Budget Passed Under the Burden of Debt

The national budget for the fiscal year 2026–27 has been passed by Parliament. One of its most notable features, however, is its growing dependence on borrowing. Owing to uncertainties surrounding external loan inflows and limitations in domestic revenue mobilization, pressure on domestic borrowing is likely to increase further. As a result, alongside maintaining the continuity of development activities, effective debt management, enhanced revenue collection, and the preservation of macroeconomic stability have emerged as major challenges for the government. A budget is not merely a statement of income and expenditure; rather, it reflects the government's development priorities, economic strategy, and long-term policy direction. In developing countries like Bangladesh, however, budget deficits have long been a structural reality due to limited revenue capacity. A significant portion of these deficits has been financed through domestic and external borrowing, and this dependence has steadily increased over time. Consequently, the recently passed budget has brought renewed attention not only to development priorities but also to the growing debt burden, its sustainability, and its broader implications for economic stability.

Following the passage of the FY2026–27 budget, the principal challenge for policymakers is implementing development programs within the constraints of limited revenue. A substantial portion of the budget is typically allocated to recurrent expenditure, including salaries and allowances of public servants, subsidies, interest payments, and administrative costs. As a result, financing development expenditure continues to require budget deficits and sustained reliance on borrowing.

An analysis of the budget indicates that revenue growth continues to lag behind expenditure growth. Weak tax collection, tax evasion, a narrow tax base, and structural inefficiencies in revenue administration have kept the fiscal gap largely persistent. Consequently, both domestic and external borrowing have become increasingly important in financing the deficit. If uncertainty in external financing continues, reliance on domestic borrowing may intensify, affecting private sector credit, interest rates, and overall macroeconomic stability. Therefore, improving revenue mobilization, enhancing spending efficiency, and ensuring sustainable debt management have become key policy priorities.

To finance the deficit, priority has been given to domestic banking institutions, savings certificates, government bonds, and loans from international development partners. However, global economic uncertainty, high interest rates, and geopolitical instability may limit external borrowing. This could further increase dependence on domestic financing sources.

Another important feature of Bangladesh’s budget structure is the growing pressure of development expenditure. Large investments in infrastructure, electricity, transport, and social sectors have made a significant portion of development spending dependent on borrowing. As a result, the budget structure is becoming increasingly debt-oriented, raising concerns about long-term macroeconomic stability.

A deficit budget is a well-established fiscal instrument in modern economics. According to economist John Maynard Keynes, increasing government spending during periods of economic slowdown can stimulate aggregate demand, production, and employment. In developing economies like Bangladesh, where large-scale investment is required in infrastructure, energy, transport, and social protection, deficit budgeting is often considered a necessary and practical policy tool.

However, when deficit financing becomes a structural dependence, concerns arise. In Bangladesh, while deficit spending has enabled major infrastructure development, its effectiveness has been constrained by weak revenue mobilization, inefficient expenditure, and delays in project implementation. In many cases, a significant portion of borrowed funds is spent on recurrent or administrative expenditure rather than productive sectors, limiting its multiplier effects.

Bangladesh has long relied on concessional and long-term loans from development partners such as the World Bank, Asian Development Bank, and the International Monetary Fund. However, in the context of implementing the FY2026–27 budget, global economic conditions, high interest rates, dollar shortages, and stricter lending terms have made external financing more uncertain. As a result, dependence on domestic borrowing has increased, putting pressure on the banking sector, private investment, and financial stability.

When the government borrows heavily from the banking system, credit availability for the private sector declines. Entrepreneurs face difficulties in securing capital for expansion or new investment. This phenomenon is known as the “crowding out effect,” where government borrowing displaces private investment. Over time, this slows the expansion of productive capacity.

At the same time, rising reliance on savings certificates has significantly increased the government’s interest burden. A large portion of the budget is now allocated to interest payments, reducing fiscal space for development expenditure and complicating future budget management.

Furthermore, rising domestic borrowing places additional pressure on monetary policy. Liquidity shortages in the banking sector may force the central bank to inject money into the economy, increasing inflationary risks. Food and energy inflation is already a major concern in Bangladesh, and debt-driven fiscal expansion may further intensify this pressure.

In developing economies like Bangladesh, the impact of deficit budgeting extends beyond financial accounts and affects the broader economic structure. When deficits are financed through borrowing, their effects spread across investment, employment, inflation, and long-term growth.

Reduced credit availability slows private investment, limiting industrial expansion and business growth. This weakens economic growth drivers and slows technological adoption and innovation. The result is reduced competitiveness in the long run.

Lower investment also directly affects employment creation. Fewer industries mean fewer job opportunities, posing a serious challenge for the growing youth labor force. Bangladesh’s demographic dividend risks being underutilized if job creation does not keep pace with labor market growth.

Meanwhile, increased money supply without corresponding production growth creates inflationary pressure, particularly in food and energy sectors. This increases living costs and weakens aggregate demand. Over time, these pressures can slow GDP growth and push the economy toward a low-growth trap that becomes difficult to escape.

The impact of deficit budgeting and debt dependence varies across countries. Sri Lanka faced a severe economic crisis due to excessive borrowing and weak fiscal management, ultimately defaulting on debt obligations. Pakistan has remained under prolonged pressure from debt dependence and IMF support. India’s large economy provides some stability, but rising state-level debt and social expenditure continue to strain fiscal management. In contrast, Vietnam and Indonesia have used deficit financing productively, investing in export expansion, industrialization, and foreign investment attraction, achieving stronger economic outcomes. These experiences suggest that deficit budgeting is not inherently problematic; its impact depends on management quality and the productive use of resources.

South Asian economies share common characteristics of high development needs and limited fiscal capacity, making deficit financing widespread. However, outcomes differ due to variations in fiscal discipline and policy effectiveness. Sri Lanka’s crisis reflects unsustainable consumption-oriented borrowing. Pakistan remains dependent on external assistance due to persistent fiscal imbalances. India maintains relative stability at the central level, though subnational debt pressures persist. Nepal and Bangladesh continue to rely on development-led deficit spending, but weak revenue systems create long-term challenges. Meanwhile, Vietnam and Indonesia demonstrate that channeling deficits into productive sectors can support export growth, industrialization, and investment inflows.

In conclusion, the budget passed under the burden of debt for FY2026–27 represents an important fiscal framework for sustaining Bangladesh’s development trajectory. However, its success will depend on efficient debt management, improved revenue mobilisation, and the quality of public expenditure. While deficit budgeting can support infrastructure development, social protection, and economic expansion, persistent reliance on borrowing—especially when not directed toward productive investment—can create pressures on investment, employment, price stability, and long-term growth. With good governance, efficient implementation, revenue reform, and productive investment allocation, however, the budget can strengthen the foundation for sustainable economic growth. Therefore, the key policy priority should not be merely increasing expenditure, but ensuring the effectiveness, efficiency, and productive impact of every unit of spending.

----------------------------------

The author is an economist, researcher and columnist. He can be reached at [email protected]