Bangladesh FY27 budget revenue targets face execution risks, says Fitch ratings

The global rating agency forecasts a 3.5 percent GDP growth for FY27 against the government's 6.5 percent

Bangladesh’s FY27 budget, the first under the newly elected government, has set revenue targets that may prove difficult to achieve given the country’s weak track record in tax mobilisation and implementing reforms, according to Fitch Ratings.

In a statement on Tuesday, the global rating agency said the budget aims to raise the revenue-to-gross domestic product (GDP) ratio to 10.2 percent from about 8 percent in FY26, which would be the highest level since 1993.

Fitch described revenue collection as the main fiscal challenge, noting that the budget targets nominal revenue growth of 18 percent year-on-year while proposing a 19 percent increase in expenditure.

Measures announced in the budget include simplifying tax procedures, reducing tax exemptions, easing value-added tax compliance for small and medium-sized enterprises, and increasing non-tax revenue from state investments in state-owned enterprises, corporations and banks.

While these steps could broaden the tax base over time, Fitch said weak implementation had limited the impact of previous reform efforts.

The agency said higher spending commitments make achieving revenue targets more important.

Social spending accounts for 29.7 percent of total expenditure, while physical infrastructure represents 18.7 percent, reflecting the government’s election pledges.

However, Bangladesh’s history of underspending could help contain the budget deficit if implementation again falls short of plans.

Fitch said energy-sector measures could support medium-term growth if properly implemented.

More than 40 percent of the country’s electricity generation capacity is gas-based, and the budget prioritises domestic gas exploration, efficiency improvements in power generation, transmission and distribution, and stronger infrastructure for liquefied natural gas supplies.

The agency also noted that Bangladesh has requested a new programme from the International Monetary Fund.

However, it said the final review of the current IMF arrangement, which expires in January 2027, appears unlikely to be completed, and agreement on a new reform agenda may take time.

As a result, Fitch said the credit implications of the FY27 budget will largely depend on whether the government can deliver stronger revenue mobilisation and investment execution than in the past.

The rating agency also described the government’s economic growth target as ambitious.

While the authorities expect real GDP growth of 6.5 percent in FY27, Fitch forecasts growth of 3.5 percent.

It cited a still-fragile banking sector, weak private-sector credit growth, shortcomings in the policy framework and an uncertain external environment as factors weighing on investment.

Fitch maintained its FY27 fiscal deficit forecast at 3.6 percent of GDP, matching the government’s target.

However, this projection is based on expectations of both lower revenue and lower expenditure than envisaged in the budget.

The agency said fiscal performance in FY26 reflected a similar pattern.

The revised deficit estimate was lowered to 3.3 percent of GDP from the original 3.6 percent due to lower-than-expected disbursements, while revised revenue estimates slightly exceeded the budget target.

Although this reduces the risk of near-term slippage in the headline deficit, Fitch said it also highlights the challenges of fully implementing the FY27 budget.

Looking further ahead, the agency said improvements in revenue collection and economic growth will depend on whether the government can implement reforms more effectively than in the past.

The authorities aim to raise the revenue-to-GDP ratio to 11 percent by FY30-FY31, increase total investment to 40 percent of GDP and lift foreign direct investment to 2.7 percent of GDP.

Over the medium term, these measures are intended to boost real GDP growth to 8.5 percent and bring inflation down to 5 percent.

Fitch said investment-related measures in the budget support those objectives, but their impact will depend on implementation.

The budget reduces withholding tax on machinery rental payments to non-residents to 7.5 percent from 15 percent, highlights bridge and expressway development, and continues support for projects under public-private partnership arrangements.

It also retains the 2.5 percent cash incentive for remittances sent through formal channels and extends duty-free import facilities and bank guarantees for raw materials and intermediate goods to encourage export diversification beyond ready-made garments.