Fiscal Discipline For Monetary Targets

Keeping budget deficit below threshold value Saves from danger coming out of the blue.

Govt has presented Tk 7.38 trillion budget before the parliament for FY 2026-27. The size of annual development program is Tk 3 trillion while the budget deficit is Tk 2.43 trillion, 3.47% of GDP.

As govt does not signal any change to policy rate, the sheer size of budget indicating larger govt spending is likely to complicate its monetary goals. Govt aims to contain the inflation at 7.5%,which is higher than 9% at this moment. Earlier govt announced a stimulus package of Tk 600 billion,committing at least Tk 30 billion annual support,which is a monetary expansion amid tighter monetary policy.

Tighter monetary policy requires similar fiscal fine-tuning in order to attain the inflation target. In this light how this budget plus the stimulus package,surprisingly organized by the central bank, will help bringing down the inflation calls for serious explanation.

Luckily, for the govt,ease of tensions in the Middle East means saving the subsidy for extra oil price. But the bad news is NPL is piling up. In three months of this year,NPL increased to 32% and became Tk 5.88 trillion or $48 billion ($1 USD= Tk 122)(See "Defaulted Loans Climb To Tk 588,704cr By March", The Daily Star,June 02,2026,https://www.thedailystar.net/business/news/defaulted-loans-climb-tk-588704cr-march-4188866). When the govt assumed office NPL was $34 billion. First two years for the govt are the right time for reforms if govt is comitted. So far govt stance oscillated between reform commitments and political goals. There is no sign of monetary and fiscal discipline. Sometimes regulatory body is committing blunder. Appointment of a chairman to a trouble-ridden bank and later revoking that decision and dissolution of the board of that bank cost the central bank liquidity support of Tk 25 billion. Govt has to deal with trouble-ridden banks and the NPL. How this can be done depends a lot on regulatory discipline.

Containing the inflation to the desired [level], monetary and fiscal discipline and a low budget deficit can lead to a stable economy. Govt revenue target is Tk 6.95 trillion while revenue deficit widens each year. In this backdrop larger budget deficit means we have to borrow more from abroad and banks. Keeping the budget deficit low should be another major policy criteria. In 2021, budget deficit was 6.2% of GDP. It became 4.6% in 2024. Last year it was 3.6% of GDP. For 2027, it is projected to be 3.7%(Source:Wikipedia, Trading economics, CPD).

Budget Deficit

Year	Deficit (% of GDP)
2021-22	6.2
2022-23	5.5
2023-24	5.2
2024-25	4.6
2025-26	3.6
2026-27	3.7(projected)

Fiscal discipline helps attaining the monetary goals quicker and guarantees macroeconomic stability. Following the 1998 financial disaster, Indonesia literally copied the Maastricht Treaty on budget deficit and made a law to keep the budget deficit below 3%. It enjoys the benefits over the years. The Maastricht Treaty or the Treaty On European Union obliges member countries to keep inflation rate no more than 1.5% higher than the average of three member countries with lowest inflation, to keep budget deficit below 3% of GDP, to keep govt debt below 60% of GDP,to keep the exchange rate of national currency within the margins set by the European Monetary System for 2 years and to keep nominal interest rate no more than 2% higher than in three member countries with lowest inflation(see Maastricht Treaty, Wikipedia,https://en.wikipedia.org/wiki/Maastricht_Treaty).

This kind of fiscal discipline keeps govt spending in check,makes currency stable and helps monetary regulation easier. We need to make similar law in the parliament to keep the budget deficit below 3% of GDP and make sure no govt can change it.

It is interesting that govt embarks on big spending programs while the pace of revenue collection is sluggish and central bank unveils a monetary expansion program while a tighter monetary policy is in action. It is interesting to see how the central bank address the issue in its upcoming Monetary Policy Statement. Point is govt has yet to establish monetary and fiscal discipline. But it is unveiling political programs that have the potentials to prolong the recovery.

Budget Aims Inflation

Budget aims at lowering inflation, Trust restored after announcement of election.

Govt announced that the next election will be held on the first week of April next year. The announcement will clear further ambiguities surrounding election. Uncertainties will be further reduced by this announcement. Though the decision will send a positive signal, it has disappointed some parties which demand early election by December this year.

Law and order condition has not improved dramatically yet. But inflationary pressure is less compared to three months ago. Lowering fuel prices will have positive impact in coming months. Governor himself reiterated that the central bank would lower the policy rate when the inflation rate would fall below 7%.

Since the revenue target has not been achieved yet, it is still uncertain whether Bangladesh will be able to grab the next IMF loan. But govt lowered import duties on LNG and refined sugar. LNG has been increasingly used in power generation and fertilizer production. It will help bringing down the cost of power generation and fertilizer production. There is a tradeoff between revenue collection and bringing down the cost of agricultural inputs. Only time will tell whether it is a good move.

Govt also raised the taxes on land purchase and apartment sale. In addition, VAT was also raised for scrap metal, real estate agencies, imported lifts etc. This will contribute to raise the price of apartments many folds. High-end apartments nowadays become liquid assets. Since tax laws allow clandestine capital in this market, many intensively used the sector to document the undocumented wealth. With some paperworks apartments can be turned into cash. This practice drove the prices of apartments higher and deprived the govt of vital revenue as taxes were lower all these years. Govt intended to stop this practice by raising VAT and other duties on land purchase and apartment sale. However, govt lowered the registration fees and claimed other VATs surpassed the lowering of registration fees.

Now time will tell how effective it will become. I think there should be two or more public companies in partnership with private companies who will build cheap apartments for lower income group across the cities in Bangladesh. Pension fund will also get a secured investment in these companies. Property prices go up year by year, so return on investment will not fall.

Lowering taxes on packed liquid milk, animal feed, neutralized soybean oil, will have positive impact in containing the inflation. The proposed budget aims at lowering inflation, a priority task for the govt. If the IMF credit is missed,there will be further tightening of belt through spending cut. I do not think govt has the capacity to grab Tk 5.6 trillion as revenue from the market next year. It has to make further spending cut to make the deficit slim. The specific election date will help to gain investors' confidence and that of overseas credit institutions, which the economy badly needs.