Fitch warns of tough road to budget goals

Bangladesh’s FY2026–27 budget sets out revenue targets that may prove difficult to achieve given the country’s longstanding challenges in tax mobilisation and reform implementation, according to Fitch Ratings.

In a report released on 16 June, the global credit rating agency noted that the budget aims to raise the revenue-to-GDP ratio to 10.2 per cent from around 8 per cent in FY2025–26. If realised, this would represent the highest ratio recorded since 1993.

Fitch identified revenue collection as the principal fiscal challenge, highlighting the budget’s target of 18 per cent year-on-year growth in nominal revenue alongside a 19 per cent increase in expenditure.

The agency said proposed measures—including simplifying tax procedures, reducing exemptions, easing VAT compliance for small and medium-sized enterprises, and increasing non-tax revenue from state-owned enterprises—could help broaden the tax base over time.

However, it cautioned that previous reform efforts have often been constrained by implementation weaknesses.

Fitch also pointed to higher spending commitments, particularly in social programmes and infrastructure, which account for 29.7 per cent and 18.7 per cent of total expenditure respectively.

While these allocations reflect the priorities of the newly elected government, they also increase pressure on revenue performance.

The agency noted that Bangladesh’s history of underspending budget allocations may help limit the fiscal deficit if expenditure implementation again falls short of targets.

Fitch maintained its FY2026–27 fiscal deficit forecast at 3.6 per cent of GDP, in line with the government’s projection, although this assumption is based on both revenue and expenditure falling below budgeted levels.

On economic growth, Fitch described the government’s projection of 6.5 per cent real GDP growth for FY2026–27 as ambitious.

The agency forecasts growth of 3.5 per cent, citing vulnerabilities in the banking sector, subdued private-sector credit growth, policy constraints and an uncertain external environment.

Fitch added that measures aimed at strengthening the energy sector—including increased domestic gas exploration, improved efficiency in power generation and distribution, and enhanced liquefied natural gas infrastructure—could support medium-term growth if implemented effectively.

The rating agency also referred to Bangladesh’s request for a new programme with the International Monetary Fund (IMF), noting that the final review of the current arrangement, which expires in January 2027, now appears unlikely.

Looking ahead, Fitch said improvements in fiscal performance and economic growth will depend largely on the government’s ability to implement reforms more effectively.

The authorities have set a target of raising the revenue-to-GDP ratio to 11 per cent by FY2030–31 and increasing investment to 40 per cent of GDP, while lifting foreign direct investment to 2.7 per cent of GDP.

The budget also includes a reduction in withholding tax on machinery rental payments to non-residents, continued investment in infrastructure projects such as bridges and expressways, and incentives for public-private partnership initiatives.

In addition, it retains a 2.5 per cent cash incentive for remittance inflows and extends duty-free import facilities aimed at supporting export diversification beyond the ready-made garments sector.