Controlling inflation, implementing economic reforms and ensuring macroeconomic stability will be the biggest challenges for Bangladesh’s interim government in formulating the budget for the next fiscal year, according to experts.

They said the interim government, led by Professor Muhammad Yunus, faces a series of formidable economic challenges as it prepares the national budget for the 2025-26 fiscal year as the nation is grappling with high inflation, dwindling foreign exchange reserves, a burgeoning external debt and an unstable foreign exchange market.

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The main challenges for the interim government in the next fiscal year will include implementing effective fiscal and monetary measures to bring inflation down to the target of 6.5%, introducing structural reforms to enhance revenue collection, curbing corruption and improving public sector efficiency.

Besides, formulating policies to address economic challenges following Bangladesh’s graduation from Least Developed Country (LDC) status will be crucial. Ensuring stability through prudent fiscal management, debt control, and fostering a congenial environment for investment and growth will also be among the top priorities.

Economist and Dhaka University Professor Rashed Al Mahmud Titumir said the interim government should declare a revised budget just after assuming power as it inherited a precarious fiscal balance. “They had inherited a precarious economy which was on the cliff,” he said.

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Prof Titumir said the previous government’s debt was mounting, as it continued borrowing new loans to repay old ones.  “They (interim govt) have inherited such an economy where there is outflow, but no inflow, the economy was stagnant -- they have inherited a crisis of income and expenditure,” he said.

Due to inflation, Titumir said, consumption had decreased and wages shrunk, leading to a rising trend of poverty even before they came to power.

He said that there was no social security, while social protection remained fragmented and plagued by inclusion and exclusion errors. The government failed to address this issue due to the absence of a robust fiscal policy to drive economic growth.

The Dhaka University teacher said that enterprises were reluctant to invest due to the ongoing liquidity crisis, which has consequently led to a rise in unemployment.  “As a result, a huge number of the youth population was supposed to be there for absorption in the job market, but they became precariat class,” he said.

Talking about the challenges for the next budget, Titumir, a professor at the Department of Development Studies, pointed out that revenue generation will be a challenge for the government while formulating the budget for the next fiscal.

Titumir said the government has to go for a good debt management which will take time, for this it should go for a common minimum reform programme. There should be a quick election for an elected government so that confidence may grow among the people of the country which will lead to the predictability of economic activity and stability, he said.

He stressed for creating depthness in the social protection system as the inflation prolonged in the country.

Rashed Al Mahmud Titumir, who is also the Chairperson of think tank Unnayan Onneshan, said that the government should go for a performance based subsidy programme shunning the pick and choose one.

He slammed the government for not scrapping the capacity charge system in the power sector. “Subsidies in the energy, power and road sector were visible,” he added.

Prof Titumir said that the government should provide a roadmap for the enterprises which are refraining from making new investments currently. “The government has to show that it has brought discipline in every sector, we are not seeing any discipline in the capacity charge system or other agreements that have done previously.”

He also stressed the importance of bringing harmonisation of the fiscal and monetary policy which is still absent.

Talking to UNB, former National Board of Revenue (NBR) chairman and a member of the advisory committee to initiate reforms in the NBR, Muhammad Abdul Mazid said that there is an uncertain time in the coming days.

“New government will come, but this interim government will stay in power for how long, there will be a surface level budget which will be automatically small one,” he said.

There should be no mega projects in the next budget, he said, adding: “The next budget will emphasise the rebuilding of the economy, subsidy, social-safety net programmes and containing the inflation.”

Talking about the deplorable condition in the banking sector, Mazid, chairman of the Social Development Foundation (SDF), said that the bleeding in the banking sector has stopped. “It is now in the recovery sector, if some of the siphoned money can be brought back it would be very good, the challenge will be in the reconciliation of the banking sector with the depositors,” he said.

He also criticised the previous Awami League government for granting immunity in the power sector, a policy that continues to this day as there is no viable exit strategy midway.

Currently, controlling inflation is the primary focus for the upcoming budget. Over the past two and a half years, overall inflation in Bangladesh has consistently surpassed 9%, with food inflation reaching double digits.

In December 2024, inflation surged to 11.38%, marking a four-month high. The interim government aims to reduce the average inflation rate to 6.5% in the next fiscal year.

To achieve this, the government plans to implement cost-saving measures in public spending, coordinate with a contractionary monetary policy, and proceed with caution in project implementation. These efforts are designed to restore macroeconomic stability and ease the financial burden on citizens.

Revenue collection has fallen short, with a gap of approximately Tk 38,000 crore against the revised target of Tk 4,10,000 crore for fiscal year 2024.

The banking sector is grappling with significant challenges, particularly a high volume of non-performing loans (NPLs). Political transitions have resulted in leadership vacuums within the central bank, further destabilising the sector. Liquidity shortages are acute, with banks struggling to secure funds even in the call money market.

The interim government is prioritising reforms to address these vulnerabilities, focusing on enhancing transparency, improving governance, and restoring confidence in the financial system.

A major concern is the $500 million debt owed to India’s Adani Group for electricity supplied from its 1,600 MW coal plant. This liability, inherited from agreements made under the previous administration, is a substantial financial burden.

The interim government is reassessing such energy deals, aiming to renegotiate terms to ease fiscal pressures.

Plans include reintroducing competitive bidding and implementing regulatory reforms to ensure transparency and cost-effectiveness in future energy agreements.