Budget 2025–26: Strong Fiscal Drive, Weak Industrial Vision
Mahmudul Hasan
The unveiling of the national budget for FY2025–26 comes at a pivotal moment in Bangladesh’s economic trajectory. A new government—formed in the wake of the July–August movement and subsequent political transition—faces the formidable task of restoring confidence in economic governance amid global uncertainty and domestic constraints. As the country approaches graduation from Least Developed Country (LDC) status in November 2026, the urgency to fortify domestic industries, expand the revenue base, and align fiscal frameworks with global trade norms has never been more critical.
This year’s Tk 7.97 trillion budget attempts to address these challenges through infrastructure investment, institutional reforms, inflation control, and broader macroeconomic stability. It also pledges improvements in social welfare, including health and education. Yet, it stops short of articulating a clear industrial vision or a coherent set of policies to guide Bangladesh’s economic transformation. In place of a strategic roadmap, the budget offers a fragmented set of fiscal measures that often appear reactive—placing disproportionate burdens on small producers while lacking a unified framework to foster innovation, competitiveness, or inclusive growth.
The budget sets an ambitious revenue target of Tk 4.8 trillion, prioritizing an expansion of the tax base and a restructured VAT system to reduce reliance on foreign aid. Within this effort, it introduces several VAT exemptions—on LNG, handmade goods, certain sanitary items, and inputs for textiles and electronics. While seemingly pro-industry, these exemptions are limited in scope and effect. Many small producers continue to grapple with high input costs, burdensome compliance, and limited access to VAT refunds or input tax credits. For them, these exemptions amount to marginal relief rather than structural support.
In contrast, the same budget raises VAT on a range of commonly used local goods, including plastic products, paper, and cotton yarn—essential inputs for many small and medium enterprises (SMEs). Exemptions on locally manufactured appliances have been scaled back, despite being extended through 2030. These are not luxury goods but essential items, often produced by firms operating on thin margins. Without a functioning VAT refund mechanism, higher input taxes translate into reduced competitiveness and tighter profit margins—particularly for firms outside major urban centers. Instead of encouraging formalization, such measures risk pushing more businesses into the informal sector.
Despite claims of harmonizing tax policy and improving compliance, the increase in VAT rates—from 5–7.5% to 15%—on items like razors, duplex paper, and household plastics inflates production costs across entire value chains. SMEs in light manufacturing, already struggling with inflation and sluggish demand, now face the added pressure of absorbing these tax hikes or passing them on to price-sensitive consumers. In practice, the policy punishes the very firms that the budget claims to empower.
While the government has also lowered the advance tax (AT) on imported raw materials—from 3% to 2%—to reduce production costs, it has simultaneously raised the AT on commercial imports from 5% to 7.5%. This dual approach aims to incentivize domestic production over trading. But its real-world effects are likely to be uneven. Large firms with in-house compliance teams and digital accounting systems may absorb the added complexity. In contrast, small manufacturers face rising administrative costs and the threat of informality. For many, this trade-off is more burdensome than beneficial.
Even well-intentioned reforms, such as these tax differentiations, risk falling short without simplification of procedures and institutional capacity building. As compliance costs rise and refund systems remain opaque, loopholes for under-invoicing and evasion widen. Instead of leveling the playing field, the current tax regime may inadvertently deepen existing inequities between large and small firms.
Looking ahead to LDC graduation, the budget introduces tariff cuts on raw materials such as petroleum oils, base metals, and industrial chemicals. These changes aim to lower production costs and enhance export competitiveness. However, the benefits are far from universal. In sectors like packaging, tanneries, and light engineering—many of which are still developing—the reduction in duties on semi-finished or finished imports increases competition and price volatility. The absence of coordinated sectoral strategies only compounds these risks. One industry’s gain in protection may result in another’s loss of competitiveness, creating contradictory outcomes across the economy.
The same contradictions are visible in the lack of targeted support for SMEs, which account for around 90% of enterprises and 12% of GDP. Beyond access to refinancing schemes or credit quotas—often out of reach for semi-formal firms—the budget offers little by way of tax relief or procedural simplification. A tiered VAT system and stronger enforcement of input tax credits could ease burdens without compromising revenue. Instead, small firms are left to navigate rising costs and compliance risks alone.
On the investment front, the budget does show intent. The establishment of 10 new Special Economic Zones (SEZs), expansion of BIDA’s One-Stop Service, and incentives for logistics and power infrastructure all aim to attract foreign direct investment. But SEZs cannot deliver broad-based benefits if they remain disconnected from domestic value chains. Without clear procurement mandates, skills training pipelines, or SME integration programs, these zones risk becoming isolated export enclaves rather than engines of inclusive industrial growth.
Ultimately, the FY2025–26 budget arrives at a critical juncture, promising progress on tax rationalization, infrastructure, and trade alignment. Yet, as with much of the broader fiscal framework, it lacks the sectoral coherence and institutional scaffolding required for a truly transformative industrial push. Fiscal reform, however necessary, is not sufficient to secure competitiveness in a post-LDC era. What’s missing is a strategic vision that ties budgetary instruments to the lived realities of producers, one that invests in innovation, strengthens domestic value chains, and drives formal employment across sectors.
As the preceding discussion underscores, the budget offers a strong fiscal drive but falls short of articulating a coherent industrial policy pull. A well-planned strategy which is centered on supporting SMEs, streamlining tax administration, and fostering sector-specific capabilities is imperative. Targeted investments in skills, R&D, and institutional linkages, especially through SEZs, must be prioritized. Without bold and coordinated measures, Bangladesh risks entering its post-LDC future with a fragile industrial base and widening structural vulnerabilities.
Author’s Biography:
Mahmudul Hasan is a Research Associate at Bangladesh Institute of Development studies (BIDS) and a postgraduate in Economics at the University of Dhaka