Banking on heavy borrowing, Bangladesh's budget offers no clear path through crisis

As inflation gnaws at lives and livelihoods and treacherous headwinds loom, the budget fails to deliver concrete plans

In recent weeks, the talk has focused on inflation. New Finance Minister Abul Hassan Mahmood Ali and State Minister for Finance Waseqa Ayesha Khan both hinted that it was a key factor in their plans for the upcoming fiscal year. The sentiment was repeated from other sources in Sheikh Hasina’s administration. But Thursday’s proposed budget has had little to say on the subject.

Instead, there are vague platitudes – a nod to contractionary monetary policy and an extension of the safety net to protect more of the poor. There are few concrete steps to rein in prices.

The budget proposal put before parliament by Mahmood Ali for the 2024-25 fiscal year presents a more modest face for the government. The growth target is more realistic than the previous year, the deficit-to-GDP ratio more prudent. But scratching beneath the surface shows the limited nature of these plans.

Achieving a deficit-to-GDP ratio below 5 percent will require the National Board of Revenue to collect Tk 4.80 trillion in taxes and for domestic banks to provide Tk 1.38 trillion in loans. Both contributions present problems.

The budget for the outgoing year had set the revenue target at Tk 5 trillion. By March, the government had only raised 70 percent of that amount. In order to achieve the tax collection target set out in the proposed budget, the NBR’s tax collection rate would have to jump by 17 percent – a rate the agency has never previously reached.

Given the weaknesses in tax collection, the decision to turn to bank borrowing is understandable. The interest on the government’s debt is piling up (near Tk 1.13 trillion) and it would like to pay as little of it in dollars as possible given the ongoing forex crunch. But bank borrowing goes directly against the government’s own contractionary monetary policy as it has to pay higher interest rates on loans. In addition, as former Bangladesh Bank governor Salehuddin Ahmed says, the government’s vast demand for loans may crowd out financing for the private sector.

As he puts it, if the business in the private sector isn’t good, how will the government raise revenue through VAT? What will power the country’s growth and recovery?

The budget’s plans for employment, investment, the finance sector, and other critical areas of the economy also lack solid grounding.

So what ties the budget together?

One answer may be too simplistic, but still has the ring of accuracy - the Awami League government’s traditional budget structure tempered by the expectations of the International Monetary Fund.

Ali, a former foreign minister, had to consider the IMF’s $4.7 billion loan programme, which mandates a series of reforms, while crafting his first budget as finance minister.

His decision to cut energy subsidies, following IMF recommendations to equitably distribute government funds between the rich and the poor, has created sudden discomfort in an economy already under pressure.

While some economists commend the realistic size of the budget and the continued subsidies in agriculture and energy, the overwhelming sentiment is one of caution, highlighting the urgent need for prudent spending and strategic prioritisation of projects.

The budget for the current fiscal year already has some initiatives aligned with the goals of the IMF programme, and in the latest one, Ali has unveiled plans to deepen these efforts – notably through increasing subsidies for social safety net schemes to better protect the poor from economic shocks.

In his budget address, the finance minister did not explicitly detail the conditions stipulated by the IMF. However, he highlighted the global lender's praise for Bangladesh's "prudent and pragmatic macroeconomic policy," which has helped maintain the government's debt management as "relatively risk-free."

He stated: “Despite the increase in expenditure for loan and interest payment due to the depreciation of foreign currency over the past two years, our deficit and borrowing will remain sustainable in our overall budget.”

He emphasised the need to boost revenue to raise the tax-GDP ratio to 10 percent, in line with IMF recommendations. However, this required the government to increase taxes in many instances, putting further pressure on both individuals and businesses.

Former governor Salehuddin had his doubts about the government's ability to collect taxes if trade and commerce stagnate, especially as the private sector may struggle to secure loans due to increased government borrowing from banks.

"If credit is restricted and businesses can't expand, how will the government collect taxes? Both corporate taxes and VAT depend on the success of businesses; if they're struggling, these revenues will not materialise," he said.

Mahbubul Alam, president of the Federation of Bangladesh Chambers of Commerce and Industry, or FBCCI, said: “The deficit in this year’s budget is set at Tk 2.56 trillion, with plans to source approximately Tk 1.37 trillion from domestic banks. We believe this amount is substantial.”

"It might restrict access to credit for traders, causing us considerable hardship. Borrowing from international sources could be a more favourable option for the government," he added.

Researcher Ahsan H Mansur also questioned the rationale behind increasing taxes in the telecom sector, which significantly contributes to Bangladesh's revenue and growth.

"While income tax increases are expected in some areas, it's not logical to raise taxes on the telecom sector," he argued.

Professor Sayema Haque Bidisha, director of research at the South Asian Network on Economic Modeling, or SANEM, criticised the lack of incentives for small and cottage industries in the budget, which could have bolstered employment and rural economic conditions.

Former NBR chairman Abdul Mazid described this year's budget as 'considerate' but noted that its success hinges on its implementation, improved governance, and economic stabilisation.

The new budget aims for a 6.5 percent inflation rate, a target Salehuddin considers realistic if coupled with strict monetary policy enforcement and essential revenue reforms.

Finance Minister Ali, however, did not explain in detail how the average price inflation could be held at 6.5 percent.

He said Bangladesh has already undertaken contractionary monetary policy in line with steps taken by other countries in the world to control inflation. The interest rate has been increased “significantly” while the policy interest rate increased to 8.5 percent.

“To control inflation, various steps are being taken to make the monetary policy a successful one. At the same time, supportive policies are being implemented in the fiscal sector as well,” Mahmood Ali said.

Salehuddin, along with other economists interviewed by bdnews24.com, opposed the policy allowing the legalisation of untaxed or black money with a 15 percent tax rate. "It's irrational that regular income is taxed at 30 percent while black money is taxed at only 15 percent. How is that fair?" he questioned.

The former governor praised the government for continuing with farm and energy subsidies despite pressure from the International Monetary Fund to cut them.

"The IMF advised reducing agricultural and energy subsidies, but I think it's appropriate to ignore their advice. If subsidies are provided, they should be targeted in the right areas. From this perspective, this aspect of the budget is realistic."