Kamal vows reforms as IMF influence seeps into budget for FY2024

Finance Minister AHM Mustafa Kamal rolls out an ambitious Tk 7.6 trillion budget for the next years, but many burning questions, especially regarding soaring inflation and the cost-of-living crisis, remain unanswered

Senior Correspondentbdnews24.com
Published : 1 June 2023, 09:21 PM
Updated : 1 June 2023, 09:21 PM

For any incumbent government, rolling out an election-year budget proposal is challenging, as anything that may negatively impact voters tends to reflect poorly on ballots. 

Proposing a budget in an election year in which the macroeconomy is spinning out of control is somewhat 'Mission Impossible', which Finance Minister AHM Mustafa Kamal attempted to address on Thursday. 

Bangladesh is heading for the general election early next year. 

With that in mind, Kamal and his team had to keep some other facts in mind this year before preparing budget proposals for the fiscal year 2023-2024: 

  • A raging inflation which brought the people in middle and low-income brackets to their knees. 

  • A cost-of-living crisis which was exacerbated by skyrocketing energy bills. 

  • A dipping US dollar reserve forced the policymakers to roll out unprecedented austerity measures, which, in turn, slowed down growth and crippled the private sector. 

  • The crushing blow of downgrading Bangladesh’s credit rating just two nights before. 

  • The tough conditions of reforms for macroeconomic, banking and taxation sectors set by the International Monetary Fund, or IMF, for extending a credit of $4.7 billion.

Kamal et al somewhat touched all these points in the budget proposal tabled in the parliament on Thursday, especially regarding setting a realistic target for growth and inflation, but with an undercurrent of reforms bubbles below the surface, the overall budget does not seem to recognise the root cause of the ongoing economic crisis and provide a clear path forward.

Hardly any policies or budget allocations were proposed for the people in the low-income bracket, who had hit rock bottom of the ongoing cost-of-living crisis and rising inflation.

One of the IMF conditions was to reduce the subsidies and increase the social safety net proportionally. In the budget proposals, Kamal did cut the subsidies to some extent (not to the thresholds to the IMF’s liking, though), but the size of the social safety net has not expanded substantially, except for some allowances, especially to senior citizens and widows.

This may haunt the Sheikh Hasina-led administration on the campaign trail later this year.

Raising the tax-free income ceiling, a long-awaited decision, is timely, but its benefits are undercut by the minimum tax of Tk 2,000 imposed on those who plan to seek government services.

There are positives of the budget as well.

Kamal, mostly absent in the public domain for quite some time, clearly had the IMF reform conditions in mind as those loomed large on many stages of budget proposals.

He promised an end to tax exemptions, a reduction of subsidies, raising the tax-to-GDP ratio, and a market-based pricing mechanism for fuel.

NO CLEAR PATH TO ADDRESS INFLATION, COST-OF-LIVING CRISIS

In his budget speech, there is no strong indication of how the government plans to tackle soaring inflation, which hit over eight per cent by the end of April.

Kamal mostly spoke about a price adjustment formula, indicating the removal of subsidies on fuel oil and electricity to tame inflation, and pledged to bring down the rate to 6 percent in the next fiscal year.

Two other positive approaches the finance minister took in this regard is adjusting the payment of senior citizens and widows under the social safety net programmes, but the overhaul of the programmes has largely been ignored, as prescribed by the IMF. The other one is raising the tax-free income ceiling to Tk 350,000 for individuals and Tk 400,000 for women and senior citizens.

Independent experts, however, cast doubt about the viability of the target against the backdrop of global economic uncertainties.

The average inflation rate has been maintaining a sustained uptick over the last 10 months, with consumer price index hovering around the 9 percent mark, mostly blamed on the war in Eastern Europe, the ripple effects of which have severely dented the Bangladesh economy.

The government planned to cap the key economic index at 5.6 per cent in the budget for the outgoing fiscal year, and the figure was later revised to 6 per cent. But even that goal could not be met.

Bangladesh's consumer market was mired in volatility throughout FY23 as headline inflation soared to a decade-high 9.52 per cent for a single month in August 2022. The average inflation for 10 months until April stood at 8.84 per cent.

Khondaker Golam Moazzem, research director of the think-tank Centre for Policy Research, feels that the goal for inflation in the latest budget is somewhat 'inconsistent with the current economic reality'.

“The government adopted this target in the hope that the war [in Ukraine] could end in the next fiscal year or that the global economic situation would improve. If the government took into account the reality of the situation and set its target now, it could have planned the necessary measures.”

Dr Binayak Sen, director general of Bangladesh Development Research Institute (BIDS), believes that the government's optimistic approach to tackling the issue could end up bringing positive results.

“I like the optimistic, positive attitude of the government. I think the developed world will take the initiative to stop the war in Ukraine in its own interest. Due to this war, the economy of developed countries is suffering -- their markets are suffering. They will take the initiative to stop the war to save their own economies.” 

As a result, Sen does not see anything wrong with the inflation target of 6 per cent and believes it could be attainable if the Ukraine war ends.

Ahsan H Mansur, executive director of the Policy Research Institute, cast a spotlight on the hefty deficit of Tk 2.6 trillion in the latest budget.

He believes that the level of inflation will not be greatly affected if the government borrows from private banks to cover the shortfall.

“But if the government takes money from the central bank again, it will fuel inflation. So, I would say the implementation of this year's budget will be very difficult."

BUDGET AT A GLANCE

  • 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%

PROPOSED GROWTH RATE ‘AMBITIOUS’

When Bangladesh’s economy is facing mounting pressure from multiple fronts, a 7.5 percent GDP growth target in the budget for fiscal 2023-24 appears “extravagant” to economists.

Some of them think being ambitious will bring good results, but others say maintaining economic stability considering the reality and risks should have been at the heart of the government’s agenda.

After Bangladesh posted 7.1 per cent GDP growth in 2021-22 by tackling the effects of the coronavirus pandemic, the government set a target of 7.5 per cent for FY23.

As the Russia-Ukraine war hit the global economy hard, the government revised the target down to 6.5 per cent.

But even that target became difficult to achieve. The national statistical agency in March projected 6.03 percent growth for the outgoing fiscal year.

This is the lowest growth achieved by Bangladesh in the past 12 years, barring the pandemic year of 2020-21, researcher Khondaker Golam Moazzem pointed out.

“It means the base of growth has fallen. There are good chances of high growth in the year after the base is lowered, but such a growth target amid an unstable global economy is ambitious,” said the research director at the Centre for Policy Dialogue, a private think tank.

“Perhaps the government thinks the war [in Europe] and commodity prices on the international market, including fuel oil and energy, will ease.”

The researcher doubts if the government took into account the risks of volatility while setting the target. “Foreign currency reserves have reached an alarming level. I don’t think this factor was sufficiently considered.”

Dr Binayak Sen, the director general at the government-backed Bangladesh Institute of Development Studies, however, thinks being optimistic is part of development.

“The government may think the Ukraine war will not last long. I agree with the idea because the developed countries are also affected by the war.”

Pointing out that Bangladesh’s GDP growth indeed crossed 8 per cent before the pandemic, Dr Sen said, “So, what’s the problem in expecting a high growth?”

The head of the think tank, however, acknowledged that Bangladesh was facing a “tough” time. “We’ll have to overcome many hurdles with a positive mindset.”

But economist Dr Ahsan H Mansur sees the target remaining elusive amid global economic volatility, inflationary pressure and falling imports.

“The growth this fiscal year is estimated at 6.03 per cent. But I think it will fall to 5 per cent. The situation is unlikely to change much next year,” said the executive director at the Policy Research Institute.

“I think the government should focus on stabilising the economy.”

REVENUE AND DEFICIT

The finance minister set the National Board of Revenue’s tax collection target at Tk 4.30 trillion, a 16 per cent rise from the revised budget. This covers approximately 56.44 per cent of total expenditure. The budget says revenue will account for Tk 5.04 trillion of expenditure.

To achieve the revenue target, Kamal has kept corporate tax rates unchanged, which had been lowered in the past three budgets to encourage investments.    

He even proposed a minimum charge of Tk 2,000 for individuals whose earnings fall below the taxable income threshold but need to file tax returns to receive a range of government services.

The other significant changes to collect revenues include a carbon tax. People owning multiple vehicles will have to face cc or kilowatt-based carbon taxes between Tk 25,000 and Tk 350,000.

Despite the huge revenue target, the expenditure plan leaves the government with a record fiscal deficit of Tk 2.61 trillion, or 5.2 per cent of total GDP. Typically, the government attempts to keep the deficit within 5 per cent of total GDP, but the need to inject money into the economy has meant the guideline was not followed in the past few years.

If government expenditure exceeds its income, the shortfall has to be covered by borrowing.

And, the government is likely to borrow heavily this time, with loans set to account for around 34 per cent of its total budget.

To this end, Kamal revealed plans to borrow Tk 1.06 trillion from foreign sources, including grants and Tk 1.55 from domestic sources.

In recent years, there has been an increase in borrowing from abroad in order to undertake major infrastructure projects. However, the government has to spend dollars from its forex reserves to pay interest on foreign loans.

But in the wake of the war in Ukraine, the heat on Bangladesh's forex reserves has intensified as the price of the US dollar soared in the world market.

The shift in emphasis to domestic sources for borrowing in this year's budget also points to a strategy to save dollars.

The government's domestic borrowings will tilt heavily towards the banking sector, from which it aims to raise Tk 1.32 trillion, or 17.37 percent of the total expenditure.

INCOME AND WEALTH INEQUALITY NOT ADDRESSED

Minister Kamal, in an attempt to please the wealthier class in Bangladesh, proposed a 10 per cent tax rebate for wealthy individual taxpayers and raised the ceiling of the total wealth to 40 million.

Currently, the minimum threshold for collecting a surcharge from an individual taxpayer stands at Tk 30 million.

He also proposed a 35 per cent surcharge for individuals who have net wealth exceeding Tk1 billion.

Meanwhile, general taxpayers will have to pay a 5 per cent tax when their income is Tk 100,000 more than the threshold of Tk 350,000, 10 per cent when Tk 300,000 more, and 15 per cent when Tk 400,000 more than the threshold.

In case their income is Tk 500,000 more than the threshold, a taxpayer has to pay 20 per cent tax and the rest of his income will be charged at a rate of 25 per cent.

Kamal was not as kind to middle-income people as he was to the wealthy.

He proposed increasing the cost of mobile phones, plastic products, sanitary napkins, toilet papers and hand towels, pens, aluminium products, and bicycle parts.

TRAVELLERS AND PROSPECTIVE CONDO BUYERS, BE WARNED!

Kamal proposed to increase the tax levied on domestic and foreign travel.

The measures include a proposal to amend the Travel Tax Act 2003 to set new rates for travel within and outside the country.

"I propose a multi-modal increase in travel tax rates to reduce unnecessary foreign travel among the public, inculcate austerity habits and create new revenue streams in the economy," he said.

Accordingly, air travel to North America, South America, Europe, Africa, Australia, New Zealand, China, Japan, Hong Kong, North Korea, Vietnam, Laos, Cambodia and Taiwan will come with a tax of Tk 6,000 per passenger, up from Tk 2,500.

The tax rate for a trip to a SAARC country has been raised by Tk 1,200 to Tk 2,000. A Tk 4,000 tax must be paid while travelling to any other country.

Meanwhile, a Tk 200 tax per passenger has been proposed for domestic air travel, which was previously free of any government charges.

The tax on trips abroad by road has been doubled to Tk 1,000 per passenger. The same rate will apply to journeys by sea.

For first-time apartment hunters, the minister brought more bad news.

The proposed budget includes an increase in taxes and duties in some sectors, which will push up the construction cost for houses and flats.

The minister proposed an increase in the tax rate at source ‘rationally’ during land registration in areas within and outside the jurisdiction of Rajdhani Unnayan Kartripakkha and Chattogram Development Authority.

He also proposed raising the duties on cement and other construction materials.

[Writing in English by Adil Mahmood]