Staff Reporter:
Bangladesh is heading towards an ambitious yet heavily deficit-driven budget for the 2026-27 fiscal year, with the proposed budget deficit projected to reach a record Tk2,35,000 crore, nearly 5% of the country’s Gross Domestic Product (GDP).
To finance the massive fiscal gap, the government is expected to rely on both foreign borrowing and domestic bank financing.
According to the proposed budget framework, Tk1,16,000 crore of the deficit will be financed through foreign loans, while the remaining Tk1,19,000 crore will come from domestic sources.
Data from the Finance Division show that the government’s dependence on domestic borrowing has been rising steadily in recent years. In the current fiscal year, the original domestic borrowing target was Tk1,25,000 crore, which was later revised upward to Tk1,37,000 crore in the amended budget.
One of the most concerning aspects of the proposed budget is the mounting cost of debt servicing. Under the new proposal, the government is expected to spend Tk1,27,500 crore solely on interest payments, Tk500 crore higher than the revised allocation for the current fiscal year.
Economists warn that a substantial portion of public expenditure that could otherwise be directed towards development projects or social protection programmes is increasingly being consumed by debt repayment obligations.
The total expenditure for the proposed FY2026-27 budget has been estimated at Tk9,30,000 crore, representing an increase of Tk1,40,000 crore from the current fiscal year’s budget.
Debt servicing has now emerged as the single largest expenditure item in the national budget.
According to the finance ministry, the government initially allocated Tk1,21,500 crore for interest payments in FY2024-25, equivalent to 2.03% of GDP. However, actual expenditure on interest payments rose to Tk1,36,123 crore, or 2.50% of GDP, accounting for 21.5% of the national budget.
In the revised budget for FY2025-26, Tk1,27,000 crore was allocated for interest payments. For FY2026-27, interest expenditure is projected to rise further to Tk1,27,500 crore, equivalent to 1.87% of GDP.
Economists have expressed concern that the growing burden of debt servicing, particularly interest payments, may significantly constrain development expenditure and social welfare spending.
Dr Zahid Hussain, former lead economist at the World Bank, said managing such a large budget deficit under the current global and domestic economic conditions would be extremely challenging.
He noted that mobilising such a large volume of financing may not be feasible in the prevailing global environment, and even if the funds are secured, Bangladesh may lack the capacity to utilise them effectively. He stressed the need for a realistic budget focused on restoring fiscal discipline and macroeconomic stability.
Dr Zahid further warned that excessive dependence on borrowing could push the country towards a “debt trap”. He said heavy government borrowing from the banking sector would intensify pressure on money supply and inflation.
“If the government borrows Tk1,19,000 crore from domestic sources next fiscal year, private entrepreneurs may face serious difficulties in accessing bank credit, creating a crowding-out effect on private sector investment,” he said.
He also warned that unless inflation declines, interest-related expenditures are likely to continue rising in the coming fiscal year. However, economists see little indication that inflationary pressure will ease in the near term.
Rising pressure from foreign debt repayment
Meanwhile, Bangladesh’s external debt servicing obligations continue to increase steadily.
During the first nine months of the current fiscal year (July–March), the country repaid more than $3.5 billion in principal and interest on foreign loans to development partners.
According to data from the Economic Relations Division (ERD), Bangladesh repaid $3.525 billion during the period, while receiving $3.89 billion in foreign loans and grants. Of the total repayment amount, $2.276 billion was paid as principal and $1.25 billion as interest.
Officials said the country’s foreign debt repayment burden has been rising continuously over the past several years. In the previous fiscal year, Bangladesh crossed the $4 billion mark in foreign debt repayments for the first time, repaying $4.09 billion compared to $3.37 billion in the preceding year.
If the current trend continues, total foreign loan repayments could exceed $5 billion by the end of the ongoing fiscal year.
Dr Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said persistent shortfalls in revenue collection continue to weaken budget management each year.
“A budget deficit approaching 5 per cent of GDP poses serious challenges to macroeconomic stability,” he said.
He emphasised that without fundamental reforms in the National Board of Revenue (NBR) and the financial sector, implementing such a large budget would be extremely difficult.
However, he added that as the BNP prepares itself politically ahead of future elections, pressure to expand public spending and budgetary commitments has also increased.
