Bangladesh’s proposed budget for FY2026-27 signals a significant shift towards greater reliance on external financing to fund development expenditure, with foreign loans and grants projected to rise sharply even as the government seeks to moderately reduce its dependence on domestic borrowing.
According to budget documents, total foreign loans and grants are projected at Tk1.62 lakh crore in FY2026-27, up from the revised estimate of Tk1 lakh crore in FY2025-26 and the actual receipt of Tk91,265 crore in FY2024-25. The increase is being driven overwhelmingly by foreign borrowing, underscoring the growing role of external resources in financing the government’s development agenda.
Of the total external financing package, foreign loans are expected to reach Tk1.56 lakh crore, while foreign grants are projected at only Tk6,150 crore. As a result, loans will account for more than 96 per cent of total external resources.
The figures highlight Bangladesh’s increasing dependence on debt-financed development spending at a time when the country is preparing for graduation from the Least Developed Country category and faces the prospect of gradually losing access to some highly concessional financing facilities.
Although project grants are projected to increase modestly to Tk6,150 crore in FY2026-27 from Tk5,000 crore in both the original and revised FY2025-26 budgets, the increase remains marginal compared with the surge in foreign borrowing.
Project loans are expected to increase sharply to Tk1.04 lakh crore from Tk67,000 crore in the revised FY2025-26 budget. In addition, the government expects to receive Tk43,841 crore under foreign development loans, more than double the revised estimate of Tk20,253 crore for the current fiscal year.
According to the budget, Tk1.10 lakh crore of foreign loans and grants will be channelled into the Annual Development Programme, while another Tk52,000 crore will finance development activities outside the ADP framework.
The financing structure indicates that the successful implementation of foreign-funded projects will become increasingly important in ensuring that higher external resource inflows translate into economic growth, productivity gains and infrastructure development.
Domestic borrowing remains key source of financing
Despite the growing role of foreign financing, domestic borrowing will continue to be a major pillar of budget financing.
The government has set a net domestic borrowing target of Tk1.27 lakh crore for FY2026-27, lower than the revised estimate of Tk1.37 lakh crore for FY2025-26. The target is broadly comparable to the actual net domestic borrowing of around Tk1.25 lakh crore recorded in FY2024-25.
To meet its financing needs, the government plans to raise Tk7.62 lakh crore from domestic sources and repay Tk6.35 lakh crore, resulting in net borrowing of Tk1.27 lakh crore.
The banking sector will remain the government’s principal source of domestic financing. Gross borrowing from banks is projected at Tk6.12 lakh crore in FY2026-27, while repayments are estimated at Tk5 lakh crore, leaving net bank borrowing at Tk1.12 lakh crore.
Although slightly lower than the revised FY2025-26 figure of Tk1.18 lakh crore, the target confirms that banks will continue to shoulder the largest share of the government’s financing requirements.
Net borrowing from non-bank sources, including national savings certificates and other instruments, is projected at Tk15,000 crore in FY2026-27, compared with the revised estimate of Tk19,000 crore in FY2025-26. The lower target suggests an effort to contain financing costs and moderate dependence on relatively expensive non-bank instruments.
Economists flag debt sustainability and investment concerns
Professor of Economics Department Deen Islam said the government’s financing strategy reflects a growing reliance on both external and domestic borrowing to support development expenditure, but warned that the composition of that borrowing would have important implications for growth, inflation and debt sustainability.
He said while borrowing for infrastructure and productive sectors is essential for sustaining economic growth, the long-term benefits would depend on whether projects are implemented efficiently and generate returns sufficient to meet future repayment obligations.
Deen Islam also said heavy government borrowing from the banking sector could create a crowding-out effect by reducing the availability of credit for private businesses. As banks allocate more resources to financing government deficits, borrowing costs for businesses may rise, discouraging private investment and slowing job creation.
“The private sector remains the primary engine of investment and employment. If access to credit becomes constrained, achieving growth targets could become more difficult,” he said.
The economist also cautioned against the risks associated with rising foreign debt. Unlike domestic borrowing, external loans must be repaid in foreign currency, placing additional pressure on foreign exchange reserves. Any depreciation of the taka could further increase debt-servicing costs.
Another concern is the persistent problem of project delays and cost overruns. While projects often begin with favourable cost-benefit projections, implementation delays can substantially increase costs, reducing the economic returns needed to service the debt incurred.
On inflation, Islam said the impact of government borrowing depends largely on its source. Borrowing from commercial banks may divert funds from private investment but does not necessarily generate inflation directly. However, financing budget deficits through central bank lending and monetary expansion can fuel inflationary pressures.
Looking ahead, he suggested that the government pursue a balanced financing strategy that combines domestic resources with low-cost foreign borrowing. For debt to remain sustainable, he argued, borrowed funds must be invested in productive projects capable of generating returns without creating excessive pressure on future tax revenues, foreign exchange reserves or public finances.
