Proposed budget revenue target highly risky: Fitch Ratings

Global rating agency Fitch Ratings on Tuesday said that achieving the revenue target outlined in Bangladesh's proposed national budget for the fiscal year FY2026-27 will be highly challenging and risks being derailed by structural weaknesses.

According to a fresh commentary published by the international credit rating agency, the country’s long-standing weaknesses in tax collection combined with slow reform implementation present significant downside risks to hitting the projected fiscal milestones, reports UNB.

The report noted that the new budget aims to elevate Bangladesh's revenue-to-GDP ratio to 10.2 percent, up from approximately 8 percent estimated for the outgoing fiscal year 2025-26. If fully realized, this would mark the highest revenue-to-GDP ratio achieved by the country since 1993.

Fitch identified the proper execution of the tax collection mechanism as the primary near-term fiscal challenge for the next financial year. This comes as the proposed budget expands state expenditure by 19 percent, while concurrently setting an ambitious 18 percent year-on-year growth target for nominal revenue.

The global agency acknowledged that structural measures embedded in the budget, such as streamlining the tax filing process, trimming extensive tax exemptions, easing VAT compliance for small and medium enterprises (SMEs), and ramping up non-tax revenue from state-owned enterprises could potentially broaden the tax base in the long term.

"However, past performance indicates that weak implementation capacity has historically undermined many of Bangladesh’s similar reform initiatives," Fitch noted in its evaluation.

The rating agency also flagged concerns over the high expenditure commitments built into the budget, pointing out that social safety nets and infrastructure sectors have been allocated 29.7 percent and 18.7 percent of the total budget respectively. While this reflects the newly elected government’s core political priorities, it places intense pressure on achieving the revenue target.

Fitch, however, highlighted that Bangladesh historically retains a pattern of under-spending its budgetary allocations. In the event of a revenue shortfall, this structural under-spending could ultimately act as a buffer to keep the fiscal deficit contained.

Consequently, Fitch maintained its financial deficit forecast for Bangladesh at 3.6 percent of GDP for FY2026-27, aligning with the government's target, but based on a calculation of lower revenue matched by lower expenditure.

Terming the government's economic growth projections as "overly optimistic," Fitch projected a real GDP growth of just 3.5 percent for FY2026-27, heavily contrasting the state target of 6.5 percent. The agency attributed its conservative forecast to a fragile banking sector, weak credit growth in the private sector, policy vulnerabilities, and an uncertain global environment.

On a positive note, Fitch lauded some of the government's latest initiatives in the energy sector. It observed that prioritizing domestic natural gas exploration, enhancing efficiency in power generation and distribution, and reinforcing Liquefied Natural Gas (LNG) infrastructure could significantly bolster medium-term economic growth if executed flawlessly.