Bangladesh’s weak tax revenue raises foreign debt trap concerns

DHAKA — Continued weak tax revenue is weighing on Bangladesh’s development and raising the specter that the South Asian nation will fall into a foreign debt trap.

Tax income in the fiscal year through June stood at a mere 6.7% of gross domestic product, down from 7.39%. A tax-to-GDP ratio of at least 15% is essential for sustaining growth and meeting development goals, according to the International Monetary Fund. The average ratio in the Asia-Pacific region stands at 19.6%.

Overall government revenue-to-GDP was 7.69% that year, down by 0.5 percentage point, even though revenue — which includes not just taxes but also income such as fines and profits from state-owned entities — grew by 6.02%.

In the same fiscal year, the government’s foreign debt rose to $74.34 billion — an 8% year-on-year increase.

“Unless domestic revenue collection increases, there is no chance of avoiding a debt trap,” said Towfiqul Islam Khan, senior research fellow at the Center for Policy Dialogue (CPD) think tank.

Economists said the decline in domestic revenue mobilization was not unexpected, given 2024 was marked by a mass uprising and an economic slowdown. But despite tax collection growth being as high as 20.6% in recent fiscal years, perennial problems including corruption, inefficiencies in areas such as tax law enforcement and a lack of automatic deductions are casting a shadow over revenues.

According to the World Bank, Bangladesh’s tax-to-GDP ratio stagnated between 7% and 8% from fiscal 2017 to fiscal 2024, which ran through June of that year.

Though the interim government has saved the fragile economy from the brink by reversing a decline in foreign exchange reserves, containing a steep rise in inflation and restoring confidence in the banking sector, efforts to substantially grow the tax-to-GDP ratio have not paid off.

The resulting surge in foreign debt was mainly driven by a record $3.41 billion in budget support loans from international development partners, which came as the government missed its revenue collection target by 834.96 billion taka ($6.8 billion) in fiscal 2025. The shortfall in tax revenue collection is equivalent to three months of total domestic revenue collected by the National Board of Revenue (NBR), the country’s primary tax authority (a small amount of tax is collected by local governments and other bodies).

Over the past five years, public foreign debt increased by 46%.

The government has also been turning to the domestic banking system to offset budget shortfalls, thereby squeezing private sector credit. In June, year-on-year private sector credit growth dropped to just 6.4% — the lowest rate in 22 years — stifling investment and job creation.

The Ministry of Finance estimates that combined foreign and domestic debt will rise to $190.08 billion, nearly five times the tax revenue collection target of $41.24 billion, by the end of this fiscal year.

Bangladesh’s debt-to-GDP ratio rose by 2.22 percentage points between July 2024 and the end of March over the corresponding period the previous year, and interest payments are set to tick higher. Those for foreign loans are projected to reach $1.82 billion in fiscal 2026, while interest on domestic borrowing is expected to hit $9.26 billion, according to the ministry.

In the latest budget, approximately 22% of the projected revenue is earmarked for interest payments alone.

The weak tax revenue is putting pressure on Bangladesh’s ability to pay import bills and cover its debt obligations, with the World Bank and International Monetary Fund recently downgrading Bangladesh’s debt sustainability rating from “low risk” to “moderate risk.”

Ministry of Finance head Salehuddin Ahmed said improving domestic revenue mobilization is one of the major challenges of the interim government, which took power in the wake of Sheikh Hasina’s ouster as prime minister in August last year.

“The government is being forced to compromise on priority sectors like health and education due to poor revenue mobilization,” he told Nikkei Asia.

Public spending was already just 12.7% of GDP in fiscal 2025, one of the lowest ratios in the world, and the interim government has cut the overall budget for fiscal 2026.

The health budget — which was already the second lowest among 44 least-developed countries in 2022, according to analysis by the CPD — has decreased from 0.75% of GDP in fiscal 2025 to 0.67% in fiscal 2026. Similarly, education spending has been cut by 0.16 percentage point.

Experts warn that this austerity will hinder economic growth, reduce employment opportunities and weaken purchasing power. That in turn could weigh on the prospect of the South Asian Nation graduating from least-developed country status in 2026.

NBR Chairman Abdur Rahman Khan admitted there are operational inefficiencies at the tax body. He blamed the low tax collection on the country’s vast informal economy, a lack of automatic payments and corruption.

“We haven’t digitized the tax collection system yet. Retail VAT collection is flawed — consumers are paying VAT, but the funds are not reaching the public exchequer,” he told Nikkei, pointing the finger at corruption among officials

For now, the government is trying to reduce its reliance on domestic loans by slashing interest rates on savings certificates and bonds to discourage local lending.

To boost revenues, meanwhile, it is taking tax policy out of the hands of the NBR to boost operational efficiency and minimize conflicts of interest, with this scheduled to be implemented by December. A World Bank-funded digitalization project is also due to start later this year.

“There is no alternative but to significantly improve domestic revenue collection,” Ahmed said. “We must address the inefficiencies, digitalize the system and bring the untaxed economy within the formal net.”

However, Zahid Hussain, a former lead economist at the World Bank’s Dhaka office, warned that making tax payments automatic will be easier said than done due to long-standing corruption.

“Partial automation is being deliberately maintained to preserve discretionary power,” he said.

The article appeared in asia.nikkei