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The government will avoid extensive foreign borrowing for health and education, choosing instead to rely on domestic resources while channelling external loans into sectors that can attract investment and generate long-term returns.

Planning Adviser Professor Wahiduddin Mahmud said on Monday that Bangladesh must rethink its development financing strategy, arguing that long-term growth cannot be sustained by taking foreign loans for social sectors.

“External borrowing should prioritise infrastructure that boosts investment, exports and sustainable returns,” he said after a meeting of the National Economic Council (NEC). “We want to come out of the previous concept. We want to develop our human capital through our local investments.”

He acknowledged that allocations for health and education fell sharply in the Revised Annual Development Programme (RADP), partly due to the winding down of donor-funded sector-wide programmes and delays in transitioning to domestic financing. Some health projects had to be approved retroactively to prevent service disruptions, he added.

Despite the current slowdown, Prof Mahmud expressed confidence that conditions would improve in the next fiscal year as political uncertainty eases and ongoing reforms begin to take effect.

He also announced a policy shift in project approvals. Under new directives from the NEC, all projects of autonomous and semi-autonomous bodies must now be approved by the Executive Committee of the National Economic Council (ECNEC). Line ministries or advisers will be able to approve projects involving up to Tk 500 million, while larger projects will require ECNEC clearance.

On the broader economy, the adviser said the slowdown stemmed mainly from weak investor confidence and stalled private investment, not from the reduced size of the ADP. A slightly smaller development budget would not have hurt the economy if investment activity had remained strong, he said.

Prolonged political uncertainty and high interest rates aimed at controlling inflation have dampened investment, particularly among small and medium enterprises. While large investors are more concerned about political stability and policy certainty, SMEs are highly sensitive to borrowing costs, he noted.

Limited access to credit and the lack of low-interest working capital loans remain key challenges for small entrepreneurs. Although the central bank introduced low-cost refinancing schemes, banks have largely diverted funds to higher-return uses, leaving SMEs short of credit, he said.

Still, Prof Mahmud ruled out any risk of economic collapse, pointing to a sharp rise in remittance inflows. He said remittances were supporting housing, retail trade, services and small businesses, especially in rural areas, helping ease poverty pressures in regions with strong inflows.

Explaining recent cuts in development spending, he cited administrative delays, weak project design and the shift to a fully digital public procurement system. While the transition to 100 per cent electronic procurement initially slowed implementation, it has improved transparency and competition, with more bidders per tender.

The government has also deliberately slowed some large projects to improve quality and rein in unnecessary costs. New approval conditions, including regular progress reporting and independent quality assessments, may delay execution in the short term but are expected to deliver stronger outcomes, he said.