Bangladesh faces hard choices as it crafts FY24 budget with election on the horizon

AHM Mustafa Kamal will need to strike a balance between political expectations and economic hardships 

Senior Correspondentbdnews24.com
Published : 31 May 2023, 08:00 PM
Updated : 31 May 2023, 08:00 PM

With the general election approaching amid a volatile global economy, the Sheikh Hasina government faces a daunting task of striking a balance between political expectations and economic hardships as it is set to unveil the national budget for the fiscal year starting on Jul 1.

In the last budget under the current term of the government, Finance Minister AHM Mustafa Kamal will be forced to make some tough decisions. Raising taxes is one of them.

As the election is barely seven months away, the ruling Awami League expects him to shore up public support by bankrolling Prime Minister Hasina’s vision of a “Smart Bangladesh” without heavily burdening members of the public who are in a cost-of-living crisis due to global economic headwinds.

The government, however, is not bothered much by the election, Planning Minister MA Mannan has said. “The prime minister scrapped the idea of a special budget for the election year. She said all the budgets are equally important for us because we work for the people’s welfare. That said, we have the election context in our mind.”

The budget will not be a big one because a rise in spending will fuel inflationary pressure further, State Minister for Planning Shamsul Alam has said.

The projected budget for the upcoming fiscal year is about 15 percent higher than what it was last year, a revised amount of Tk 6.6 trillion.

But the government may need to make hard choices for economic stability in the long run as it is currently implementing a $4.7 billion International Monetary Fund loan programme to create a buffer for dwindling dollar reserves.

It has already raised fuel prices to cut subsidies in the energy sector following the IMF’s suggestion. To fulfil the agenda, Kamal will now channel the funds to programmes especially designed for the poor.

Greater subsidies for social safety net programmes are indeed on the cards in the forthcoming budget, according to Mannan. The government will also continue subsidies for the agriculture sector so that farmers can grow food at a low cost and keep prices under control, he said.

Bangladesh’s poverty rate stands at 18.7 percent, according to the latest census of the statistical agency. The total population stands at about 170 million.

To feed the budget, which officials said will be of around Tk 7.6 trillion, the government will likely rely on indirect tax to generate the bulk of revenue in the next fiscal year, which economists and analysts believe will only help widen income and wealth inequality.

Officials expect the revenue target to be around Tk 4.3 trillion, up by 16.2 percent from the outgoing fiscal year. The target is a mere 8.6 per cent of the total gross domestic product, a 0.3 percent increase from the previous year. One of the IMF's conditions for extending the $4.7 billion credit was to hit a 0.5 percent increase in the tax-GDP ratio annually.

Dr Sayema Haque Bidisha, a Dhaka University economics professor, believes tax reforms to reduce income and wealth inequalities in an election year will be a challenging job for the government.

“A progressive direct tax structure would be people-friendly and will satisfy the voters in an election year. Such a structure would definitely help boost direct revenue collection as well,” she said.

Speaking about poverty and inequality, Mannan said: “The aim of the Awami League government was to end poverty in the country. But we found out that though we might reduce poverty, in theory, we can’t completely make it disappear. Some people want to stay poor by choice and they find joy in it.”

“Conspicuous inequality looks odd. One of our primary goals is to reduce such disparity. I think inequality will exist. It exists in merit, technology, capital, networking -- so it will pertain to those who walk in the higher quarters of society. As they have a special power, so they receive special privileges.”

Besides the cost-of-living crisis, Bangladesh is facing an energy crisis fuelled by a shortage of foreign currency. As Mustafa Kamal is preparing to place the budget in parliament, many factories, offices and households are without power or gas.

Even after unprecedented fuel price hikes, dwindling forex reserves have continued to disrupt supply, for which Bangladeshi mostly depends on imports.

With tight restrictions in place on imports and the energy crisis, measures are expected from Kamal to ensure undisrupted fuel supply for production without any obstacle to spur growth and exports.

  • Size of budget: Tk 7.6 trillion (15.2% of GDP, 12.34% more than FY23)

  • Revenue target: Tk 5 trillion, including Tk 4.3 trillion for NBR

  • Estimated fiscal deficit: Tk 2.6 trillion (5.2% of GDP)

  • GDP growth target: 7.5%; if achieved, Bangladesh’s economy will be Tk 53.82 trillion

  • Annual Development Programme: Tk 2.63 trillion

  • Foreign loans target: Tk 1.27 trillion

  • Net bank loans target: Tk 1.32 trillion

  • Savings certificates sales target: Tk 180 billion

  • Inflation target: 6.5%

CONTROLLING INFLATION: A PATH TO HIGHER GDP

The high inflation rate will take centrestage in the budget announcement at parliament on Thursday as the government seeks a path to relieve people from the soaring cost-of-living crisis.

State Minister for Planning Shamsul Alam said: “Inflation is a huge concern for everybody. So we are prioritising a way to control it. It will be the best gift for the people.”

At the end of April, the inflation rate stood at 9.24 percent and its impact on everything is visible -- blatantly so on food products.

The finance minister seeks to pull it back to 6.5 percent by the end of the next financial year as the government is pressed by inflation-induced issues from multiple ends.

The government is turning to huge bank loans to meet the budget deficit, which is leading to higher inflation rate, all the while combating supply and import-related problems amid a global crisis.

The Centre for Policy Dialogue encourages market-based interests in the government efforts to control inflation. But that, in turn, will push business expenses up. On the other hand, curbing higher inflation rate through providing support to those at risk under the social safety net is contradictory to striking balance in an ideal budget.

Dr Bidisha said inclusive development must deliver reprieve to struggling citizens.

The finance minister, however, is expected to remain ambitious in estimating GDP growth with 7.5 percent for the upcoming fiscal year. It will stand at 6.03 percent at the end of the outgoing year.

Ahsan H Mansur, the executive director of Policy Research Institute, said the growth target would be “unattainable”.

“It’s because the situation is not good. The pressure of inflation, declining investment and import -- it’s not right to think that the growth will be much in such a situation. It’s 6.03 percent this year and that may fall to something around 5. I don’t think something different will happen this year either.”

He thinks the government should focus on bringing stability to the economy.

Economists say the private sector fails to take loans to meet demands when the government borrows too much money from the banking sector. That affects investment, employment and overall GDP growth.

If this goes on, raising the investment target will become a tough task. And if investments fall short, achieving 7.5 percent growth will become next to impossible.

The budget may include steps to boost local and foreign investment with an aim to improve GDP growth. The finance minister might focus on preserving duties to prioritise local industries. The ministry has decided to continue providing incentives and subsidies to encourage agricultural production.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, suggested that the government keeps watch on the SME sector to increase employment in the industrial sector. But he stressed that the budget should reflect efforts in social development instead of economic growth considering current circumstances.

SUBSIDIES

The subsidies for fuel oil, gas and power sectors will not be increased in the upcoming budget due to the price hike. But the ministry will propose making existing subsidies bigger in almost all sectors, with around Tk 10 billion addition to food subsidies.

The government agreed to several conditions of the IMF involving reforms to the financial sector, including hiking fuel prices and cutting subsidies, during the $4.7 billion loan approval.

But the FY24 budget is likely to propose Tk 1.1 trillion in subsidies. The government allocated around Tk 815 billion for subsidies in the outgoing financial year, but it ended up shooting above a trillion taka.

Mannan said: “We have things to say about moving away [from subsidies]. We will not pull the plug on everything at once. We can’t move away from providing some money to the poor under the social safety net, rather I’d say we make it bigger.”

“We have to do what we must to achieve self-sufficiency in food. So we’ll promote fertiliser, research, mechanisation, commercialisation,” he added.

Mannan said subsidies for the social safety net might get bigger as part of meeting the expectations of the lower-income people, but the scope was not likely to be expanded.

The budget proposal may also bring up universal pension which could be mandated after 2028.

The finance minister seeks to allocate Tk 1.3 trillion for the social safety net in the upcoming financial year. But Dr Bidisha pointed out that social safety means little without pension and savings interest and stressed that increasing allocation had ‘no alternatives’.

She mentioned social insurance under the social safety net programmes and introducing more expansive employment training programmes.

  • Revenues: Tk 2.27 trillion (NBR); growth 10.54% (July-March 2022-23); 60.95% of target

  • Imports: $62.39 billion; fell by 8.15% (July-March 2022-23)

  • Exports: $45.67 billion; rose by 5.38% (July-April 2022-23)

  • Remittances: $1.77 billion; rose by 2.39% (July-April 2022-23)

  • Trade deficit: $14.61 billion; fell by 41.63% (July-March 2022-23)

  • FDI: $1.8 billion (July-December 2022-23)

  • Reserves: $29.96 billion as of May 24, 2023

  • Taka depreciation: 22.95% to Tk 108.7 per dollar (May 24, 2023)

  • Inflation: 9.24% (April 2023)

  • GDP growth: 6.03% (govt forecast for 2022-23)

  • ADP implementation: 50.33% (July-April, 2022-23)

  • Foreign loan clearance: $5.36 billion (July-March, 2022-23)

  • Private sector loan growth: 12.03% (July-March, 2022-23)

REVENUES

Analysts think the finance minister will heed demands to cut taxes amid the high inflation rate, so the ceiling for non-taxable income may be raised from Tk 300,000 to Tk 350,000 a year. But the government will then focus on drawing more income from other avenues.

The National Board of Revenue plans to introduce carbon tax, increase wealth tax, additional tax for flats and residences and make return submissions obligatory for six other services.

Apart from these, proposals for cancelling several duty tax cuts and reducing tax holiday facilities were also on the cards, along with lifting VAT exemption from several sectors and imposing 15 percent universal VAT.

Kamal is also supposed to strongly propose increasing the number of electronic fiscal devices to make revenue collection faster.

Of the Tk 5 trillion target revenue collection for the next fiscal, the NBR would be tasked to gather Tk 4.3 trillion. Economists think the target is too low compared to the tax-GDP ratio. They have been opposed to the government’s plans to rely on indirect tax to generate bulk of the revenue for a long time.

The government needs to directly focus on removing inequity and distribute the fruit of growth equally among everyone, Salehuddin said.

No countries in the world rely on VAT and Bangladesh must step out of it, he said.

During the IMF loan sanction, Bangladesh agreed to tax revenue mobilisation efforts of additional 0.5 percent of GDP. Officials said the finance minister will mention it during his budget speech.

FINANCING BUDGET DEFICIT

With the tax-GDP ratio yet to reach satisfactory levels, the country’s economy is burdened with a huge budget deficit.

PRI’s Dr Mansur said the deficit in the FY24 budget was likely to hover around Tk 2.6 trillion and it was very tough for the government to generate the money to meet the deficit.

“People are turning to their savings. So most of the money will flow out of banks. Deposit growth in the banking sector is next to nothing. It was only 7 percent last year. Deposit growth in the private sector has slipped to 11 percent. It’s been declining every month and is likely to keep doing so in the days ahead.”

Citing finance ministry data, the CPD said the budget deficit stood at Tk 212 billion in the July-February period of the ongoing fiscal year, including grants, while bank loans climbed to Tk 820 billion in March.

Bangladesh was Tk 280 billion behind the revenue collection target from July-March in FY23, which could jump up to Tk 400 billion at the end of the year.

[Reporting by Zafar Ahmed, Faysal Atik and Abu Taleb; Writing in English by Osham-ul-Sufian Talukder and Syed Mahmud Onindo]