Economists warn of deepening crisis as budget relies on debt

Economists propose reducing debt reliance by cutting needless spending to ease pressure on the crisis-hit economy and weak banks

The government's FY 2025 budget proposal has sparked intense debate, with economists raising concerns about its heavy reliance on borrowing.

They are particularly worried about the reliance on internal debt, which could exacerbate inflation and strain the already weakened banking sector.

Highlighting the vulnerability of weak banks to handle substantial loans, economists suggest reducing debt dependency by cutting non-essential spending to relieve the beleaguered economy and fragile banks.

Finance Minister Abul Hassan Mahmood Ali must secure over 17 percent of the proposed Tk 7.97 trillion budget through bank loans as he unveiled the new Sheikh Hasina administration's first budget in parliament on Thursday.

More than 36 percent of the budget will need to be financed through borrowing.

Ali plans to borrow Tk 1.27 trillion from abroad and nearly Tk 1.61 trillion domestically. Of this, Tk 1.38 trillion will be from banks.

Former Bangladesh Bank Governor Salehuddin Ahmed highlighted the banking sector's liquidity crisis, questioning the feasibility of substantial government borrowing from banks amidst widespread public distrust.

"The banks are already in a liquidity crisis. Where will they get the money from? Moreover, the banking sector's condition is such that people don't trust banks to keep their money. How will the government raise money from banks?"

He criticised the budget's debt-centric approach as unsuitable under the current economic conditions and suggested prioritising spending on essential projects only, given the dire state of schools and hospitals lacking basic necessities.

"We already have a heavy burden of foreign debt. I believe cutting costs would reduce the deficit. The focus should be on policies that improve people's standard of living."

Ahsan H Mansur, the executive director of the think tank Policy Research Institute or PRI, believes that the size of the budget is ‘appropriate’ given Bangladesh's macroeconomic situation.

However, he questioned the wisdom of planning to borrow approximately Tk 1.37 trillion from a faltering banking sector, emphasising the potential adverse effects on the private sector.

“If the government borrows such a large amount from it, how will it meet the demand of the private sector?"

He added, "The private sector accounts for 87 percent of the economy, with the government making up just 13 percent. If the government absorbs all available funds, what will be left for the private sector?”

Sayema Haque Bidisha, a researcher and professor of economics at Dhaka University, believes the government's plan to borrow domestically in the budget will worsen the crisis.

"If we borrow from the central bank, it will fuel inflation," she warned. "So, it was essential to monitor this closely."

She also criticised the lack of incentives for small and cottage industries in the budget, which could have bolstered employment and rural economic conditions.

Former governor Salehuddin was of the view that although the budget is modest, the spending reductions were not reflected in the finance minister's proposal.

"We can see that the deficit budget is nearly Tk 2.52 trillion. In other words, the government plans to spend this amount," Salehuddin remarked.

"From this perspective, in my view, the budget is not ideal... It could have been better. Spending on non-essential sectors should be reduced, and priority should be given to essential projects. Why allocate Tk 2.65 trillion in the Annual Development Programme?"

"Stop everything except the priority projects. There are schools without materials, and hospitals without doctors or equipment. Why are we doing this? The government will not be able to raise Tk 4.8 trillion in income tax, but they will spend."

The former governor also believes that if the government borrows about Tk 138 trillion from banks, the private sector will struggle to get loans.

"The banking sector is in a bad state. There's a liquidity crisis, and Bangladesh Bank has tightened monetary policy. If credit shrinks and businesses don't grow, where will the government get taxes from? Whether it's corporate tax or VAT, if businesses aren't doing well, these revenues won't come."

He also wonders how the government will collect taxes if trade and commerce did not grow.

However, Salehuddin is satisfied with the budget size, saying, "The budget size is reasonable and realistic. The main issue is generating revenue and managing expenditures.

“The government needs to be careful with spending. The Annual Development Programme has 12,098 projects, many of which aren't meaningful. These should be reduced."

He also opposes the opportunity offered to legalise black money by paying a 15 percent tax.

"It's very irrational when the maximum tax on regular income is 30 percent. I pay 30 percent tax on my legitimate income and only 15 percent on black money. How does that make sense?"

However, the former governor praised the government for continuing with farm and energy subsidies despite pressure from the International Monetary Fund.

"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."

Inflation is now the country's biggest economic challenge, with rates already close to hitting double digits. In the new fiscal year's budget, the inflation target has been set at 6.5 percent, which Salehuddin considers realistic.

"It's a step in the right direction. This will help to control inflation. Immediate market monitoring is necessary."

He also recommended that the government increase direct taxes while reducing indirect taxes.