FY24 budget fails to address key economic challenges: CPD

The think tank is critical of the spending plan for lacking an adequate strategy to deal with inflation and key factors

At a time when Bangladesh is mired in a cost-of-living crisis, fuelled by skyrocketing prices of essentials and energy bills, the Centre for Policy Dialogue says the proposed budget for fiscal 2023-24 fails to provide a blueprint for containing inflation, the key challenge facing the economy.

Some of the underlying assumptions relating to key macroeconomic factors in the budget do not reflect the current economic reality, raising the risk of budgetary targets being missed 'by a substantial margin', according to the think tank.

CPD's reaction on Friday came a day after Finance Minister AHM Mustafa Kamal unveiled a Tk 7.6 trillion budget for the next fiscal year starting in July.

The budget, the last of the Awami League government's current term, Kamal's fourth national budget, equivalent to 15.2 percent of the national GDP, is over 15 percent higher than the revised outlay for FY23.

However, the spending plan runs an estimated fiscal deficit of Tk 2.6 trillion, is 5.2% of the GDP, much of which will be offset by heavy borrowings from domestic and external sources.

Revenue’s tax collection target at Tk 4.30 trillion, a 16 percent rise from the revised budget. This covers approximately 56.44 percent of total expenditure. The budget says revenue will account for Tk 5.04 billion of expenditure.

The revenue target has been increased to Tk 5 trillion, or 10 percent of the GDP. But public expenditure is projected to grow faster than revenue mobilisation, according to CPD.

In her analysis of the budget, Fahmida Khatun, executive director of the think-tank, flagged a range of internal and external factors that have significantly weakened Bangladesh's macroeconomic stability. These include spiralling prices of commodities, scarcity of foreign exchange, reduced revenue collection, high borrowing from the central bank, liquidity crunch in the banking sector, and lower export growth.

The average inflation rate has been maintaining a sustained uptick over the last 10 months until April 2023 when it stood at 8.6 percent. This has mostly been blamed on the war in Eastern Europe, the ripple effects of which have severely dented the Bangladesh economy.

In the fiscal plan for FY24, the government aims to bring the inflation rate down to 6 percent, a target that CPD believes is 'overambitious'.

The targets fixed under the macroeconomic framework for FY24, including 15 percent growth of credit flow to the private sector compared to 14.1 percent in last year's revised outlay, do not reflect the 'current realities', according to the think tank.

Although not explicitly mentioned, the budget speech also carried some undertones of the conditions for reforms set by the International Monetary Fund when it extended a $4.7 billion credit facility to Bangladesh earlier this year, CPD noted.

However, details about critical reforms, including shifting towards market-based

exchange rate and interest rate, and the adoption of periodic formula-based

petroleum product prices, were not been elaborated.

It also failed to acknowledge structural weaknesses in the domestic economy, with macroeconomic targets and strategy outlook remaining vague, according to the think tank.

In order to finance a record fiscal deficit, the government plans to borrow heavily from domestic sources to cover the shortfall. The critical question now is how much will be borrowed from the central bank, according to CPD. If the liquidity situation in the banking system does not improve, the government will have no other option but to borrow from the central bank, and this will create inflationary pressure, it noted.

In view of the skyrocketing prices of essentials, CPD had previously recommended changing the personal income tax structure by raising the tax-free income ceiling. And, the government has seemingly obliged as the threshold has been raised by Tk 50,000 to Tk 350,000 for individuals.

Highlighting the erosion of purchasing power in the backdrop of the impact of high inflation on low-income people, CPD welcomed the change and noted that the lowest segment of income earners will benefit the most from it.

However, the benefits of the change are somewhat undercut by the minimum tax of Tk 2,000 imposed on individuals below the taxable income threshold who are required to submit income tax returns to take a range of services from the government. "Such a move will burden low-income TIN holders and contradict the concept of tax-free income thresholds," it said.

Minister Kamal also proposed a 10 percent tax rebate for wealthy individual taxpayers and raised the ceiling of the total wealth to Tk 40 million. Currently, the minimum threshold for collecting a surcharge from an individual taxpayer stands at Tk 30 million.

CPD described the move as a concession to the rich, which will leave a number of wealthy people out of the surcharge net.

The organisation did, however, laud the move to impose a carbon tax on people owning multiple vehicles. It also praised the government for cutting the share of projects with a symbolic allocation under the Annual Development Programme.

On the whole, the budget for FY24 failed to fully acknowledge the ongoing macroeconomic challenges and, therefore, offered inadequate remedial measures, it concluded.