Bangladesh's economy is showing early signs of recovery after two years of sustained macroeconomic stress. Headline inflation, which surged to a decade high in mid-2024, has started to ease, thanks to a tighter monetary stance and better food supply management. Foreign reserves, though still under pressure, are stabilising after months of depletion, aided by exchange rate adjustments and import compression. Furthermore, the financial sector has seen renewed reform efforts, including tighter regulatory oversight and gradual progress on recapitalisation measures. Yet, beneath these visible signs of stabilisation lies a persistent vulnerability — Bangladesh's fragile fiscal framework.

Between July 2024 and March 2025, revenue mobilisation has remained lukewarm. Despite commitments to broadening the tax base and enhancing compliance, actual collections have significantly underperformed projections. The National Board of Revenue (NBR) has struggled to sustain momentum in direct tax growth, while VAT collections have suffered due to declining domestic demand and a still-recovering private sector. This weakness in revenue generation is now exerting significant pressure on public finances — forcing the government to rely more heavily on costly domestic borrowing, while curtailing development expenditures to maintain macroeconomic balance.

As things stand currently, even under an optimistic 15 percent revenue growth over last year's actual collection, the NBR's FY25 revenue collection would still fall short of the target by Tk 23,420 crore. Under more realistic growth rates of 7-10 percent, the shortfall could be even higher, ranging between Tk 42,500 crore and Tk 54,000 crore. To achieve the revised revenue target for FY25, the NBR needs to collect more than Tk 69,000 crore in April, May, and June 2025, which appears very unlikely.

This fiscal fragility is culminating into the downsizing of Annual Development Programme – whose implementation rate till March 2025 has already been lowest in last 15 years. This slashing of public investment is occurring at a moment when the economy needs a well-calibrated public spending push to stimulate demand, rebuild infrastructure, and crowd in private investment. Instead, Bangladesh is witnessing a procyclical retrenchment of development spending that could weaken the ongoing recovery. Besides, growing dependence on expensive local debt — particularly from the banking sector — is beginning to create fiscal distortions. Interest payments are now consuming an increasing share of government expenditures, leaving fewer resources for productive investments in health, education, and social protection. This debt pattern, if left unchecked, could pose significant macro-fiscal risks in the medium term.

The root of this problem lies in the lack of a coherent, credible fiscal reform strategy. While monetary and exchange rate reforms have received considerable attention from both policymakers and international partners, the fiscal side of the macroeconomic equation remains under-addressed. There is still no substantive breakthrough in modernising tax administration, rationalising tax exemptions, or enhancing digital enforcement mechanisms. Likewise, expenditure reforms — especially around subsidy targeting, SOE rationalisation, and project efficiency — remain slow and fragmented. Without a stronger fiscal anchor, Bangladesh's economic recovery risks becoming uneven and short-lived. It is important to recognise that macroeconomic stability cannot rest solely on the shoulders of monetary tightening or foreign reserve management. Fiscal health — anchored in robust revenue generation, efficient spending, and credible budgeting — is indispensable.

Bangladesh's economic story has long been one of resilience. But resilience alone is not enough. It must now be complemented by a deliberate effort to build fiscal resilience — through bold, politically difficult, yet ultimately necessary reforms. A robust and modern fiscal framework is not just a technocratic ideal at this point; it is a prerequisite for Bangladesh's transition from recovery to sustained, inclusive growth.

The writer is a principal economist at the Policy Research Institute of Bangladesh. He can be reached at: [email protected]