FY27 subsidy, debt servicing projections based on pre-Mideast war data

Highlights:

• FY27 budget ignores economic impact of ongoing Middle East conflict
• Subsidy allocation cut despite rising energy and import costs
• Debt interest allocation reduced despite rapidly growing public debt
• Budget projections rely on pre-conflict data and assumptions
• Economists question growth, inflation, exports, and credit targets
• Officials expect future subsidy and debt costs to exceed allocations

The government's proposed budget for the 2026-27 financial year (FY27) has been built on outdated economic assumptions that completely ignore the ongoing Middle East conflict.

The oversight has resulted in artificially depressed allocations for subsidies and public debt servicing, leaving key macroeconomic projections detached from current global and domestic realities, according to budget documents, discussions with government officials and independent analysts.

Despite a sharp increase in subsidy requirements following the escalation of conflicts involving Iran, the United States, and Israel, the government has proposed slashing subsidy allocations for FY27 to Tk89,538 crore. This represents a drop of over Tk19,000 crore—nearly 18%—compared to actual spending in FY25.

Similarly, the proposed allocation for public debt interest payments has been cut to Tk127,500 crore—roughly Tk9,000 crore lower than the FY25 expenditure—even though total public debt stock is projected to surge to Tk26.33 lakh crore by FY27.

Infograph: TBS

Formulated on pre-war assumptions

Ministry of Finance sources revealed that the revised FY26 budget and FY27 projections rely on data approved back in November last year by the interim government's Coordination Council on Fiscal, Monetary and Exchange Rate Matters, chaired by then Finance Adviser Salehuddin Ahmed.

Although the council met again in April after the BNP government took office in February, the projections were never updated to account for the Middle East crisis that erupted in late February.

The omission is explicitly acknowledged in a footnote within the Medium-Term Macroeconomic Policy Statement, released alongside the budget on 11 June:

"The projections presented are based on data covering July-November of FY2025-26 approved by the coordination council for the revised budget. As such, the effects of the Middle East conflict were not captured in the underlying data used for these estimates... As a result, some projections may, in retrospect, appear somewhat overstated when considered in more recent context and available information."

The conflict has severely disrupted regional energy markets, driving up global prices for oil, gas, coal, and fertiliser. Finance Minister Amir Khosru Mahmud Chowdhury recently admitted that these surging import costs have already saddled the current fiscal year with an additional subsidy burden exceeding Tk42,600 crore.

The conflict has also contributed to a renewed rise in inflation and weakened momentum in both imports and exports after earlier signs of improvement.

Questions over macroeconomic forecasts

Economists and policy analysts have heavily criticised the ministry's ambitious growth, inflation, and credit targets, pointing out that they defy current trends.

According to official data, inflation rose to 9.42% in May, while average inflation during the first 11 months of FY26 stood at 8.63%. Despite this, the finance ministry projects inflation will fall to 7% by the end of the fiscal year and has forecast average inflation of 7.5% for FY27.

Similarly, export earnings recorded negative growth of 2.55% during the first 11 months of FY26. Nevertheless, the government expects export growth to reach 9.02% by the end of the fiscal year and has projected growth of 7.94% for FY27.

Bangladesh Bank data show private sector credit growth slowed to 4.75% in April. However, the finance ministry expects credit growth to accelerate to 8% by June and further to 9.42% in FY27.

The Centre for Policy Dialogue (CPD) has openly questioned whether these targets are remotely achievable. CPD Executive Director Fahmida Khatun noted that the revised budget failed to ground itself in actual implementation progress.

"The projections and targets are unlikely to be achieved because they were formulated based on conditions that no longer exist," Dr Khatun told The Business Standard. "Many assumptions are entirely inconsistent with current realities."

Artificially compressed expenditure

Before the intensification of the Middle East conflict, softening global commodity prices and a weakening US dollar had kept Bangladesh's subsidy bill manageable. That window has closed, yet the budget reflects the opposite reality.

That situation has changed dramatically. Despite this, the proposed subsidy allocation for FY27 has been reduced compared with both actual spending in FY25 and revised estimates for FY26.

Government records show actual subsidy expenditure reached Tk108,673 crore in FY25. The revised allocation for FY26 has been estimated at Tk95,031 crore, while the proposed allocation for FY27 stands at Tk89,538 crore.

A similar pattern is evident in debt servicing.

The government spent Tk1,36,123 crore on interest payments in FY25, when total public debt stood at Tk21.44 lakh crore. Budget documents project public debt will increase to Tk26.33 lakh crore in FY27. Nevertheless, the proposed allocation for interest payments has been reduced to Tk127,500 crore.

Finance Division officials privately concede that if international commodity prices remain elevated or domestic energy tariffs are not hiked, actual subsidy requirements will wildly exceed the budget. They estimate that debt servicing alone will require an additional Tk15,000 crore over the current allocation. 

Operating expenditure compressed

On paper, the government has managed to compress operating expenditure to 66.30% of total spending in FY27, down from 72.73% in the revised FY26 budget. Officials claim this reduction accommodates a 50% boost to the Annual Development Programme (ADP) and welfare initiatives, alongside a Tk33,812 crore block allocation for a new public sector pay scale. 

Additional block allocations include Tk4,000 crore for unforeseen expenditure and Tk2,041 crore under other expenditure categories.

However, insiders suggest the numbers are a mathematical placeholder. One ministry official hinted that slow implementation of development projects and delays in the planned expansion of the 41-lakh Family Card welfare scheme will likely result in funds being quietly diverted later in the year to cover the inevitable overruns in subsidies and debt interest. 

Neither the finance minister nor Finance Secretary Khairuzzaman Mozumder directly responded to questions from TBS at a post-budget press briefing regarding whether operating expenditure had been understated in the proposed budget.