IMF Conditions and National Budget FY2026

Our economy is badly shaken by various local and external economic and non-economic shocks, including export bans, reciprocal US tariffs and inflationary stress along with political instability, which aggravates the entire macroeconomic gamut. Against this harsh backdrop, the IMF has imposed several key conditions that will directly impact the country’s upcoming budget formulation. Central to these conditions is the implementation of flexible interest and exchange rates. Bangladesh Bank has confirmed that the nation is transitioning towards a fully market-based interest rate system, allowing banks to determine rates based on demand and supply factors. This shift from the previous 9% cap for lending and 6% for deposits represents a fundamental change in the monetary policy approach.

In parallel, a critical IMF requirement is the comprehensive reform of Bangladesh’s tax system. With a persistently low tax-to-GDP ratio hovering around 8-9% compared to over 15% in peer economies, the IMF has emphasised the urgent need for tax reforms aimed at building a more equitable, transparent, and high growth tax regime. The revenue to GDP growth by 0.5% each fiscal year is another big challenge in the current dry economic state. Meanwhile, we had almost Tk2 lakh crore behind the target until April 2026.

These reforms include reducing widespread tax exemptions that currently benefit specific sectors and influential stakeholders, improving compliance through modernised administration and distinctly separating tax policy from administration. The recent split of the National Board of Revenue (NBR), as demanded by the IMF, represents a significant step towards this separation, with tax policy formulation and administration now handled by different entities. This institutional restructuring aims to reduce conflicts of interest and enhance policy effectiveness, though it introduces short-term implementation challenges.

Moreover, the IMF has also mandated thorough and well-sequenced financial sector reforms to maintain stability. These include legal reforms aligned with international standards, operationalisation of new frameworks for orderly bank restructuring while protecting small depositors, strengthened risk-based supervision, and improved governance and transparency. Additionally, institutional reforms to enhance Bangladesh Bank’s independence and governance are critical for maintaining long-term macroeconomic and financial stability and the successful implementation of financial sector reforms.

Given these mandates, the IMF conditions will have profound implications for Bangladesh’s upcoming budget. The national budget has a critical role in addressing all fiscal and monetary reform issues. First, the requirement for fiscal consolidation means the government must prioritise the swift implementation of tax policy reforms while containing non-essential expenditures. This will probably result in a more conservative budget with reduced spending in certain sectors as the government aims to address the mounting external financing gap and ensure a continued decline in inflation. The IMF’s “near-term policy tightening” suggests that the budget must demonstrate a clear commitment to austerity measures, potentially affecting development projects and public sector investments. However, many sectors and avenues of the economy require huge allocation, indicating a budget deficit to a large extent.

Furthermore, revenue mobilisation faces significant challenges under these conditions. The removal of extensive tax preferential treatments and simplification of the tax system, while beneficial in the long term, may initially reduce revenue collection as businesses and individuals adjust to the new framework. The NBR split seems to temporarily disrupt revenue administration during the transition period, potentially affecting the government’s ability to meet its revenue targets in the short term.

Adding to the complexity, the budget deficit must be reduced significantly as per IMF requirements. This is particularly crucial as higher deficits would necessitate greater reliance on external loans, including from the IMF itself. The government faces the challenge of balancing deficit reduction with maintaining essential public services and investment in critical infrastructure. The IMF has specifically called for “fiscal consolidation through reduction of the budget deficit”, suggesting that the upcoming budget should target a deficit below 5% of GDP, compared to the current level of approximately 6.5%. The given prescriptions of the IMF are apparently game-changing and useful for the economy but their impacts and hurts are unavoidable. If we review the experience of IMF’s financial agenda in neighbouring economies, their suggestions trigger some socioeconomic hiccups and take time to bring effects.

In this context, the upcoming budget poses a significant test for Bangladesh, as it must carefully navigate IMF-prescribed reforms while addressing domestic economic pressures. Key priorities include subsidy rationalisation, especially in the power sector, exchange rate flexibility and inflation control. Currency devaluation has improved export retention but also heightened inflation and increased debt servicing costs. With tight foreign exchange reserves and expensive essential imports like fuel and food, the government faces difficult fiscal trade-offs that must be managed without hurting vulnerable populations. None of the previous exchange rate control mechanisms contained the devaluation spree. However, the multiplier effects of devaluation from a market-led exchange system will be passed on to the private sector in terms of higher doing business costs, expensive production, lower return margin and trade imbalance.

To respond effectively, the budget should emphasise strategic reforms backed by clear performance indicators, programme-based budgeting and contingency planning for revenue shortfalls and market shocks. Priority areas include expanding the tax base, improving governance and ensuring transparency in financial sector reforms. Additionally, austerity in public expenditure management is very critical to ensure public governance and cost management, which in turn can rationalise the budget size. Ultimately, the budget must strike a delicate balance between key IMF conditions and safeguarding national interests. Policymakers must maintain constructive engagement with the IMF while asserting domestic development priorities to stabilise the economy featured by sustainable recovery and holistic development ahead.

The writer is a macroeconomic analyst and policy researcher