Fiscal crisis looms as revenue gap hits Tk1.05 lakh crore

Staff Reporter :

Bangladesh is poised to fall significantly short of its revenue target for the current financial year, with a projected shortfall of Tk1.05 lakh crore, according to the Centre for Policy Dialogue (CPD). The findings were presented at a press briefing in Dhaka by CPD Executive Director Dr Fahmida Khatun, who outlined the think tank’s third quarterly economic review.

Dr Fahmida reported that revenue growth for the first nine months of FY2024-25 stood at just 5 per cent, a stark contrast to the 13 per cent growth recorded during the same period last year. To meet the annual target, revenue would need to grow by an implausible 64 per cent in the final quarter. The CPD attributes the shortfall to weak fiscal management and overly ambitious revenue targets. Consequently, the revenue-related conditions stipulated by the International Monetary Fund (IMF) are unlikely to be fulfilled.

The government’s aim to reduce inflation to 6.5 per cent in the next fiscal year was also deemed unrealistic by the CPD. Drawing on inflation data from 2012 to 2025, Dr Fahmida projected a temporary dip in inflation between May and February, followed by an increase from March to June, driven by agricultural supply constraints and seasonal demand spikes during Ramadan.

The CPD further warned that the proposed Tk7,000 crore dearness allowance for government employees would exacerbate inflationary pressures, particularly for workers in the private and informal sectors. While replacing the existing 5 per cent incentive for public employees with a fixed allowance may be warranted in light of inflation, the timing, CPD argued, is problematic.

The think tank urged the government to consider tax relief or similar support mechanisms for non-government employees to mitigate the impact. Dr Fahmida also highlighted the potential ramifications of a proposed 5 per cent US tax on remittances, which could raise the cost of money transfers from the United States by approximately 9 per cent. This could cost Bangladeshi expatriates an estimated additional $460 million annually. Meanwhile, the CPD cautioned that increasing US tariffs on exports may undermine Bangladesh’s earnings.

Concerns were also raised regarding the health of the banking sector. The capital-to-risk weighted assets (CRWA) ratio has deteriorated significantly, with state-owned banks registering negative values since July 2024 – a sign of entrenched structural weaknesses.

Despite past regulatory interventions, fundamental problems persist, according to the CPD. A Granger causality test conducted by the think tank found that an expanded money supply is contributing to inflationary pressures. The CPD stressed the importance of aligning monetary expansion with real economic activity to maintain macroeconomic stability.

The capital market, too, remains under strain. The CPD attributed poor performance during the interim government period to regulatory corrections and unresolved legacy issues. Simultaneously, the country faces a worsening energy crisis, caused by declining domestic gas production, rising dependency on imports, and outdated energy infrastructure.

In response to these challenges, the CPD outlined a set of key policy recommendations. They are identify new revenue sources and enhance tax collection efficiency, sddress financial leakages in public expenditure, limit money supply growth to rein in inflation, enforce comprehensive banking sector reforms, including stricter loan approval processes, implementation of exposure limits, and a halt to repeated loan rescheduling, enhance productivity and domestic value addition in the ready-made garments (RMG) sector, strengthen backward and forward linkages and diversify export markets, accelerate reforms within the Bangladesh Securities and Exchange Commission (BSEC) and prioritise domestic gas exploration and invest in renewable energy sources.

Despite these challenges, the CPD acknowledged a positive development in the RMG sector, noting an uptick in domestic value addition, which has supported improvements in the country’s foreign exchange reserves.