2026-27 budget must stabilise economy amid mounting pressures

The government of Bangladesh, formed less than two months ago, finds itself at a delicate yet consequential moment as it enters the 2026-27 national budget cycle. The economy is not grappling with known cyclical ups and downs, but rather a combination of domestic constraints and external shocks. Growth has significantly slowed down compared to earlier years, inflation remains persistently high, foreign exchange reserves have yet to stabilise fully, there is mounting pressure on the exchange rate, and private investment continues to lag. At the same time, global uncertainties are becoming more pronounced. The ongoing crisis in the Middle East is already taking a toll on our economy through energy markets, remittance flows, and disruptions to trade logistics.

In this context, while the government has several election promises to deliver, it cannot treat the upcoming national budget as a routine fiscal exercise. Rather, it must serve as a strategic instrument to stabilise the economy in the short term, while also preparing for a more demanding transition, particularly in light of the country’s forthcoming graduation from the Least Developed Country (LDC) status.

External shocks and transmission channels

The Middle East crisis adds a new layer of unprecedented complexity to an already constrained macroeconomic environment. Its implications for Bangladesh are complex, and they work through various interconnected channels.

First is energy. Bangladesh’s heavy reliance on imported fuel exposes it to global price fluctuations. Persistent rises in oil and gas prices, as well as deep uncertainty about availability in time and sufficient quantity, would increase import and production costs, raise the current account deficit, and increase inflationary pressure. At the same time, continued reliance on fuel subsidies may not be fiscally sustainable. A gradual adjustment strategy, clearly communicated in advance, and complemented by targeted support to the most affected groups, would be more feasible. Meanwhile, the effort to diversify energy supplies and build renewable capacity must speed up.

Second is the remittance channel. A large portion of Bangladesh’s labour force works in Gulf countries. Any economic slowdown in those countries, or disruptions to labour markets linked to geopolitical instability, could conspire to reduce inflows of remittances. This would immediately impact household consumption and foreign exchange availability. Another risk is the possibility of return migration from the Middle East. Proactive planning is, therefore, essential. This also involves identifying who may return, what the capacity of the labour market is to absorb them, and how temporary support measures are shaped.

The third channel is trade and logistics. Disruptions to maritime routes and rising freight costs would hike import costs and erode export competitiveness. Combined, these channels indicate a scenario of higher inflation, tighter external balances, and weaker growth.

If the crisis persists and worsens, these pressures will increase. So the upcoming budget should be prepared with caution, keeping a long-term perspective in mind while also considering potential downside scenarios.

Aligning political commitments with fiscal realities

The government enters this budget cycle with a set of political commitments that are both ambitious and socially significant. The Family Card programme, support measures for agriculture, and broad reforms in social protection are all aimed at addressing structural inequalities and vulnerabilities.

These commitments are all the more crucial in a time of increasing economic stress. However, their efficacy will derive not only from scale but from design as well. The country’s social protection system has long been characterised by fragmentation, duplication, and leakage. Expanding the social protection programmes without fixing the structural problems would risk a rise in fiscal pressure without corresponding advantages. And in the context of high inflation, especially food inflation, protecting vulnerable households is an urgent task.

Hence, the budget should prioritise consolidation and integration. Developing a unified beneficiary registry, strengthening digital delivery mechanisms, and improving targeting criteria are essential steps. The budget must come up with a mechanism to shift focus from only the volume of expenditure to its effectiveness.

Revitalising investment and competitiveness

Reviving investment is central to restoring growth momentum. However, fiscal incentives alone are unlikely to suffice. Investor confidence depends on broader institutional and policy conditions. Hence, improving the business environment is critical. This includes enhancing the predictability of policy, strengthening transparency in regulatory issues, and increasing efficiency in public service delivery. Investment in large-scale infrastructure should continue, but be increasingly refocused on quality and connectivity as well as economic returns.

Foreign direct investment can supplement domestic endeavours; however, its growth will rely on further changes to trade policy, transportation, and governance systems. The impending LDC graduation also calls for the urgency of such reforms, since Bangladesh will have to compete in a much more demanding global environment with no preferential market access.

Monetary policy and financial sector reform

Monetary policy has already adopted a tightening stance in response to inflationary and external pressures. However, tighter monetary conditions also constrain investment and economic activities. Monetary policy effectiveness is closely tied to the soundness of the banking sector. Structural weaknesses, including high levels of non-performing loans (NPLs) and governance deficiencies, hamper financial intermediation. Therefore, it is vital to address these challenges. The budget needs to support a comprehensive reform agenda for the banking sector. The key will be to strengthen regulatory oversight, improve loan recovery frameworks, and enhance transparency. Without such reforms, the transmission of monetary policy will continue to be limited.

Fiscal policy and revenue mobilisation

Fiscal policy under the 2026-27 budget will have to balance competing demands in a context of a limited resource envelope. However, given limited fiscal space, the need for further support to households and key sectors must be balanced against new expenditures.

Fuel prices pose an especially complicated problem. Fuel taxes and levies are a key source of revenue, but they also have an impact on inflation dynamics. Therefore, fuel taxes and levies must be finely calibrated.

More fundamentally, the tax system needs to be reformed. Bangladesh has a low tax-GDP ratio, limiting its fiscal space. Expanding the tax base, improving compliance, and reducing reliance on distortionary taxes should be prioritised.

The 2026-27 budget comes at a critical moment for the country. This situation demands a budget that is not only prudent but also future-oriented. It needs to stabilise the present and set the stage for future competitiveness. Adapting policy and continued surveillance of changing conditions will be important. Ultimately, the effectiveness of the budget will depend on coherence across fiscal, monetary and structural policies. The challenges are daunting, but the opportunity to guide the economy towards a more resilient and sustainable path is still within reach.

Dr Selim Raihan is professor of economics at Dhaka University and executive director at the South Asian Network on Economic Modeling (Sanem). He can be reached at selim.raihan@gmail.com.

Views expressed in this article are the author's own. 

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