Gauging Bangladesh’s Fiscal Strategy for Inclusive and Sustainable Growth

The national budget for FY2025-26 presented by Bangladesh’s interim government marks a significant deviation from years of growth-centric fiscal policies. This budget, which totals Tk 7,90,000 crore—Tk 7,000 crore less than the previous year—represents a historical moment as it is the first time in over a decade that a Bangladeshi budget has contracted in nominal terms. This shift is not merely statistical; it serves as a deliberate effort to recalibrate national priorities. The focus is now on macroeconomic stability, institutional reform, and human development, rather than solely on infrastructure-driven growth.

Redefining Economic Growth

The new fiscal approach embraces the “quality over quantity” philosophy in growth theory. Traditional economic frameworks, including Keynesian and neoclassical models, often hinge on large-scale capital investment as the primary means for GDP growth. However, modern perspectives, especially the endogenous growth model developed by Paul Romer in 1990, posit that human capital, innovation, and robust institutions are crucial for long-term, inclusive development.

By adopting this paradigm, the interim government seeks to remedy existing structural imbalances. Essential governance reforms are prioritized, including the establishment of eleven sectoral reform commissions tackling electoral governance, public administration, and anti-corruption. Moreover, the repeal of opaque laws, such as the Quick Enhancement of Electricity and Energy Supply (Special Provisions) Act, 2010, indicates a commitment to transparency and rule-based governance.

Focus on Macroeconomic Stability

Macro-stabilization strategies feature prominently in this budget. Through contractionary monetary policies and the rationalization of subsidies in vital sectors like energy and agriculture, the government has successfully reduced inflation rates from 11.66 percent in July 2024 to 9.17 percent in April 2025. These measures reflect the monetarist economic principle that views inflation control as essential for sustained growth and future investment.

A GDP growth target of 5.5 percent has been set, which is lower than the typical 6 percent average achieved over the last decade. While some critics might perceive this as a demotion in ambition, it can instead be viewed as a prudent acknowledgment of the need for stability. Historical examples from countries like Chile, Vietnam, and Indonesia show that moderate and stable growth accompanied by governance reforms can transition nations from aid dependency to resilient economies.

Human Capital Investment: A Critical Shortcoming

Despite the promising structural shifts, one glaring issue remains: inadequate investment in human capital. Allocations for education and health—Tk 95,644 crore and Tk 41,908 crore, respectively—are significantly below global recommendations. UNESCO advises that nations allocate between 15-20 percent of their national budgets to education; Bangladesh’s allocation hovers around 12 percent. Similarly, the WHO recommends a health budget allocation of 5-6 percent, yet Bangladesh barely meets the lowest limit.

This discrepancy has stark implications for economic growth and social equity. Countries like Sri Lanka and Vietnam, which allocate robust investments in human capital, have successfully cultivated competitive, export-oriented economies supported by a healthy and skilled workforce. The Human Capital Theory suggests that returns on investments in education and health are not only high but critical for long-term poverty alleviation and economic growth.

The Challenge of Resource Mobilization

A pivotal obstacle hindering progress is Bangladesh’s chronic inefficiency in mobilizing domestic resources. This inadequacy constrains the government’s ability to finance essential social programs, enhance infrastructure, and invest in sustainable development without heavily relying on foreign debt. Unfortunately, this budget lacks a progressive plan to tackle these challenges.

While the digitization of tax systems and improvements to the Integrated Budget and Accounting System (iBAS++) are commendable, the absence of strategies to expand the tax base—mainly through direct taxation on property and capital—emerges as a significant policy gap. Global experiences indicate that political will, taxpayer education, and simplified tax codes can significantly bolster revenue collection. Emulating such efforts—like enhancing the autonomy of tax authorities and incorporating data analytics—could improve outcomes in Bangladesh.

Addressing Social Protection Needs

Although the budget includes slight increases in allowances for vulnerable groups—elderly citizens, widows, and persons with disabilities—these changes are woefully inadequate, especially against a backdrop of over 10 percent inflation. Social protection mechanisms remain limited, particularly in urban informal sectors, where a majority of the poor reside. This situation poses a direct threat to the government’s aim of fostering an inclusive growth model.

To genuinely build an inclusive society, Bangladesh must revamp its social protection strategies. Prioritizing well-targeted safety nets that stimulate local economies and enhance human capital can make a significant difference. Aligning social protection with health, education, and employment services would transition the country from fragmented aid to a comprehensive “social protection floor” model recommended by organizations such as the International Labour Organization (ILO).

Preparedness for LDC Graduation

As Bangladesh gears up for its anticipated graduation from least developed country (LDC) status in 2026, it faces an imperative to harmonize fiscal discipline with social investment, strengthen institutional frameworks, and position itself strategically for stable middle-income status. While the current budget initiates essential reforms, its success will largely depend on ensuring adequate investments in education, healthcare, and equity—without which the vision of inclusive prosperity may remain unfulfilled.

The insights conveyed through the budget reflect a progressive intention to reframe Bangladesh’s economic landscape. Still, the necessity for ongoing commitment to education, health, and robust governance systems cannot be overstated. For the seeds of reform to flourish, the environment must be fertilized with targeted investments and innovative policies that prioritize human well-being alongside economic growth.