Executive Summary

A Fiscal System Under Strain

Bangladesh confronts a defining fiscal challenge. With a tax-to-GDP ratio of just 8.9%, the country collects less revenue relative to its economy than almost any peer in South and Southeast Asia. This chronic revenue shortfall constrains public investment in education, health, and infrastructure at precisely the moment when LDC graduation demands a step-change in state capacity.

This report examines Bangladesh's fiscal position through five analytical lenses: revenue mobilization, expenditure composition, fiscal balance and sustainability, public debt architecture, and LDC graduation readiness. The analysis employs six state-of-the-art econometric methods including IMF-style debt sustainability analysis, fiscal space estimation, and structural balance decomposition.

Chapter 1

Revenue Mobilization

Bangladesh's revenue mobilization challenge is structural, not cyclical. The tax-to-GDP ratio has hovered around 8-9% for over a decade, among the lowest in the world for a country of its income level. The National Board of Revenue (NBR), the primary tax collection agency, relies heavily on indirect taxes, with VAT contributing 39.0% of total NBR revenue and customs duties adding another 11.8%.

NBR Revenue Composition

NBR revenue has grown from BDT 51,136 crore in FY2010 to BDT 275,800 crore in FY2024, a 5.4x increase. However, the composition tells a more nuanced story. Income tax has grown from 23.1% to 38.1% of total revenue, while customs share has declined from 19.2% to 11.8%, reflecting both tariff rationalization and the growing domestic tax base.

Peer Comparison & Tax Gap

Among South and Southeast Asian peers, Bangladesh ranks near the bottom in tax revenue collection. India collects approximately 11% of GDP, Thailand 14%, and Vietnam nearly 15%. Even accounting for structural differences (agricultural share, informality, per-capita income), Bangladesh significantly underperforms its tax potential.

Tax Buoyancy

Tax buoyancy, the elasticity of tax revenue with respect to GDP, stands at 1.05 over the full sample period, indicating the tax system is elastic (growing faster than GDP). The rolling 5-year estimates reveal significant variation over time, suggesting that policy changes and compliance efforts have had measurable but inconsistent effects on revenue responsiveness.

Chapter 2

Expenditure Analysis

Bangladesh's budget allocation reflects competing priorities. In FY2024, education accounts for 19.4% of the budget, health 9.1%, defense 9.7%, and interest payments 20.8%. The growing share of interest payments is particularly concerning, as it crowds out development spending.

Annual Development Programme

The Annual Development Programme (ADP) has grown from BDT 30,500 crore in FY2010 to BDT 277,600 crore in FY2024. However, execution rates remain a persistent challenge, with the latest utilization at 80.8%. The gap between allocation and execution reflects institutional capacity constraints, procurement delays, and land acquisition bottlenecks.

Subsidy Burden

Total subsidies reached BDT 69,500 crore in FY2024, with energy subsidies accounting for 44.9% of the total. The energy subsidy surge in FY2022-2023 (driven by global fuel price increases) strained the budget significantly, crowding out other priorities. Agriculture and food subsidies remain substantial, reflecting the political economy of food security in Bangladesh.

Interest Burden & Crowding Out

Interest payments now consume 34.3% of NBR revenue (FY2024). This ratio has been rising steadily as both domestic borrowing costs and the external debt stock have increased. When interest payments absorb a growing share of revenue, less remains for education, health, and infrastructure, the very investments needed for long-term growth.

Chapter 3

Fiscal Balance & Sustainability

Bangladesh has maintained fiscal deficits consistently in the range of 3-6% of GDP over the past four decades. While the deficit has been relatively contained compared to some South Asian peers, the combination of low revenue and rising spending needs creates structural pressure. The latest fiscal balance stands at -3.9% of GDP (2026).

Primary Balance

The primary balance (fiscal balance excluding interest payments) provides a cleaner measure of fiscal effort. Bangladesh's primary balance of -2.0% of GDP (2026) indicates a primary deficit, meaning even excluding interest, spending exceeds revenue.

Structural Balance

Decomposing the fiscal balance into structural and cyclical components reveals the underlying fiscal stance independent of the business cycle. The structural balance, estimated using HP-filtered potential GDP with a budget elasticity of 0.4, shows the deficit that would prevail if the economy were at potential output.

Debt Sustainability Analysis

The IMF-style debt sustainability analysis projects debt trajectories under three scenarios. Under the baseline (current policies, growth at 5.5%), debt reaches 10.8% of GDP by 2034. The adverse scenario (growth shock, higher interest rates) pushes debt to 26.2%, while fiscal reform could stabilize it at -5.6%.

Chapter 4

Public Debt Architecture

Bangladesh's public debt, while moderate by international standards at 40.2% of GDP, is undergoing a structural transformation. The traditional reliance on concessional multilateral and bilateral lending is giving way to a more expensive mix, driven by megaproject financing, commercial borrowing, and domestic market instruments.

Debt Composition

The external debt portfolio is dominated by multilateral creditors (55.3%), followed by bilateral (27.6%) and commercial borrowing (17.2%). The rising commercial share is the most significant structural shift, as these loans carry higher interest rates and shorter maturities, increasing debt service obligations.

Megaproject Debt

Bangladesh has committed to $19.2 billion in megaproject loans, primarily for power generation, transport, and port infrastructure. While these investments are critical for long-term growth, they concentrate debt service obligations in the late 2020s and 2030s, creating a repayment hump that coincides with LDC graduation.

Reserves & Import Cover

Foreign exchange reserves have fallen from a peak of $46.4 billion to $24.4 billion, reducing import cover to 3.2 months. The 3-month threshold, below which the IMF considers reserves critically low, is now uncomfortably close. This reserve erosion limits the central bank's ability to manage exchange rate volatility and service external debt.

Chapter 5

LDC Graduation & Fiscal Reform

Bangladesh's graduation from LDC status, expected in 2026 with a transition period extending to 2029, has significant fiscal implications. The loss of preferential access to concessional financing, favorable customs treatment, and trade preferences requires proactive fiscal reform to maintain development momentum.

Trade taxes currently account for 22.3% of total NBR revenue. Our mid-range estimate suggests 4.0% of total revenue (BDT 11,079 crore) could be at risk from tariff rationalization and preference erosion following graduation.

Revenue Reform Scenarios

Meeting the fiscal demands of a post-LDC Bangladesh requires raising the tax-to-GDP ratio from the current ~8.5% toward the developing-country average of 15%. We model three scenarios of progressive reform ambition, each building on the previous one.

Reform Roadmap

Phase 1: Foundation (2024-2026)

• Universal TIN registration and enforcement
• VAT automation and e-filing expansion
• Customs modernization (single window, risk-based inspection)
• Tax expenditure review and rationalization

Phase 2: Broadening (2026-2028)

• Property tax reform at local government level
• Capital gains tax on real estate transactions
• Digital economy taxation framework
• Reduction of tax exemptions (current ~3% of GDP in tax expenditure)

Phase 3: Deepening (2028-2030)

• Progressive income tax with expanded brackets
• Environmental taxation (carbon, pollution)
• Financial transaction taxes
• Full integration of informal economy

Spending Gaps vs SDG Benchmarks

Across five key sectors, the total spending gap relative to international benchmarks amounts to 10.1% of GDP ($45.5 billion). This quantifies the fiscal effort needed to achieve SDG-aligned spending levels:

• Education: 2.0% vs 4.0% target (UNESCO), gap: 2.0% GDP ($9.0B)
• Health: 0.9% vs 3.0% target (WHO/Lancet), gap: 2.1% GDP ($9.5B)
• Social Protection: 1.7% vs 4.0% target (ILO), gap: 2.3% GDP ($10.4B)
• Infrastructure: 2.5% vs 5.0% target (ADB), gap: 2.5% GDP ($11.3B)
• Climate Adaptation: 0.8% vs 2.0% target (IPCC), gap: 1.2% GDP ($5.4B)

Chapter 6

Analytical Methods & Cross-Cutting Findings

Revenue Effort Index

The revenue effort index compares actual tax collection against the level predicted by structural factors (GDP per capita, agricultural share, trade openness). Bangladesh's effort index of 1.024 means it collects more than predicted by its structural characteristics. Despite collecting above its structural prediction, the absolute level remains low.

Fiscal Multiplier

The estimated fiscal multiplier for Bangladesh is 0.49, meaning that a 1 percentage point increase in government spending as a share of GDP is associated with a 0.49 percentage point change in GDP growth. This is above the South Asian average of 0.4, suggesting that fiscal expansion has above-average growth impact.

Structural Balance Assessment

The structural fiscal balance, adjusted for cyclical effects using HP-filtered potential GDP, stands at -2.35% of GDP (2024). The 5-year average structural balance is -4.09%. The structural deficit is narrower than headline, indicating some cyclical deterioration in the current year.

Conclusion

Policy Implications

Bangladesh's fiscal position is not in crisis, but it is on an unsustainable trajectory absent reform. The combination of the lowest tax-to-GDP ratio in the region, rising interest burden, declining reserves, and impending LDC graduation creates a window for action that is closing. Six strategic priorities emerge from this analysis:

1. Revenue Mobilization as the Top Priority. Raising the tax-to-GDP ratio by 4-6 percentage points over a decade through VAT base broadening, TIN enforcement, property tax reform, and reduction of tax expenditures. This is the single most impactful reform available.
2. Expenditure Efficiency and Reallocation. Improving ADP execution rates, rationalizing energy subsidies toward targeted transfers, and protecting development spending from interest payment crowding out. Every taka spent must deliver maximum development impact.
3. Debt Portfolio Management. Actively managing the shift from concessional to commercial borrowing, extending maturities, diversifying the creditor base, and ensuring megaproject debt service does not crowd out essential spending.
4. LDC Graduation Preparedness. Implementing a phased fiscal reform roadmap that replaces trade-dependent revenue with domestic taxation before preferential access expires. The 2024-2029 window is critical.
5. Reserve Rebuilding. Coordinating fiscal consolidation with monetary policy to rebuild foreign exchange reserves above the 3-month critical threshold. External debt service capacity depends on adequate reserve buffers.
6. Institutional Capacity Building. Strengthening NBR's digital infrastructure, expanding the tax net through automation, building capacity for evidence-based fiscal policy, and improving budget transparency and accountability.