Record budget risks crowding out private investment

The government plans a record 12.5 per cent year-on-year increase in the national budget outlay for the next fiscal year, amid multiple headwinds, with economists warning that the move could crowd out private investment, eventually affecting the economy.

The government has started preparing the fiscal 2026–27 budget with projected spending of Tk8.83 lakh crore and a revenue target of Tk6.36 lakh crore, or 9.4 per cent of GDP.

The deficit is estimated at Tk2.47 lakh crore, or 3.6 per cent of GDP.

To bridge the gap, the government plans to raise Tk2.41 lakh crore, including Tk1.20 lakh crore from banks and Tk1.06 lakh crore from external sources, according to finance ministry officials.

Economists warn that weak private investment has so far softened the impact of higher government borrowing, but any recovery could tighten credit for businesses.

If loan demand rises, banks may favour government borrowing, squeezing financing for the private sector.

Sovon Islam, former director of Bangladesh Garment Manufacturers and Exporters Association, said the risk is already evident.

“Investment has been stagnant for years. In this situation, if the government borrows more from the banking sector, private sector investment will certainly be hampered,” Islam, also managing director of Sparrow Group – one of the largest garments exporters, told TIMES of Bangladesh.

Khandaker Golam Moazzem, research director at the Centre for Policy Dialogue, said rising fiscal pressure could push the government towards more borrowing.

“There will be pressure on the government to meet higher energy costs, some populist expenditures, and the costs of large projects. To manage this pressure, the government will have to look for alternative sources of financing. Because if the government borrows more from domestic sources, the private sector may be affected,” he told TIMES.

He said stronger private investment is key to job creation and warned that reduced credit flow would directly constrain business expansion.

He urged the government to rely more on foreign financing to ease pressure on domestic credit.

Bangladesh’s external debt stood at $113.51 billion, or Tk13,96,173 crore, in December 2025, according to Bangladesh Bank.

About 82 per cent of the debt is in the public sector, with 87.62 per cent long-term and 12.38 per cent short-term.

Domestic borrowing from banks and financial institutions reached Tk62,246 crore in the first half of the current fiscal year.

The revenue target for FY27 is Tk6.36 lakh crore, up Tk53,000 crore from the proposed FY26 budget and Tk48,000 crore from the revised estimate.

The current fiscal year’s original target was Tk5.18 lakh crore, revised to Tk5.23 lakh crore.

National Board of Revenue tax collection is projected at Tk5.50 lakh crore, or 8.1 per cent of GDP, up from Tk5.03 lakh crore in the revised FY26 budget.

NBR collected Tk3.72 lakh crore in FY25, and collections may reach Tk4.20 lakh crore this fiscal year.

Officials expect revenue to rise to around Tk4.50 lakh crore next year if business conditions improve.

Non-tax revenue is projected at Tk21,000 crore, slightly higher than Tk20,000 crore in the revised current budget.

Economist M Masrur Reaz said higher spending reflects rising development demand after a prolonged transition.

“An elected government has been established in the country. Public expectations from this government are also high. As the country has gone through a transition period over the past one and a half years, the Annual Development Programme had slowed down. As a result, there is now strong demand for development spending. For these reasons, an increase in the size of the budget is natural,” he said.

However, he warned of financing limits.

“Now the question is where the financing will come from. Due to structural weaknesses in the NBR and the fact that business activities have not yet fully recovered, tax collection is not reaching expected levels. At the same time, domestic and foreign debt has increased abnormally in recent years, leaving limited scope to raise it further,” he added.

Masrur, also chairman of Policy Exchange Bangladesh, urged the government to be selective in project approvals and cut unnecessary spending amid mounting economic pressure.