Budget’s Biggest Gamble Is the Deficit as Development Dreams Rest on Loans
In the next fiscal year (2026-27), the government will have to borrow nearly one taka out of every four taka it spends. The biggest challenge in implementing the proposed Tk 938,000 crore budget is financing the massive deficit of Tk 243,000 crore.
To bridge this gap, reliance on both domestic and foreign borrowing has been significantly increased.
Economists say that while borrowing is necessary to sustain development spending, failure to achieve the desired progress in revenue collection could make future debt repayment a major risk for the economy.
According to sources at the Finance Division of the Ministry of Finance, the government has projected a budget deficit of Tk 243,000 crore for the next fiscal year. Financing this deficit will mainly depend on two major sources.
One source is foreign financing, including loans and grants, from which the government plans to collect Tk 116,000 crore. The other is domestic financing, including banks and other sectors, from which Tk 127,000 crore is expected to be raised.
Economists note that according to the standards of the World Bank, IMF and other international institutions, a budget deficit below 5 percent of GDP is generally considered manageable. By that measure, Bangladesh’s deficit has not yet reached a dangerous level. However, the concern is that the government’s dependence on borrowing to finance the deficit is steadily increasing.
They also point out that a deficit budget is not inherently a problem. Developing countries often use deficit financing to accelerate economic growth. The real question is where the borrowed money is being spent and how much economic return it will generate in the future.
Is Debt a Tool for Growth? Economic theory suggests that when a government borrows to invest in power plants, ports, roads, railways, industrial infrastructure or skilled human resources, those investments increase the productive capacity of the economy over the long term. Bangladesh’s own history supports this argument.
Projects such as the Padma Bridge, Metro Rail, Karnaphuli Tunnel and investments in the power sector have enhanced the country’s economic capacity. These projects are expected to deliver gains in productivity and economic growth in the years ahead.
However, economists argue that the most important issue is a country’s debt carrying capacity. Borrowing itself is not a problem. Problems arise when borrowed funds are spent on unproductive sectors, when project implementation faces prolonged delays or when corruption leads to waste. In such cases, debt ceases to be an engine of development and instead becomes a trap for the economy.
Additional Pressure on the Banking Sector: To finance the deficit, the government plans to collect Tk 127,000 crore from domestic sources. Of this amount, Tk 111,000 crore is expected to come from the banking system. According to economists, this represents one of the most significant risks in the budget.
The banking sector is already burdened by nonperforming loans, liquidity shortages and high interest rates.
In such a situation, if the government borrows heavily, the availability of credit for the private sector may decline. Economists refer to this as the “crowding out” effect. When both the government and private sector compete for funds from the same banking system, industrial entrepreneurs may find it more difficult to secure loans. As a result, new investment, industrial expansion and job creation could be hindered.
Another Reality of Foreign Debt: The second major source of deficit financing is foreign borrowing. The proposed budget aims to raise a net Tk 116,000 crore from external sources.
However, there is an important reality behind this figure. Although the government plans to borrow a total of Tk 147,000 crore from foreign sources during the next fiscal year, nearly Tk 36,000 crore of that amount will be used to repay installments and principal on existing loans. In other words, a substantial portion of new borrowing will go toward servicing old debt rather than financing new development expenditure.
According to relevant experts, this reflects a new reality in Bangladesh’s debt cycle. Only a few years ago, the burden of repaying foreign loans was relatively low. Now, as repayment schedules for large infrastructure projects begin to mature, that pressure is increasing rapidly.
In this regard, former Chief Economist of the World Bank’s Dhaka office, Dr Zahid Hussain, told Kaler Kantho, “A budget deficit is not a problem in itself if it is used for productive investment. However, if revenue collection remains weak and dependence on borrowing continues to rise, future debt repayment pressure could become a major risk for the economy. The target for foreign borrowing has nearly doubled, but achieving that target will be difficult unless implementation capacity is strengthened.”
