Govt spending without productivity gains may stoke inflation: CPD

Published : Friday, 12 June, 2026 at 3:26 PM Count : 20

The government's ambitious spending plans for the next fiscal year could add to inflationary pressures if the expenditure fails to generate productivity gains, the Centre for Policy Dialogue (CPD) cautioned today.

While reviewing the proposed budget for the fiscal year 2026-27, the think tank said the government's inflation target of 7.5 percent would be difficult to achieve unless public spending translates into higher investment, employment and output.

"This is a large budget and government expenditure will increase. If spending does not enhance productivity, it could further fuel inflation," said CPD Executive Director Fahmida Khatun at a briefing to present its analysis of the proposed budget at Lakeshore Hotel in Dhaka.

Finance Minister Amir Khosru Mahmud Chowdhury placed a Tk 938,000 crore budget for the next fiscal year in parliament yesterday.

The proposed outlay is 18.7 percent higher year on year. The government targets to bring down annual average inflation to 7.5 percent next year.

Average inflation, measured on a 12-month moving average basis, stood at 8.6 percent through May, while point-to-point inflation reached 9.4 percent, indicating that price pressures remain elevated.

According to CPD, inflation remains largely supply-driven rather than demand-driven, meaning that controlling prices will require measures beyond monetary tightening.

The think tank argued that increased public expenditure must create productive capacity in the economy by improving infrastructure, supporting businesses, boosting employment and expanding output.

"If expenditure generates returns through higher productivity, investment and job creation, people's purchasing power will improve in a sustainable manner. Otherwise, additional spending may simply increase inflationary pressures," said Fahmida.

Against this backdrop, reducing inflation to 7.5 percent will require a combination of fiscal, monetary and supply-side measures, it said.

A key challenge, according to CPD, is ensuring adequate food and energy supplies at affordable prices.

"Food inflation is primarily being driven by supply-side constraints. Increasing food availability and ensuring stable energy supplies at reasonable prices will be critical," CPD observed.

The CPD highlighted the uncertainty surrounding global energy markets, warning that further increases in fuel prices could complicate efforts to contain inflation.

CPD said Bangladesh Bank may need to maintain its contractionary monetary policy for some time to anchor inflation expectations.

At the same time, fiscal policy must be carefully managed to ensure that increased government spending does not undermine the central bank's anti-inflation efforts.

CPD said most macroeconomic indicators remain under pressure despite improvements in foreign exchange reserves, largely driven by strong remittance inflows.

The organisation also questioned the economic growth targets set by the government for the coming fiscal year.

The government aims to achieve 6.5 percent GDP growth in the fiscal year, up from 4.14 percent growth in the outgoing fiscal year, according to a provisional estimate by the Bangladesh Bureau of Statistics.

Private investment remains another concern.

The budget projects private investment at 21.3 percent of GDP next fiscal year, only marginally higher than the revised estimate of 21.2 percent this year.

CPD noted that private investment had remained around 23-24 percent of GDP for many years before declining in recent years.

The organisation also expressed doubts over the government's projections for private-sector credit growth.

The budget targets private-sector credit growth of 9.4 percent in FY2026-27. Yet credit growth stood at only 4.75 percent in April amid high interest rates, sluggish demand and geopolitical and economic uncertainty.

To achieve both higher growth and lower inflation, CPD said restoring investor confidence would be essential.

"The economy needs productive investment, stronger supply chains and efficient public spending. Without these, achieving the budget's growth and inflation targets will be challenging," it said.

Implementation will be challenging

The CPD said implementation of the proposed budget will be challenging.

Though the budget is larger than previous ones, its success will depend less on size than on the quality of execution, the CPD said.

This will require strong institutions capable of implementing the budget efficiently and delivering tangible outcomes.

FP/MI