Bangladesh’s Economic Crossroads: Navigating Between Development and Debt
As Bangladesh strides toward ambitious development goals, alarm bells are ringing over its economic undercurrents. A recent report by Nikkei Asia highlights a concerning trajectory: Bangladesh’s faltering tax revenue and surging foreign debt may be steering the nation toward a precarious debt trap, threatening long-term growth and financial stability.
Declining Tax Revenue Raises Red Flags
In the fiscal year ending June 2025, Bangladesh’s tax-to-GDP ratio slipped to a worrying 6.7%, down from 7.39% the prior year. To put this in perspective, the International Monetary Fund recommends a minimum of 15% tax revenue relative to GDP for sustainable growth and development. The Asia-Pacific average stands markedly higher at 19.6%, underscoring Bangladesh’s significant gap.
Low tax revenue places considerable strain on the government’s fiscal space. Despite a nominal 6.02% rise in total government revenue—which includes taxes, licenses, fees, and earnings from state-owned enterprises—the overall revenue as a share of GDP has actually decreased to 7.69%. This sluggish revenue growth comes amid political uncertainties and economic slowdowns experienced throughout 2024.
Rising Debt Burden: The Price of Revenue Shortfall
To bridge widening budget gaps, Bangladesh relied heavily on foreign and domestic borrowing. Foreign debt swelled to $74.34 billion in 2025 — an 8% increase year-over-year. Over five years, public foreign debt surged nearly 46%, while total debt is expected to soar to $190 billion by fiscal year-end, almost five times the nation’s tax revenue target of $41.24 billion.
This growing debt pile has begun to crowd out private lending, with private sector credit growth dropping to its lowest point in 22 years at 6.4% as of June 2025, dampening investment and job creation. Increasing interest payments—projected at $1.82 billion on foreign loans and $9.26 billion on domestic debt for 2026—now consume approximately 22% of government revenue, squeezing funds available for essential public services.
The Human Cost: Shrinking Public Services and Development Risks
Bangladesh’s weak domestic revenue mobilization has led to significant cuts in public spending—down to just 12.7% of GDP in 2025, one of the lowest ratios globally. Critical sectors like healthcare and education have borne the brunt: health expenditure dropped to 0.67% of GDP, and education funding fell by 0.16 percentage points. Experts warn this austerity approach may slow economic growth, limit future employment prospects, and jeopardize Bangladesh’s planned graduation from least-developed country status in 2026.
Expert Insights: Why Tax Collection Remains a Challenge
Abdur Rahman Khan, Chairman of the National Board of Revenue (NBR), points to deep-rooted inefficiencies, a large informal economy, and corruption as key barriers. Notably, VAT collection efforts are marred by leakages where consumers pay taxes, but funds fail to reach the public treasury.
Finance Ministry head Salehuddin Ahmed stresses, "Improving domestic revenue mobilization is one of the major challenges of the interim government." To tackle this, the government is embarking on reforms, including shifting tax policy control directly under the finance ministry, initiating World Bank-backed digitalization programs, and cutting interest rates to discourage excessive domestic borrowing. However, some experts, like former World Bank economist Zahid Hussain, remain skeptical, warning of partial automation designed to maintain discretionary power within the tax system.
Contextualizing Bangladesh’s Debt Dilemma: Regional and Policy Perspectives
Bangladesh’s predicament is emblematic of a broader challenge facing many emerging economies striving to balance rapid development with fiscal prudence. In the U.S. economic policy realm, lessons underscore the importance of robust tax systems, transparency, and digital infrastructure to widen tax bases and enhance compliance while safeguarding social spending.
Moreover, international financial institutions have recalibrated Bangladesh’s debt risk from 'low' to 'moderate,' signaling the urgency for credible reforms that reconcile growth ambitions with sustainable debt management.
Looking Ahead: Navigating the Tightrope
Bangladesh stands at a pivotal juncture. The path it chooses now—to deepen tax reforms, combat corruption, and optimize borrowing—will define its economic trajectory for decades to come. Failure to act decisively could trap the country in a cycle of debt dependency and austerity, undercutting progress on poverty reduction, infrastructure development, and job creation.
Editor’s Note
Bangladesh’s economic challenges serve as a poignant reminder of the vital interplay between tax policy, debt management, and development goals. As policymakers push for digital reforms and tighter fiscal discipline, the question remains: Can Bangladesh expand its tax base without stifling growth or exacerbating inequality? And how can international partners support more transparent, efficient financial governance to help the nation avoid the debt trap? These are critical areas for ongoing analysis, as Bangladesh strives to fulfill its promise as a rising economic powerhouse in South Asia.
