Revenue Shortfall Increases Debt Risks

The shortfall in revenue collection is increasing debt risks. As a result, the government is being forced to rely more on domestic and foreign loans. At the same time, a structural dependence on both types of debt is emerging.

The Finance Division believes that this chronic weakness in revenue collection is also constricting the financial capacity needed to fund critical infrastructure, expand investment in human resource development, and cope with external macroeconomic shocks. These assessments were highlighted in the medium-term economic policy framework presented by Finance Minister Amir Khasru Mahmud Chowdhury to Parliament last Thursday during his budget presentation for the upcoming fiscal year.

Dr. Debapriya Bhattacharya, Distinguished Fellow of the Centre for Policy Dialogue (CPD), said when revenue collection targets are not met, many questions arise—such as where cuts will be made, how priorities will be determined, whether social sector allocations will remain protected, and whether the private sector will be deprived if public debt increases. Amid such questions, the government ultimately has to adjust subsidies, which impacts lower- and middle-income groups and increases pressure on them. Additionally, when allocations are reduced across various sectors, the expected benefits from those sectors are also not realized.

The Finance Division's policy statement noted that domestic revenue collection is the foundation of sustainable fiscal management and the primary source of the government's ability to fund development expenditures without taking on excessive debt. However, Bangladesh has historically experienced persistent shortfalls in revenue collection compared to budget targets. Relative to peer countries and in terms of budget targets, Bangladesh's revenue collection has consistently fallen short, creating a growing dependence on domestic and foreign borrowing to finance the widening resource gap. An analysis of the past five fiscal years shows that actual revenue collection has averaged 16 percent below budget targets. In recent years, this gap has shown a tendency to widen further.

From 13.05 percent in fiscal year 2020-21, the shortfall rose to 19.41 percent in fiscal year 2024-25. In fiscal year 2025-26 (up to March), total revenue collection stood at Tk 3.315 billion, which is only 56 percent of the targeted revenue goal.

Impact on Government Expenditure: The Finance Division states that persistent revenue shortfalls will necessitate significant fiscal adjustments, putting pressure on both operating and capital expenditures. Under a shock scenario, operating expenditure is projected to remain below baseline levels throughout the medium term. However, this gap is expected to gradually narrow as the revenue base expands. Critically, capital expenditure—the primary driver of public investment and development activities—will face deeper cuts, as there is limited room to reduce operating expenses. Under the shock scenario, capital expenditure is projected to reach only Tk 4,625 billion by fiscal year 2028-29, indicating a shortfall of nearly Tk 960 billion in that fiscal year alone. This contraction in the Annual Development Programme (ADP) will have an adverse impact on infrastructure development, investment in human resource development, and the government's medium-term development initiatives.

Budget Deficit Increases

The Finance Division states that revenue shortfalls lead to a significant deterioration in fiscal balance and accelerate the growth of accumulated public debt. In a scenario of a 16 percent revenue shortfall from budget targets, the budget deficit rises substantially, approaching the fiscal limit of 5 percent of GDP. It is projected at 4.67 percent in fiscal year 2026-27. It could reach 4.58 percent in 2027-28 and approach 4.91 percent in 2028-29. Although under the medium-term projections of the shock scenario, it will remain slightly below the fiscal balance limit in subsequent years, its trajectory remains concerning. Operating so close to this fiscal limit will leave insufficient capacity to cope with any future adverse situations.

Impact on Public Debt-to-GDP Ratio

The Finance Division states that under the shock scenario, the debt-to-GDP ratio increases. While the baseline projection kept the debt ratio confined to around 37-38 percent of GDP, it is projected to reach 40.08 percent in FY 2026-27. It is then projected to rise to 41.53 percent in FY 2027-28 and to 44.12 percent by FY 2028-29. If this trajectory continues, it indicates a deteriorating situation for Bangladesh's sustainable debt management, which could constrain the government's borrowing capacity and fiscal space in the coming years.

Impact on Private Investment

The Finance Division states that one of the most far-reaching economic consequences of revenue shortfalls is the "crowding out" of private sector investment. When government revenues fall short of targets, reliance on domestic borrowing to meet expenditures increases. This creates competition with the private sector's demand for credit in the domestic financial market. This upward pressure on borrowing costs reduces both the availability and affordability of credit for private investors. According to the shock scenario, private investment—which was projected in the baseline to recover strongly from Tk 8,094 billion in FY 2024-25 to Tk 11,506 billion by FY 2028-29—could decline to approximately Tk 10,649 billion by FY 2028-29 as a result of this shock. This is nearly Tk 857 billion lower than the baseline. This contraction in private investment is particularly damaging because private capital formation is the primary driver of productivity growth, employment generation, and export capacity, which serve as the engine of Bangladesh's long-term growth structure.

Impact on Real GDP Growth

The combined effect of cuts in public development expenditure, constraints on private investment, and tight financing conditions could reduce GDP growth over the medium term. According to baseline projections, real GDP growth was estimated to recover from 3.5 percent in FY 2025 to 6.5 percent in FY 2027, 7.0 percent in FY 2028, and 7.5 percent by FY 2029. However, under a revenue shortfall scenario, this growth trajectory will drop visibly below target, reaching an estimated 5.57 percent in FY 2027, 6.03 percent in FY 2028, and 6.45 percent in FY 2029. This means that due to a 16 percent revenue shortfall, Bangladesh could lose approximately 1.0 percentage point of GDP growth annually in the later years of the medium-term framework.