Fiscal Policy

The State of Bangladesh Public Finance

Executive Summary

Bangladesh's public finances present one of the most consequential policy puzzles in developing Asia. An economy of $450.1 billion that has sustained 4.2% growth collects just 7.64% of GDP in tax revenue, critically low and roughly half the developing country average of 15%. Only 1.2 million people actually pay tax in a population of 173.6 million, a taxpayer-to-population ratio of just 0.69%. Government expenditure of 8.32% of GDP against total revenue of 9.54% of GDP yields a fiscal surplus of 1.21% of GDP. Total external debt of $104.49 billion and public debt at approximately 40% of GDP remain manageable, but the combination of chronically low revenue, rising megaproject debt service, and approaching LDC graduation creates compounding fiscal pressure. The window for structural reform is narrowing rapidly.

Revenue Mobilization: The Tax-to-GDP Crisis

Bangladesh's tax-to-GDP ratio of 7.64% is not merely low; it is an outlier. Among the 50 largest economies by population, Bangladesh consistently ranks at or near the bottom of revenue mobilization tables. India, with comparable informal sector challenges and federal complications, collects approximately 17% of GDP in combined central and state taxes. Vietnam collects approximately 18%. Even within South Asia, Nepal collects around 18%. The gap between Bangladesh and its peers is not a few tenths of a percentage point; it is a chasm of 7.4 percentage points of GDP that translates into $33.1 billion in foregone annual revenue at the developing country median.

The ratio has improved by 0.64 percentage points year-on-year, a marginally positive development that nonetheless falls far short of the structural shift required.

Tax composition reveals the structural weaknesses. VAT, contributing 38% of total tax revenue, is the single largest instrument but operates far below potential. The 2012 VAT and Supplementary Duty Act, designed to introduce a uniform 15% rate and modernize administration, was repeatedly delayed and finally implemented in 2019 in diluted form with multiple reduced rates, truncated input credit chains, and extensive exemptions. VAT collection efficiency (C-efficiency ratio) remains below 40%, compared with 55-65% in Vietnam and Thailand. Income tax at 32% of total is constrained by the vanishingly narrow base discussed below. Customs duties at 22% face structural decline as trade liberalization commitments deepen, with an estimated $7.6 billion at risk.

Non-tax revenue at 2.0% of GDP provides a thin additional cushion, derived primarily from dividends of state-owned enterprises, telecom spectrum fees, and administrative charges. Total government revenue (excl. grants) of 9.54% of GDP leaves a massive shortfall against even the modest expenditure envelope of 8.32% of GDP.

The Tax Base Crisis: 1.2 Million Payers in 172 Million People

The most damning statistic in Bangladesh's fiscal landscape is the funnel from 7.0 million TIN (Taxpayer Identification Number) holders to 3.5 million return filers to just 1.2 million actual taxpayers. Only 50% of TIN holders file returns, and only 34% of filers actually pay any tax. The remaining returns show zero liability through exemptions, deductions, or underreporting.

Three structural factors explain why Bangladesh collects so little. First, the informal economy, estimated at 30-40% of GDP, operates almost entirely outside the tax net. Street vendors, smallholder agriculture, informal manufacturing, and a vast array of service activities generate significant economic value but virtually no tax revenue. Formalizing these activities requires not punitive enforcement but simplification of tax procedures, digital payment infrastructure, and incentive structures that make formality less costly than informality.

Second, the National Board of Revenue (NBR) suffers from deep institutional deficits: outdated IT systems that cannot cross-reference income, spending, and asset data; inadequate staffing relative to the taxpayer population; weak audit capabilities; and governance challenges that erode both collection efficiency and public trust. The NBR processes returns largely manually in many district offices. The contrast with India's GSTN (Goods and Services Tax Network), which processes over 10 million returns monthly through a unified digital platform, is stark.

Third, a dense web of tax exemptions, holidays, and preferential rates, many dating to the early years of RMG sector development, erodes the effective tax base even within the formal economy. Revenue foregone through these concessions is estimated at 2-3% of GDP annually. The political economy of exemptions is self-reinforcing: each concession creates a constituency that lobbies against its removal.

Expenditure Priorities and Development Spending

Government expenditure at 8.32% of GDP (+0.18pp change) is low not because Bangladesh practices fiscal austerity by choice, but because inadequate revenue imposes a binding constraint. Current expenditure at approximately 5.6% of GDP absorbs the bulk, leaving only 2.7% for the Annual Development Programme (ADP). ADP utilization at 80% means even the limited development budget is not fully spent, reflecting procurement delays, land acquisition bottlenecks, and weak project management capacity.

Interest payments at 2.5% of GDP and rising represent a growing first charge on the budget. Energy and agricultural subsidies at 1.5% of GDP are a persistent fiscal drag. Energy subsidies driven by below-cost electricity tariffs and LNG import costs have at times exceeded budgeted allocations by 30-50%. These subsidies are regressive (wealthier households consume more electricity and fuel) yet politically difficult to reform.

Sectoral allocation reveals difficult trade-offs. Defense at 1.2% of GDP is modest by regional standards (India 2.4%, Pakistan 3.5%) but absorbs resources that could flow to human development. Health spending at 0.7% of GDP, among the lowest globally, means 65-70% of health expenditure is out-of-pocket, driving millions into poverty annually. Education at 2.0% of GDP falls short of the 4-6% recommended by UNESCO. Social protection at 2.5% of GDP covers a limited share of the vulnerable population.

Infrastructure megaprojects dominate the development budget. The Padma Bridge ($3.5 billion, self-financed), Dhaka metro rail ($2.8 billion, JICA), Rooppur nuclear power plant ($12.65 billion, Russian credit), and Payra deep sea port have collectively committed tens of billions. These are individually defensible on economic returns, but their aggregate effect on the fiscal position is substantial. The recurrent cost implications, maintenance, operations, and debt service, have not been adequately integrated into medium-term fiscal frameworks. Bangladesh is building 21st-century infrastructure on a 7.6% tax base, a combination that creates inescapable fiscal tension.

Fiscal Balance, Deficit, and Debt Sustainability

The fiscal surplus of 1.21% of GDP represents a narrower gap than the historical norm of 4-5% of GDP. With tax revenue at 7.64%, a deficit of 1.21% means roughly one-third of all government spending is financed by borrowing, a structurally precarious position.

Public debt at approximately 40% of GDP (18% domestic, external debt-to-GNI 22.3%) remains well below the 60% benchmark for developing countries. Bangladesh compares favorably with India (83%), Sri Lanka (128% pre-restructuring), and Pakistan (75%). However, trajectory matters more than level.

External debt (medium/long-term) at approximately $68 billion has grown rapidly, driven by megaproject disbursements and balance-of-payments support. Domestic debt expansion through treasury bills and bonds creates a crowding-out dynamic in Bangladesh's shallow financial market. When government securities absorb growing banking liquidity, private sector credit growth is constrained, dampening investment and undermining the growth that generates tax revenue. This is a vicious cycle: low revenue forces higher borrowing, which crowds out private investment, which slows growth, which further constrains revenue.

The Sri Lankan experience is a cautionary tale. Sri Lanka's 2022 sovereign default was the product of decades of low revenue mobilization (tax-to-GDP falling from 14% to 8%), persistent deficits financed by increasingly non-concessional borrowing, and external shocks. Bangladesh shares several structural vulnerabilities. The critical difference is that Bangladesh still has time and policy space, but that window is finite.

Debt service obligations are rising as grace periods on major loans expire. The Rooppur loan alone will generate annual debt service of approximately $1 billion. Combined with other megaproject servicing, the external debt service burden could double within five years, absorbing a growing share of export earnings precisely when LDC graduation tightens access to concessional finance.

LDC Graduation: Fiscal Reckoning

Bangladesh's scheduled LDC graduation carries profound fiscal consequences. Trade liberalization commitments will erode customs collections (estimated $7.6 billion annually). Loss of EU Everything But Arms duty-free access and GSP benefits will pressure RMG exports, indirectly constraining corporate tax revenue from the largest formal-sector employer.

On the borrowing side, LDC graduation means the loss of the most concessional lending windows. IDA terms (0.75% interest, 38-year maturity) will give way to IBRD terms (market-referenced rates, 20-25 year maturity), adding 200-300 basis points to new multilateral borrowing costs. Every dollar of post-graduation development finance will carry significantly higher fiscal cost.

Bangladesh must build domestic revenue capacity to replace both customs revenue lost to liberalization and the concessional finance premium lost to graduation. This is not a future problem. Revenue reforms must be implemented before graduation, not after.

Outlook, Risks, and Policy Implications

Bangladesh's fiscal position is sustainable in the near term but faces compounding pressures. Three principal risks:

• Revenue shortfall and the development trap: If tax-to-GDP remains near 7.64%, Bangladesh cannot fund the infrastructure, education, healthcare, social protection, and climate adaptation investments required for sustained development. The fiscal space constraint will become progressively more binding as population growth, urbanization, and climate vulnerability drive expenditure needs upward. The risk is not fiscal crisis in the Sri Lankan sense, but a slow strangulation of development potential as the state proves unable to deliver the public goods that a middle-income transition demands.
• Megaproject debt service and contingent liabilities: As grace periods expire on Rooppur ($12.65B), metro rail, and other major loans, annual debt service could increase by $2-3 billion within five years. Beyond explicit debt, contingent liabilities from state-owned enterprises (power sector), PPP guarantees, and unfunded pension obligations represent fiscal risks not captured in headline debt figures. Energy subsidy overruns from oil price shocks or taka depreciation can add $1-2 billion to the annual bill, overwhelming budget projections.
• LDC graduation fiscal squeeze: The simultaneous loss of customs revenue (trade liberalization), concessional borrowing terms, and competitive trade preferences creates a triple squeeze on fiscal space. With only 1.2 million actual taxpayers, Bangladesh cannot absorb these shocks without fundamental revenue reform.

Three policy priorities:

• Digital tax administration and base expansion: Rather than raising rates, focus on bringing the informal economy into the tax net through digital payment mandates, simplified presumptive tax for small businesses, universal TIN-NID linkage, and e-invoicing for VAT audit trails. A realistic target of 10% tax-to-GDP within five years would generate an additional $10.6 billion annually. Medium-term target of 12% would yield $19.6 billion. Mandatory e-filing for all TIN holders would immediately surface the gap between 7.0M TIN holders and 1.2M actual payers.
• Subsidy rationalization with targeted protection: Replace blanket energy subsidies with automatic fuel price adjustment mechanisms and targeted cash transfers to the bottom 30% via mobile financial services. Redirect savings (potentially 1-1.5% of GDP) to health (from 0.7% toward 1.5%), education (from 2.0% toward 3%), and climate adaptation. This is fiscally neutral but developmentally transformative.
• Fiscal federalism and local revenue: Empower local governments to raise revenue through property taxes, urban service charges, and land transfer fees. Currently, local governments depend almost entirely on central transfers, creating accountability gaps and underinvestment in local public goods. Municipal property tax reform alone could generate 0.3-0.5% of GDP in additional sub-national revenue, reducing pressure on the central budget while improving service delivery.

With inflation at 10.5%, GDP growth at 4.2%, and a $450.1 billion economy, Bangladesh has the growth momentum to execute fiscal reform from a position of relative strength. But the combination of a 7.64% tax base, 1.2 million taxpayers, and $12.65 billion in nuclear power debt approaching repayment creates a fiscal equation that cannot be solved by growth alone. Revenue reform is not optional; it is existential for Bangladesh's development trajectory.

*Data sources: World Bank Development Indicators, Ministry of Finance (Government of Bangladesh), National Board of Revenue, IMF Article IV and Programme Reviews, ERD Debt Statistics, IMED ADP Review.*