Expansionary Budget Meets Banking Crisis and Revenue Shortfall: Bangladesh Confronts a Narrow Fiscal Path

The FY27 Budget: Ambition Against a Backdrop of Underperformance

Finance Minister Amir Khosru Mahmud Chowdhury presented the national budget for FY2026-27 on June 11, 2026, with a total outlay of Tk 9.38 trillion. The proposed budget is 19 percent larger than the revised budget of Tk 7.88 trillion for the outgoing fiscal year. The framework rests on twin macroeconomic objectives: achieving a GDP growth target of 6.5 percent and reducing inflation to 7.5 percent. These goals represent a pronounced pivot from the provisional FY26 performance, which registered actual GDP growth of only 4.14 percent according to the Bangladesh Bureau of Statistics.

The inflation target faces immediate headwinds. Headline inflation rose to 9.42 percent in May 2026, up from 9.04 percent in April 2026. This elevated price level accompanies a dramatic contraction in monetary transmission. Private sector credit growth fell to a historic low of 4.72 percent in March 2026, with subsequent data placing it at 4.75 percent. Simultaneously, the volume of currency circulating outside the banking system reached a record Tk 3.03 trillion as of March 2026, indicating a severe breakdown in financial intermediation and deep public distrust in formal depository institutions.

Revenue Mobilisation and the Fiscal Deficit

The credibility of the Tk 9.38 trillion spending plan depends on an unprecedented revenue mobilisation effort. The government has set a total revenue collection target of Tk 6.95 trillion, with the National Board of Revenue tasked with collecting Tk 6.04 trillion. Prime Minister Tarique Rahman has outlined plans to increase the tax-to-GDP ratio to 10 percent within five years and 15 percent by 2035. The NBR aims to raise the revenue-to-GDP ratio to 10.7 percent by FY2028-29, with Fitch Ratings noting the budget aims to raise the ratio to 10.2 percent in the current fiscal year.

However, immediate precedents undermine these projections. The NBR expects a revenue shortfall of approximately Tk 880 billion against the revised target for FY26, which was set at Tk 5.03 trillion. The NBR estimates total collection will reach a record Tk 4.15 trillion by the end of June 2026. As of June 20, 2026, total revenue collection stood at Tk 3.899 trillion.

Independent assessments highlight the scale of the challenge. Fitch Ratings characterised the FY27 revenue targets as "highly challenging" due to structural weaknesses in tax mobilisation and reform implementation. The Centre for Policy Dialogue noted that the actual required revenue growth is closer to 54.4 percent. The CPD also criticised the proposed personal income tax structure as highly discriminatory, noting it disproportionately increases the tax burden on lower-income individuals earning between Tk 600,000 and Tk 1.5 million compared to those earning over Tk 3 million.

The Research and Policy Integration for Development projected that the actual deficit could reach nearly Tk 4 trillion if the budget is fully implemented, far exceeding the official fiscal deficit projection of Tk 2.43 trillion. The Ministry of Finance's Medium-Term Macroeconomic Policy Statement identified revenue shortfalls as a primary domestic risk, warning that persistent gaps could increase government debt by over Tk 1.2 trillion by 2029. Former Bangladesh Bank governor Mohammed Farashuddin argued the budget should have been at least Tk 14 trillion, or 20 percent of GDP, rather than the current 13.7 percent of GDP.

Banking Crisis: Solvency Collapse and the Islami Bank Intervention

The fiscal expansion unfolds against a banking sector confronting a solvency crisis of extraordinary depth. Distressed loans reached Tk 10.87 lakh crore by the end of 2025, equivalent to 59 percent of total outstanding loans of Tk 18.20 lakh crore. The official non-performing loan ratio stood at 30.60 percent as of December 31, 2025, with NPLs reaching Tk 5.88 trillion. By March 2026, the NPL ratio had risen to 32.6 percent, with non-performing loans reaching Tk 5.89 trillion.

The system-wide capital adequacy ratio fell to negative 2.64 percent by the end of 2025, indicating that the aggregate equity cushion has been fully exhausted. The banking sector collectively posted a net loss of Tk 1.3 trillion in 2025. At 10 specific banks, risky loans accounted for 47.75 percent of total lending at the end of December 2025, an increase from 42.96 percent in 2024. In 2025, the central bank injected Tk 21.68 trillion in liquidity support into the country's financial institutions.

The crisis manifested acutely at Islami Bank. On June 14, 2026, Bangladesh Bank dissolved the entire board of directors, including the chairman, Md. Khurshid Alam. Mohammad Zahir Hussain, an Executive Director of Bangladesh Bank, was appointed as administrator. During the peak of the panic, average daily cash withdrawals reached approximately Tk 1,200 crore. Bangladesh Bank provided special liquidity support of Tk 2,500 crore on June 14, 2026, followed by an additional Tk 2,500 crore on June 15, 2026. Islami Bank had sought a total of Tk 10,000 crore in liquidity assistance. On June 16, 2026, Islami Bank announced a special financial assistance program for depositors who prematurely closed their savings or term-deposit accounts between June 1 and June 15, 2026.

Competing Claims on Limited Fiscal Space

The budget's design reveals severe competing claims on limited fiscal resources. The government faces a debt repayment obligation of nearly Tk 1.25 lakh crore in the current fiscal year and must manage Tk 50,000 crore in outstanding power sector liabilities inherited from the previous administration. The Annual Development Programme is set at Tk 3 trillion, with development expenditure projected to rise by 47 percent to Tk 3.16 trillion, lifting development spending to 33.7 percent of total outlays.

Rigid commitments further constrain flexibility. The budget allocates Tk 350 billion to implement the first phase of recommendations from the new Pay Commission for public-sector employees. Social safety net allocation increased by 14.4 percent to Tk 1.44 trillion. The education sector allocation was raised to 2 percent of GDP, totaling Tk 1.37 trillion, while the Ministry of Health and Family Welfare received Tk 69,409 crore. The proposed budget also includes Tk 112,000 crore in government borrowing from the banking system, with another provision targeting Tk 1.35 lakh crore from domestic banks.

The government has allocated approximately Tk 40,000 crore for the recapitalisation and restructuring of distressed banks. Bangladesh Bank announced Tk 19,000 crore across four key refinance schemes in June 2026, with an additional Tk 5,000 crore earmarked for the CMSME sector from a Tk 60,000 crore stimulus package. The proposed budget includes SME incentive programs worth nearly Tk 7,800 crore.

Execution Capacity and External Vulnerabilities

Implementation capacity presents a fundamental bottleneck. The July to May implementation rate for FY2025-26 fell to a historic low of 48.23 percent. The Health Services Division utilised only 25.87 percent of its Tk 31.28 billion allocation, while the Ministry of Primary and Mass Education utilised 35.18 percent of its Tk 80.54 billion allocation.

External buffers remain limited. Foreign exchange reserves stood at US$35.63 billion, or US$31.08 billion under the IMF BPM-6 standard. The World Bank approved $1.1 billion in emergency financing, with $300 million allocated for the import of 600,000 metric tons of fertilizer and $713 million designated for cash transfers and livelihood assistance. The World Bank also approved $450 million for the Financial Sector Support Project II.

The government, which took office on February 12, 2026, has branded its approach as the "3R Strategy: Recovery and Stabilisation, Restoration, and Reconstruction for Acceleration." The stated ambition is to transition Bangladesh into a $1 trillion economy by 2034. The Finance Bill 2026 includes a multi-year income tax roadmap extending through FY2030-31. The government is also offering a 1.5 percent consultancy fee or commission to individuals who successfully bring foreign direct investment into the country.

Policy Implications

The period's developments reveal three interlocking risks. First, the revenue target of Tk 6.04 trillion for the NBR represents a discontinuous leap from estimated FY26 collections of Tk 4.15 trillion, and independent analysts project the actual deficit could approach Tk 4 trillion. Second, the banking sector's negative capital adequacy and collective losses mean that proposed bank borrowing of Tk 1.35 lakh crore will compete directly with private credit needs at a time when private sector credit growth is near historic lows. Third, the simultaneous pursuit of 47 percent ADP growth, Pay Commission implementation, bank recapitalisation, and inflation reduction creates contradictory pressures on aggregate demand and monetary management.

The path forward requires sequencing: conditional liquidity tied to governance reform, a realistic revenue target that avoids pro-cyclical expenditure cuts, and immediate corrective action on project execution to convert the largest budget in the country's history into measurable economic output.