A budget that talks reform but walks protection

Bangladesh enters FY27 at a moment when its economic trajectory is being tested more severely than at any other time since the early 1990s. LDC graduation is no longer a distant horizon but an approaching reality. Export preferences will gradually disappear, compliance costs will rise, and competitiveness will matter more than ever. 

The budget speech recognises that Bangladesh's export basket remains narrow and that the transition to a post-LDC world will require a more competitive economy. The government's request for a three-year deferral reflects official concern about the economy's readiness for the transition.

Yet the trade measures embedded in the budget tell a more complicated story. The rhetoric is about reform, competitiveness, and export diversification. The policy instruments continue to rely heavily on protection, exemptions, and selective incentives.

That matters because Bangladesh is no longer a low-income economy experimenting with industrialisation. As it prepares for a post-LDC world, the relevant question is not whether protection can sometimes support development, but whether Bangladesh's own experience justifies extending the same model.

For decades, Bangladesh has maintained one of the highest tariff structures in Asia. The economy is layered with customs duties, supplementary duties, regulatory duties, advance taxes, and a growing collection of exemptions and special regimes. Yet export diversification remains limited. Manufacturing exports remain overwhelmingly concentrated in garments. Many protected sectors continue to depend on policy support long after infancy.

The export challenge

Against that backdrop, one of the most consequential features of the FY27 budget is the continued organisation of incentives around the domestic market rather than export competitiveness.

To be fair, the budget contains a significant number of tariff reductions on imported raw materials and intermediate goods. These measures lower production costs and improve profitability for domestic manufacturers. In large economies such as China or India, such a strategy can support industrial upgrading because firms can achieve efficient scale by serving vast domestic markets before competing internationally.

Bangladesh faces a different reality. Its population is large, but its market for many capital-intensive manufactures remains relatively small. For many industries, efficient scale requires access to export markets. Yet much of the budget's input liberalisation is directed toward firms serving the domestic market, while exporters continue to rely on bonded warehouses, duty exemptions, and special regimes. The result is a trade regime that lowers costs for protected producers while leaving intact the incentive to sell at home rather than compete internationally.

At the same time, duties and para-tariffs have been increased on a wide range of industrial products. The cumulative effect is to strengthen incentives to sell at home rather than compete abroad. Higher protection may improve profitability for incumbent firms, but it also makes success in the domestic market more attractive than the harder task of competing internationally.

Rather than lowering the tariff wall, the budget expands access to bonded facilities and duty-free inputs for a growing list of sectors. This may help exporters, but it also amounts to an implicit acknowledgement that the underlying tariff structure remains too distortionary for many industries to compete without exemptions. The consequence is an increasingly dual-track economy in which exporters operate through special regimes while everyone else remains behind a high tariff wall. As exemptions expand, the pressure for genuine tariff reform recedes.

The politics of protection

The budget also exposes the political economy that increasingly shapes trade policy. Sectors with strong lobbying capacity receive protection, concessions, and special treatment. Sectors without organised political influence are more likely to face liberalisation. The result is less a trade strategy than a collection of exceptions.

The contrast between liberalisation where organised opposition is weak and higher protection where producer interests are well organised is unlikely to be coincidental.

This matters because successful industrial policy requires discipline. Governments must be willing to withdraw support from unsuccessful activities, impose performance requirements, and allocate incentives according to economic objectives rather than political influence. Bangladesh's experience has often been the opposite. Protection tends to persist, exemptions tend to expand, and temporary support frequently becomes permanent.

Too often, what is presented as industrial policy becomes a mechanism for allocating rents. When tariff schedules become vehicles for distributing privileges rather than instruments of development strategy, investment decisions are shaped less by productivity and innovation than by access and influence.

Industrial ambition and reality

This concern becomes even more relevant when one examines the budget's industrial ambitions. Long-term concessions are being extended to sectors such as solar equipment, EV components, lithium-ion batteries, semiconductors, digital devices, and other technologically sophisticated industries. The ambition is understandable. Whether the strategy can deliver is another question.

The budget exposes the political economy that increasingly shapes trade policy. Sectors with strong lobbying capacity receive protection, concessions, and special treatment. Sectors without organised political influence are more likely to face liberalisation. The result is less a trade strategy than a collection of exceptions.

Bangladesh's own experience suggests that incentives alone do not create competitive industries. Successful industrial transformation requires capabilities, skills, infrastructure, supplier networks, technology transfer, and institutional coordination. Fiscal incentives can support these processes, but they cannot substitute for them.

The question is therefore not whether industrial policy is desirable. It is whether Bangladesh has learned the right lessons from its own experience. After decades of protection, export incentives, and sector-specific concessions, the economy remains heavily dependent on a single export sector. That record should encourage some humility about what tariff protection can achieve on its own.

An island of efficiency

Perhaps the most interesting feature of the budget is the introduction of Free Trade Zones under the new Customs Act. Combined with liberalisation in logistics, off-dock operations, cargo handling, and warehousing, this represents one of the most promising reform initiatives in the entire budget.

Yet it also reveals the deepest contradiction in the country's trade regime. FTZs are necessary because the broader economy remains burdened by protection, administrative discretion, valuation disputes, and complex tariff structures. They create islands of efficiency because the surrounding environment remains inefficient.

In that sense, FTZs are both a solution and a symptom. Bangladesh wants world-class logistics and globally integrated supply chains, but remains reluctant to dismantle the protectionist architecture that makes special zones necessary in the first place.

The post-LDC test

The budget contains several positive reforms, including the compression of regulatory duty rates, the withdrawal of minimum import values, the liberalisation of ICT equipment, and support for pharmaceutical inputs. These measures show that reform is possible when political-economy resistance is limited.

Yet they do not alter the broader direction of policy. Bangladesh's trade regime still resembles a system designed to offset the distortions created by earlier distortions. Bonded warehouses, duty exemptions, special regimes, and now FTZs all help firms compete despite a policy environment that continues to make competition unnecessarily difficult.

Many of the budget's trade reforms share that characteristic. They are solutions, but they are also symptoms — attempts to help firms navigate a system whose deeper contradictions remain unresolved. The question is whether Bangladesh is preparing its firms to compete in the world that is coming, or protecting them from it.

Zahid Hussain is a former lead economist at the World Bank, Dhaka Office.