending. But the bigger challenge is ensuring good governance.

“The government says the ADP will be trimmed, but if implementation lacks quality, what’s the point? Execution quality is the real hurdle.”

On financing the deficit, he said: “The government claims it won’t put excess pressure on the banking sector to allow credit access for the private sector, even if investment rises.”

Inflation control remains a continuing challenge, according to the economist.

He identified the key hurdles for the upcoming fiscal year as: strengthening positive trends in the economy, addressing emerging risks, reforming the revenue system, boosting collection, and ensuring discipline in spending.

Economics professor Selim also highlighted that key challenges are already emerging in budget planning.

“Currently, inflationary pressure, heavy foreign debt repayment obligations, investment and employment shortfalls, and foreign exchange reserve constraints all weigh heavily on the economy.”

He says the government faces a “tough task” to boost revenue but has not yet shown “enough effective or widely accepted measures” to broaden the tax base.

He criticised past budgets for being “politically” driven rather than grounded in reality.

"A huge gap exists between revenue and expenditure. Large deficits have been the norm, and this budget will be no different, said Selim. “To cover the shortfall, the government depends heavily on internal and external borrowing, which is already straining the economy.

“Often, budgets looked good on paper but weren’t realistically implementable due to political priorities."

CALL FOR REALISTIC BUDGET

Every year, the government unveils an “ambitious” budget even when funds fall short -- a practice Zahid Hussain advises against this time.

The former World Bank economist said, “We hear about ambitious budgets every year. The size that’s being discussed isn’t implementable.

“I hope when I open the newspaper on the 3rd of June, I won’t see that word again.”

“But I doubt that hope will be fulfilled,” he added. “What I’m hearing suggests the figure is still large and unfeasible. It would be better to go for something realistic.”

With GDP growth slowing, he explained what a realistic budget might look like: “It should reflect what you can actually finance. If your projected revenue, foreign assistance, and domestic borrowing add up to a manageable amount, only then can the budget be called implementable -- at least in the initial sense.”

Securing funds under such constraints likely means slower GDP growth.

Global development partners including the World Bank, Asian Development Bank (ADB) and International Monetary Fund (IMF) have already warned that growth could hover around 4 percent in the upcoming fiscal year.

Economist Mirza Aziz stressed the need to address these macroeconomic challenges, particularly falling GDP growth.

He warned that poverty reduction efforts could “suffer” setbacks. “Now everyone expects growth to fall below 5 percent.

“If national output slows, jobs won’t be created. Without job creation, poverty reduction will stall.”

Selim said, “The expectation from the interim government is a budget rooted in reality.”

“Political stability, administrative efficiency, and transparency must underpin every stage of budget preparation and implementation.

“Otherwise, Bangladesh’s economy risks becoming structurally weaker,” he added.

THE WAY FORWARD

Most economists prefer expanding the tax base rather than increasing tax rates to boost revenue collection.

Mustafizur said, “Be it income tax or corporate tax, the focus should be on broadening the base without harassing those already in the net.

“Online tax submission is a good move. With more digitalisation, the net can be widened effectively.”

On spending, he stressed timely implementation. “Projects nearing completion should be prioritised. The foreign assistance already in the pipeline must be disbursed efficiently.

“That process needs to be accelerated.”

The economist also called for a better investment climate.

Zahid echoed the view that tax rates should not go up to meet revenue targets.

“The revenue target must be achievable. Expecting a sudden surge in collections through reform alone is unrealistic,” he said.

“Taking the easy route--like raising tax rates, VAT, or SD--might seem tempting. But in today’s high-cost environment, that would only increase people’s hardship. That’s a path we should avoid.”

Former advisor Azizul pointed to the need for a broader assessment. “First, we must look at the big picture: revenue collection, spending limits, and the budget deficit.

“Our key concern should be how the deficit will be financed. That’s where the attention must lie,” he added.

[Writing in English by Sheikh Fariha Bristy]