United News of Bangladesh

The government is set to implement a strategic shift in the national budget for fiscal year 2026-27 by significantly reducing its reliance on internal debt, particularly from the banking sector, according to an official working on budget preparation. This move aims to maintain macroeconomic stability, control persistent inflation, and ensure an uninterrupted flow of credit to the private sector, the official said, wishing anonymity. According to sources at the Ministry of Finance and Bangladesh Bank, the proposed budget for FY27 is estimated at Tk 9.38 lakh crore. While the projected budget deficit stands at approximately Tk 2.43 lakh crore, the government plans to borrow only Tk 1.19 lakh crore from internal sources. This represents a Tk 18,000 crore reduction from the current fiscal year's revised internal borrowing target of Tk 1.37 lakh crore. Shift Towards Foreign Financing To bridge the deficit while easing pressure on local banks, the government is pivoting towards long-term and more affordable international loans. The target for foreign borrowing is projected to reach Tk 1.16 lakh crore in the next fiscal year, nearly doubling the current year's revised target of Tk 63,000 crore. Officials believe that reduced government borrowing will leave banks with surplus funds to invest in industrialisation and business expansion. Furthermore, this strategy is expected to mitigate the inflationary pressures previously caused by excessive bank borrowing and the printing of money by the central bank. Aggressive Revenue Targets and Reforms To compensate for the reduction in internal debt, the National Board of Revenue (NBR) is undertaking massive reforms to achieve a revenue collection target of Tk 6.95 lakh crore. Key measures include expanding the tax net and withdrawing various VAT exemptions, increasing tax rates on online gaming and luxury goods, and enhancing transparency and liquidity within the banking sector. Economists have welcomed the move on paper but cautioned that its success depends heavily on the pace of foreign aid disbursement and the government's ability to meet its ambitious revenue targets. Former NBR Chairman Dr Muhammad Abdul Majid warned that if the NBR fails to collect the desired revenue, the government might be forced to return to heavy bank borrowing by the end of the year, risking further financial instability. While talking to UNB, he emphasised the need for strict monitoring and financial discipline from the beginning of the fiscal year.  

The interim government has reversed years of aggressive bank borrowing, opting instead to repay outstanding loans in a move economists said could unlock fresh credit for the private sector and cool inflationary pressures. The policy shift marks a clear departure from the previous administration, which had leaned heavily on bank financing to meet its fiscal needs, they said. In contrast, the new government has prioritised debt reduction, expenditure restraint and project rationalisation, a combination analysts describe as rare in the country’s recent fiscal history. “The country’s economic landscape has seen a notable change over the last year, as the interim government is repaying its outstanding loans to the banking system,” said Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD). He said the administration’s approach is already forcing banks to reorient their portfolios towards the private sector after years of safe lending to the government. Mustafizur Rahman praised the decision not to take fresh bank loans this fiscal year while paying down legacy debt, calling it “a clear example of fiscal discipline” and a shift towards “a more responsible pattern of public expenditure”. Economist Abu Ahmed echoed that view, arguing that spending cuts – particularly on “highly ambitious and unnecessary” projects – had become essential to rebalance the credit market. Ahmed, who also chairs the Investment Corporation of Bangladesh (ICB), noted that government borrowing had previously crowded out private investment by drawing banks into low-risk lending to the public sector. Devt partners push govt for tougher tax measures amid debt pressure: NBR head “Banks got an opportunity to lend to the government, and they felt shy to invest in the private sector as there is a risk of recovery,” he said. Debt Reversal Data from the Bangladesh Bank shows a dramatic turnaround. Between July and October of FY2025–26, the government repaid Tk 503 crore to the banking system. During the same period last fiscal year, it had borrowed Tk 15,450 crore. The total net government debt with banks has also edged down. From Tk 5,50,904.96 crore at the end of June, it fell to Tk 5,50,401.65 crore by 30 October.On that day alone, repayment totalled nearly Tk 1,009 crore, including Tk 899 crore to the Bangladesh Bank and Tk 2,541 crore to scheduled banks, driven largely by clearance of short-term “Ways and Means Advance” obligations. Non-Bank Funding Rises The government has simultaneously strengthened its reliance on non-bank financing. Between July and October, it raised Tk 9,565.52 crore through treasury bills and bonds sold to non-bank financial institutions, insurers and individual investors. Excluding National Savings Certificates, total domestic borrowing from non-bank sources stands at Tk 9,062 crore. Economists say the fiscal tightening reflects a broader rethink of development spending. The interim government has cancelled or suspended numerous non-priority and non-profitable development projects, while slowing the pace of many others. IMF-WB proposes unified debt management office in Dhaka to strengthen public debt governance Insiders attribute the lower debt needed to this project screening, along with stricter revenue management. Former National Board of Revenue chairman Dr Muhammad Abdul Mazid said stronger-than-expected tax collection in the first quarter had also supported the government’s ability to repay loans. “This strong revenue position, combined with the government’s firm stance on expenditure control, has made it possible to repay debt instead of taking new loans,” he said. He said reduced government borrowing should ease inflationary pressure while expanding banks’ lending space to the private sector, a shift that could boost production and job creation. Risks Ahead Despite widespread praise for the government’s fiscal prudence, analysts warn that prolonged delays or cuts in development projects risk slowing investment and dragging on growth. For now, however, Bangladesh’s banking sector is preparing for a new era in which the government is no longer its largest and most reliable borrower – and the private sector may once again take centre stage in the credit market. Read more: Banking, power, revenue reforms in focus as govt faces IMF debt concerns: Salehuddin