Economist flags soaring inflation, dollar crunch as key issues in Bangladesh budget

Dr Zahid Hussain, a former lead economist at the World Bank, calls on the government to curb inflation by cutting the budget deficit

The level of inflation in Bangladesh has been hovering close to the double-digit mark for some time now amid mounting concerns over a cost-of-living crisis. On top of that, the ongoing dollar crunch has further fuelled price spirals, adding to the woes of ordinary people. 

These issues currently stand out as the biggest challenges facing Bangladesh from a macro-economic perspective and the government must prioritise tackling them, according to Dr Zahid Hussain, a former lead economist at the World Bank’s Dhaka office.  

Hussain, therefore, believes that a crucial aspect of the upcoming national budget for fiscal 2023-24 will be how the government addresses the twin crises. 

Finance Minister AHM Mustafa Kamal will propose the budget worth Tk 7.5 trillion, the biggest in the country's history, for FY24 on Thursday. However, the spending plan is set to leave a record deficit of more than Tk 2 trillion, an 8 percent increase from FY23's budget. 

Taking the hefty deficit into account, the government is aiming to bring down the rate of inflation to 6 percent, said Hussain. 

"This means the budget will be expansionary. So how can inflation be controlled by increasing the deficit? 

The extent to which this could impact inflationary pressures will depend on the sources that will be relied on to finance the deficit, according to him. 

In order to cover the deficit, the government plans to tap the banking sector and foreign sources, which is set to account for one-third of the borrowings. 

The question that arises then is whether the Bangladesh Bank or commercial banks will provide the domestic loans, he said. 

However, loans from domestic sources should not be facilitated by printing new currency notes, according to Hussain. The central bank printed 700 billion new currency notes from July 2023 until now to maintain the credit flow.

Hussain believes that the notes printed by the Bangladesh Bank are ‘high-powered’ money that will only propel the inflation rate. 

The economist highlighted the challenges this poses to the government in its reported plans to drag the inflation rate down from the current rate of 9 percent to 6 percent. “How will that be possible if the government takes loans by printing more money?” 

There could be little pressure on inflation if the government took loans from the commercial banks, but only private investment would have been impacted, he said. 

Inflation would not be greatly affected if the government borrowed from commercial banks, but private investment could raise problems, according to Hussain. 

He suggested slashing the budget deficit to curb inflation. "The bigger the budget deficit, the more pressure it will put on the dollar. This means the value of the taka will also be affected." 

‘‘A deficit budget will aggravate the dollar crisis further as the inflow of the currency will be hampered. The valuation of the taka will subsequently drop due to demand and inflation will automatically surge,” he said. 

The government is targeting 7.5 percent GDP growth and 6 percent inflation in the upcoming budget. 

In light of the dollar crisis, which has prompted import restrictions and thereby reduced the supply of goods in the economy, coupled with the high level of inflation, how much growth can realistically be achieved? 

"An increase in GDP growth and a drop in inflation is only possible when supply goes up but demand falls. At present, we can’t import fuel and other goods, but their demand remains the same," Hussain replied. 

Again, due to the dollar crisis, the scope of economic activities is being reduced by controlling imports. In this way, it will be difficult to achieve GDP growth targets and control inflation. 

"Also, the implementation of import controls due to the dollar crisis has seen the scope of economic activities shrink. Hence, it will be quite challenging to achieve the GDP growth target and control inflation at the same time.” 

This economist believes that as part of the direct action in the budget to reduce the dollar crisis, unnecessary expenditure should be reined in and import-dependent projects should be left out for the time being or implemented slowly. 

To address the dollar crunch, Hussain called on the government to curb unnecessary expenditures and pause or delay the implementation of import-based projects as part of its measures in the budget. 

‘‘It should avoid the projects which are locally funded, but need imported raw materials, machinery or tools.”  

"The inflow of dollars has stalled due to the lack of foreign funding. Therefore, we must take the initiative to curtail expenses and reduce the deficit.” 

Another way to cut the budget deficit is to enhance revenue mobilisation. But the outlook for revenue collection so far this year is bleak, according to Hussain. 

The economist noted that as part of the conditions laid down by the International Monetary Fund under its lending programme with Bangladesh, the government must collect another Tk 800-900 million worth of revenues. "Where will the National Board of Revenue get that amount?” 

Every year, the government provides Tk 2.5 trillion in tax rebates to different sectors, he said. ‘‘Some of those tax rebate benefits will end this year. It will help the government if those benefits are not renewed. Gradually, other benefits can be stopped in the future when their terms end.” 

‘‘The government may not be able to do so due to the pressure from different quarters. A maximum of Tk 200-300 billion may be expected from the revenue sector in the future. But this amount isn't currently available.”

In order to boost revenue collections, Hussain says the NBR should consider adopting a direct taxation system in place of the existing indirect one. 

To this end, he called for further transparency and digitisation of the tax structure and revenue collection system. 

“All measures, including tax assessment, re-verification, dispute resolution or objection should be automated so that there is no direct meeting between taxpayers and government officials.'' 

Although he believes the 0.5 percent increase in the tax-GDP ratio suggested by the IMF will be very difficult to achieve, Hussain hoped the government would set some specific targets for the tax authority in the upcoming budget. 

Another way to reduce the budget deficit is to lower subsidies. "The government tried to reduce subsidies in the energy sector by increasing prices quite a few times, but it didn’t work. The question that then arises is where did all that money go?” 

The economist suggested that the government took initiatives to reduce production costs at local oil and gas supply companies and power plants. 

After purchasing power and paying capacity charges for 5-8 years, private companies have already recovered their investments and made profits. Now, the capacity charges should be dropped, he said. 

Hussain also downplayed the impact of subsidies in the export sector. He drew the government's attention to cases where traders export goods under different names only to receive the subsidies. 

Similarly, a 2.5 percent incentive on remittances isn’t beneficial, according to him. "Most of the remittances sent by expatriates are not coming through the banking channel, so the benefits of the subsidies are being reaped by third parties. The government can shave another Tk 50-60 billion from the deficit if these subsidies end.” 

Hussain also urged the government to release foreign funds and loans that are in the pipeline faster. ‘‘It can earn $10 billion when accountability is ensured. This can also help combat the dollar crisis.” 

Highlighting the slow progress of initiatives under the Annual Development Plan (ADP) in the last few years, he said, "The officers assigned there are being given ample facilities, including training abroad. But due to the lack of accountability for project directors, the pace of implementation has been sluggish.” 

Hussain also flagged the growing income disparity in Bangladesh. ‘‘Although GDP growth has risen, employment in the industrial sector did not increase. Historically, increasing growth sees higher employment in industries as jobs move away from the agricultural sector. But our situation is different. We have more employment in the agriculture sector.” 

‘‘We need to find out why there’s less employment in the production sector. Who is reaping the benefits of economic growth? Decent employment should come from the industrial sector. If we can’t manage decent employment, then the workforce will definitely move abroad,” he added. 

The online job market offers another avenue to earn foreign exchange, said Hussain. A large group of urban, educated youths is earning in dollars by working online via outsourcing. This could be a new earning sector for Bangladesh, he added. 

At present, only urban people are working in this sector, but people in the rural parts of the country can also do the same work provided they receive training in English language, computer literacy, technical knowledge, and financial incentives, according to Hussain. 

He urged the government to focus on this sector to open up a new source of earning foreign currencies. 

[Writing in English by Sabrina Karim Murshed]