Bangladesh's long-standing problem with poor tax income is causing concern about its financial well-being, with specialists warning the nation may be on the path towards a foreign debt trap. Tax revenue in the year to June only captured 6.7% of GDP, down from 7.39% the prior year, well short of the International Monetary Fund's 15% target that is required to support growth. It is below the Asia-Pacific average of 19.6%.
Overall government revenue, comprising taxes and receipts from other sources like fines and state-owned enterprises, dipped to 7.69% of GDP even as there was a 6% overall rise. Bangladesh's foreign debt hit $74.34 billion, a rise of 8% over the last year. "There is no hope of evading a debt trap unless there is an increase in domestic revenue collection," Towfiqul Islam Khan, a senior research fellow at the Center for Policy Dialogue, stated.
Political instability and a 2024 economic slowdown fueled the decline in revenue. Even after years of tax revenue growth of as much as 20.6%, structural flaws like corruption, weak enforcement, and the absence of automated tax withholding hold back collections. Tax-to-GDP levels have lingered frustratingly between 7% and 8% from fiscal 2017 to 2024, the World Bank reports.
The nation's increasing dependence on overseas borrowings is mainly due to budget support of $3.41 billion to finance a revenue deficit equivalent to three months' worth of overall domestic tax collection. Public foreign debt has risen by 46% in the last five years. In order to plug budget holes, the government has also relied heavily on domestic banks, leading to a slowing of private sector credit growth to merely 6.4% in June the lowest in 22 years.
The total debt level is forecast at $190.08 billion by the close of this fiscal year, almost five times the target for tax revenues of $41.24 billion. The interest payments alone will account for around 22% of forecasted income, with $1.82 billion on foreign borrowings and $9.26 billion on domestic borrowing. This financial strain has necessitated the reduction of expenditure in priority areas like health and education, with allocations for health declining to 0.67% of GDP and education by 0.16 percentage points.
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Taxes inefficiencies and corruption are at the root of the issue, authorities admit. National Board of Revenue Chairman Abdur Rahman Khan told retail VAT collection is defective, with money not being deposited into the public exchequer. Finance Ministry chief Salehuddin Ahmed emphasized digitization and reforms are needed to enhance revenue collection, with a World Bank-supported digital initiative to be launched this year.
Unless there are improvements in tax mobilization at home soon, economists say Bangladesh's growth could slow down, employment may lose steam, and Bangladesh's ambitions to graduate to a developing country in 2026 would be threatened. Former World Bank economist Zahid Hussain further added, "Partial automation is being deliberately maintained to preserve discretionary power," unmasking the upcoming challenges.
Bangladesh is now at a turning point: structural tax reforms and digitalization are no longer choices but necessities to prevent falling into a debt trap while achieving sustainable development.
