Budget 2025: Can Mahmood Ali navigate Bangladesh towards calmer economic waters?

Inflation, the dollar crisis, currency devaluation, the IMF loan agreement and LDC graduation are major challenges for the new finance minister

With multiple inflation shocks, and the dollar and currency crises, Bangladesh’s increasingly shaky economy is facing a host of daunting challenges. Difficult realities have also become apparent as the country attempts to implement the various reforms suggested by the IMF as the conditions for its loan agreement in wanting to reverse the economic downturn. And then, on the horizon, is Bangladesh’s graduation from least developed country (LDC) status.

While graduation from an LDC to a developing country shows how far Bangladesh has come, it will also lead to the loss of many benefits afforded to poorer countries.

So what is Abul Hassan Mahmood Ali, the veteran diplomat who returned from retirement to helm the Ministry of Finance, planning in the first budget he will present to Parliament on Thursday to turn around the struggling economy?

The outlay for the 2024-2025 fiscal year is expected to be around Tk 7.95 trillion, a 4.46 percent year-on-year increase from the nearly Tk 7.62 trillion budget for the fiscal year 2023-2024.

To fund this massive spending, the government will try to raise Tk 5.40 trillion from domestic sources. This target is an 8 percent increase compared with the internal revenue generation goal in the current fiscal year's budget, which stands at Tk 5 trillion. Of the total budget, 68 percent will be sourced domestically, while the remaining 32 percent will be obtained through both domestic and foreign loans.

Bangladesh achieved the milestones necessary to transition from the list of LDC countries in 2018. The transition was supposed to take effect in 2024 but was pushed back two years to 2026 due to the COVID-19 pandemic. But, just as Bangladesh celebrates its newfound status, it will simultaneously lose the duty- and quota-free trade benefits it has enjoyed up to now.

The additional facilities afforded to export trade will also be reduced. Policies taken to protect domestic industries must also be withdrawn.

These are significant shifts and great care should be taken in adapting to the new situation. It is a novel challenge for the budget and a test for the new finance minister. Many will be looking to his budget speech for an idea of how the Awami League government plans to navigate this transition.

Mahmood Ali received plaudits as an economics student at Dhaka University in the 70s but is best known for a long and successful career as a diplomat. He retired in 2001 but ran successfully for MP in 2008 and has since served in various roles in the cabinet. As finance minister, he has inherited a tricky and complex situation since the 12th parliament was sworn in.

No doubt he will be turning to Waseqa Ayesha Khan, a former banker and the country’s first woman state minister for finance, to keep the economy’s wheels churning.

Mahmood Ali has acknowledged the many challenges in implementing the budget for the coming fiscal year.

“There are challenges,” he recently told the media regarding the budget. “There is inflation, and issues such as reserves, revenue, the value of the dollar, and many other things.”

But he says he wants to face those challenges as part of his goal of taking the country forward.

KEY POINTS

- Officials have hinted at a Tk 7.95 trillion budget

- The size is 4.46 percent bigger than the previous Tk 7.61 trillion budget

- The government will try to feed the huge expenditure with Tk 5.4 trillion, or 68 percent, from domestic sources, which is 8 percent more than the target set in the current budget.

- The remaining 32 percent is expected to come from local and foreign loans.

WHAT ARE THE MAJOR CHALLENGES?

Bangladesh’s foreign currency reserves, which determine its purchasing power in the international market, are dwindling.

As of Mar 30, the forex reserves stood at $18.72 billion, according to the IMF’s BPM6 measure. By Bangladesh Bank’s gross account, reserves stood at $24.21 billion.

A year before that, the account had stood at $30 billion in gross reserves and $25 billion according to the BPM6.

To combat the drain of international currency, the government has undertaken several contractionary policies, including reining in imports and regulating the gas and power supply to save dollars. But these policies have negative impacts as well. The restrictions on imports restrain the dynamism of the macroeconomy and the disruption of gas and power service hampers industry and production.

To shore up its reserves, Bangladesh turned to the IMF, an international lender that agreed to provide a loan of $4.7 billion to the country. The loan, however, came with several strings attached that could prove uncomfortable for domestic industrial interests.

The government has attempted to maintain the relative value of the taka against the dollar for a long time. But, due to a shortage of supply of the dollar in the open market, prices rose week by week. And last month, as the central bank liberalised the exchange rate, it jumped up by Tk 7. Now, the exchange rate stands at Tk 117.83 to buy $1. It is a sharp rise from the price of Tk 107.92 a year ago and a far cry from the Tk 79 it was a year before that.

This means every purchase made on the international market two years ago could be bought at Tk 79 per dollar, but has now jumped up to Tk 117.83 per dollar, making imports substantially more expensive.

The hike in the price of commodities in the international market after the COVID-19 pandemic also impacted the domestic market. As a result, Bangladesh’s commodity market has suffered from substantial inflation since 2021. When the price of the dollar rose further, inflation ran rampant and people were forced to cut back to cope with eye-watering prices.

For the past two years, inflation has hovered near the double digits, rising to a high of 9.94 percent in August last year. Before that, inflation had usually remained in the 6-7 percent range.

In April, inflation stood at 9.74 percent, but food inflation jumped to 12.5 percent.

INFLATION BY FISCAL YEAR

2020-2021 = 5.73 percent

2021-2022 = 6.05 percent

2022-2023 = 9.02 percent

HOW CAN THE FINANCIAL SECTOR BE FIXED?

Bad loans are the main problem in the banking sector and have become a major problem for the entire economy.

In December last year, the total loans issued by the banking sector amounted to nearly Tk 16.12 trillion, of which nearly Tk 1.46 trillion, or 9 percent, had defaulted. The amount of defaulted loans in December 2022 was about Tk 1.21 trillion. This means the value of defaulted loans jumped by 20.7 percent in just a year.

Most of the 61 banks involved in the sector have been involved in one loan scam after another due to collusion between the banks and customers. In an unprecedented decision, the central bank has extended unsecured liquidity facilities to three banks weakened by these bad loans.

These irregularities have resulted in the downgrading of Bangladesh’s credit rating in the international arena.

In the past year, Bangladesh Bank has decided to merge five banks that have weakened due to financial irregularities with five stronger ones.

Padma Bank has agreed to merge with Shariah-based EXIM Bank and state-owned Sonali Bank will take on the responsibility for the state-owned BDBL Bank.

The merger process of the six remaining banks, including the state-owned Basic Bank, has suffered some setbacks.

“We need to prioritise strengthening the banks. Stopping loan defaulters from getting away with it will bring money back into the banks, improving liquidity and overall stability," former governor Salehuddin Ahmed said.

Finance Minister Mahmood Ali, who is short-spoken by nature, warned that action would be taken against corrupt people in the finance sector. He has also hinted indirectly that those who default intentionally will be caught. A hint of how he plans to accomplish this may be included in his budget speech.

“Now the defaulters have to be caught. I want to catch them. Let's see if we can," he told reporters recently.

The central bank has passed the responsibility of rescheduling defaulted loans to commercial banks to reduce the rate of defaulted loans. In addition, it will form a unit to identify those who default on loans intentionally.

Wilful defaulters will not be able to purchase any new houses, cars, or apartments, or form companies. Anyone who commits forgery or fraud, or misappropriates defaulted loans will be identified as wilful defaulters.

Initiatives have also been taken to list wilful and involuntary defaulters to block them from buying air tickets, travelling abroad, being invited to state functions and founding new industrial establishments.

Commercial banks will start submitting their list to the Bangladesh Bank Credit Information Bureau (CIB) from Jul 1.

WHAT IS BEING DONE TO CONTROL INFLATION?

The government has declared paddy, rice, wheat and flour, potatoes, seeds and seedlings, jaggery, fish, fish products, meat, milk, and eggs as essential commodities as a measure to control inflation. The government will control the price of these products if deemed necessary.

There are indications that the upcoming budget may reduce taxes and import duties on various necessities. However, it isn’t clear how much these will curb rising commodity prices amid the devaluation of the taka.

The government’s fiscal policy will tend towards austerity in terms of spending, market monitoring, and the import of essential commodities.

Government ministers have announced steps to increase the coverage of social security and sales of necessities at subsidised prices for low-income people through the TCB and at fair prices for the middle class ahead of the budget.

Both Finance Minister Mahmood Ali and State Minister for Finance Waseqa said at separate events that initiatives to control inflation will be a key feature of this year's budget.

TIME RUNNING OUT

Grants are not available. Patent privileges will be revoked. Low-interest foreign credit facilities will be reduced. The supplementary duties available at the import level to protect domestic industries will be discontinued. There will also be cuts in the duty-free and quota-free benefits for Bangladesh’s exports to the developed world. Various types of tax exemptions, subsidies and incentive measures will be abolished for domestic industries.

Although these measures are supposed to be implemented after the completion of LDC graduation in 2026, Bangladesh has asked for an additional two years to stabilise the situation. However, the government is also working to increase the competitiveness of industry in the current budget to tackle the issues of the new stage of development.

The government has already approved an export policy for two years to coincide with LDC graduation. There are plans to reduce ongoing subsidies and incentives, instead focusing on alternate ways to support domestic industry.

In the budget of the current financial year, the government had planned to spend Tk 840 billion on subsidies and Tk 152.25 billion on incentives. However, the IMF’s recent proposal included a reduction in incentives as part of economic reforms.

CAN THE ECONOMY GET BACK ON TRACK?

The impact of the COVID-19 pandemic was brought up regularly in budget discussions after 2020. Before Bangladesh overcame the full impact of that shock, the reserve crisis and the sharp devaluation of the taka began to disrupt the government’s accounts.

Under the conditions set out by the IMF, the exchange rate of the taka against the dollar was made more market-oriented, and the government has lifted the interest rate limit. A major shift in contractionary monetary policy has put pressure on most economic indicators.

At the end of last January, the gross domestic product (GDP) of the economy crossed Tk 504.80 trillion. The major problems faced by the economy seem to be growing more complex day by day.

Economists say the inflation rate has gone out of control of macroeconomic management and is having a knock-on effect on the economy’s other issues.

Dr Fahmida Khatun, executive director of the private research organisation Centre for Policy Dialogue (CPD), says: "The economy is currently in a fragile state. High inflation rates and declining foreign exchange reserves are the most pressing issues. These two problems need to be solved now, immediately. These two main challenges of the economy will also affect the budget.

“Other problems in the economy include increasing internal resource circulation. The tax-to-GDP ratio should be increasing, but it isn’t doing so. Because of this, the budget deficit is increasing. The more the deficit increases, the more the government will go into debt. This will increase the government's spending on interest payments, which has risen in the current financial year. And if you take it from domestic sources, you need to get it from a bank.”

"Our financial sector and banking sector are in a bad place already. Bad loans, poor implementation of bank management, all in all, the situation is not looking good.”

Asked what the priority for the budget will be, Finance Minister Mahmood Ali said: "To bring the economy back on track, to ensure that the prices of goods are within the purchasing power of the people and that people’s quality of life is up to a certain standard.”

The finance minister said there were many challenges in the economy.

"We have to overcome these difficulties. We hope that, slowly, these obstacles will be removed. We want to move in that direction at a steady pace. But there are many hurdles and challenges to overcome. Overcoming those obstacles is a work in progress.”

INITIATIVES TO RAISE RESERVES

Former governor Salehuddin said: ‘‘Bangladesh is getting weaker in reserve management. These days, even a rickshaw-puller knows that we don’t have enough reserves, while earlier they didn’t even know what reserves were.

“We heard of so many policies taken in the past few years. If those weren’t weak, why didn’t the reserve increase? It never increased at all.“

While discussing some of the elements in the budget, Finance Minister Mahmood Ali raised the topic of offshore banking.

The government has already unveiled the Offshore Banking Act. The finance minister believes that this banking will play an important role in increasing the foreign reserves in the upcoming budget.

If offshore banks are opened, expatriates and their Bangladeshi representatives will be able to deposit dollars there. In return, they will get interest at competitive rates. In the case of capital investment, it takes time to get the liquid money, but it is easy to get the money back from an offshore bank.

When asked what special measures for revenue collection were included in the budget, Mahmood Ali said, "We need a strategy to recover tax from those who will not pay tax. A lot of money is stuck in court; about Tk 1 trillion. We will try on that front too.”

A lot of money is currently outside the country and was expected to be brought back after the elections. Asked whether any steps would be taken to recover this money, the finance minister said, "Offshore banking will start at 8.4 percent interest. There will be more steps as well.”

WHERE DO PUBLIC EXPECTATIONS STAND?

As with any new budget, the business community wants to continue to reap the old benefits while steering clear of the burden of additional taxes. Exporters have again raised various demands, including continuing export incentives, and bringing down the tax at source to 10.5 percent as it was before. The general public, meanwhile, wants commodity prices to return to tolerable levels.

Economists want rationalisation of tax management and a budget funded by the government’s resources. They are also pushing for policy continuity and long-term investment policies to improve business conditions.

However, most experts are of the view that there will be many challenges in implementing the budget due to the reserve crisis, inflation and uncertainty in funding.

Zahid Hussain, the former chief economist of the World Bank's Dhaka Office, has suggested reducing the spending target, reducing the 'leakage' in income tax, and not taking up new mega projects to balance spending and revenue in the budget.

He also believes the government is missing out on a lot of revenue due to improper policy planning.

Dr Sayema Haque Bidisha, a researcher and professor of Economics at Dhaka University, insists on changes in the spending system and says that expenditure priorities should be fixed to reduce the pressure on the economy. Priority should be given to projects that benefit the most people, she said.

Revenue collection should also be made strategic, Prof Bidisha added.

The extremely wealthy must be identified and checked to see if they are paying taxes commensurate with their wealth, she added.

Former NBR chairman Dr Muhammad Abdul Mazid said that one of the major problems with the budget is the discrepancy between spending and revenue.

He says this is because of two reasons. First, spending is increasing. Secondly, good governance, austerity measures, and cost-effectiveness are not being implemented.

Instead, ambitious budgets are planned and spending continues to grow in an undisciplined way, he said.

Mazid argued that costs should not be inflated for government purchases, project deadlines should not be extended and costs cannot be increased when extending the deadline.

Economic analyst Ahsan H Mansur believes that, due to unnecessary expenditure, the government is unable to properly allocate funds to important sectors. To escape this situation, the existing system needs to be reformed, he said.

"The government should undertake some reforms to the administration,” he said by way of example. “Through this, it is possible to reduce the expenditure. There is no need to have so many ministries. A large amount of expenditure is being spent on maintaining offices like the Ministry of Jute and Textiles. They should be phased out slowly. And the army of officials and a fleet of vehicles at each ministry are unnecessary.”