Economists in Bangladesh are currently highlighting the need for the government to address a range of economic issues in the upcoming fiscal year’s budget. These include persistently high inflation, macroeconomic stability, and a low revenue base. The budget for the fiscal year 2023–24 is particularly crucial since it marks the final budget for the current Awami League government’s five-year term.
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One of the significant challenges facing the Bangladeshi government as it prepares the budget is the time-bound conditions imposed by the International Monetary Fund for its $4.7 billion loan. Meeting these conditions will require the government to adopt measures aimed at reducing inflation, promoting macroeconomic stability, and enhancing revenue generation. The government must, therefore, prioritise these areas in its budgetary plans.
High inflation rate mishap
High inflation rates have been a tenacious problem in Bangladesh from last couple of years, causing widespread economic hardship for the population. According to the economists, the government needs to address this issue by implementing measures aimed at reducing inflationary pressures, such as improving the supply of essential commodities and addressing supply chain disruptions.
Additionally, the upcoming elections also weigh heavily on the government’s budgetary plans. To ensure that the budget reflects the priorities of the electorate while also addressing the country’s economic challenges, the government requires striking a balance between addressing the demands of the electorate and implementing sound economic policies that promote macroeconomic stability.
The proposed budget for the fiscal year 2023–24 is expected to be Tk 750,165 crore, which represents a 10.6 per cent increase from the previous year. To meet the government’s revenue generation targets, there may be an increase in taxes and tariffs on certain goods and services. However, this must be balanced against the need to promote economic growth and maintain macroeconomic stability.
Reliance of central bank only rising the vulnerability
Due to the weak regulatory system, budgets tend to get revised downward every year. As a result, economists are warning that the proposed budget will be extremely challenging to fund realistically.
It is widely acknowledged that budgetary deficits arise from a combination of structural and economic factors, such as the high rate of inflation, balance of payment deficits, and increased government expenditures. To tackle this issue, the government is expected to borrow from both banks and the public by issuing government securities.
Though the decline in net foreign financing led the government to heavily borrow from the banking system, especially from the central bank, due to a liquidity crunch, several banks are now becoming unable to lend, resulting in an increase in currency circulation outside the bank. Meanwhile, despite the growth in currency circulation, people’s purchasing power appears to be decreasing, further exacerbating the economic uncertainty.
However, this strategy poses a potential risk of pushing up domestic interest rates and crowding out the already-squeezed private sector, which may negatively affect economic growth and conflict with the targeted GDP growth in the upcoming fiscal year’s budget. Furthermore, higher public borrowing would result in increased internal debts and require a rise in debt-servicing costs too.
According to data from the Bangladesh Bureau of Statistics, inflation in Bangladesh averaged 8.74 per cent in the first eight months of the fiscal year, which is way above the budgetary target of 5.6 per cent. This high level of inflation is a cause for concern and poses significant challenges for the government in formulating its upcoming budget.
Need of addressing printing money and planned tax reform announcement
Another issue that the government must address is the central bank’s printing of money through refinance packages, which is like a parallel budget. This practice is unsustainable and must be controlled to prevent further inflationary pressures.
One of the conditions set by the International Monetary Fund (IMF) for the $4.7 billion loan is to increase the tax-to-GDP ratio to 11 per cent from the current 8 per cent. However, Ahsan H. Mansur, a former economist at the Washington-based multilateral lender, believes that this would be difficult for the government to implement in the upcoming budget. He suggests that the government should announce planned tax reforms in the budget, including modernising the tax system and administration and withdrawing tax exemptions to increase the tax-to-GDP ratio in the future.
According to a study of CDP, the country’s socioeconomic indicators have deteriorated significantly, with revenue collection in the first six months of the current fiscal year falling short of expectations. As a result, there may be a shortfall of around Tk75,000 crore in revenue collection for the current fiscal year.
If Bangladesh is to meet the International Monetary Fund’s conditions, a 27% growth in revenue collection will be required for the next fiscal year, reveals the study. This highlights the urgent need for the government to take swift and effective action to address the current economic challenges and ensure a sustainable path to recovery.
Need to schedule an incentive policy
There is intense inflationary pressure in the economy, and it is putting tremendous stress on low- and middle-income households too. Addressing income inequality and the abnormal accumulation of wealth by a few is now an urgent too. For this, the government has steps to do to recoup money from defaulters and prevent them from contesting at the polls as these loan defaulters often manipulate the system to participate in polls despite being ineligible.
Moreover, there has the need for a special increment to be given to officials and employees in both the public and private sectors to alleviate the impact of inflation on individuals with limited income, as, Fahmida Khatun, Executive Director of CDP, has highlighted that the prices of daily essentials have risen by more than 25%, which is not reflected in the average inflation data published by the government.
Fahmida went on to explain that a family of four living in Dhaka city currently spends Tk7,131 per month on food without fish and meat (compromise diet), and the cost increases to Tk22,664 when fish and meat are included.
Given this situation, it is recommended to inept a 5% increment in the wages of workers in various industries, as well as the formation of a new wage structure for them. In addition to food aid, CPD has suggested cash incentives for the poor to help them cope with the rising costs of living too.
At the same time, to promote export diversification, there is a need for significant changes to the cash incentive structure for the export sector in the upcoming fiscal year. Part of the Ready-Made Garments (RMG) cash incentives could be shifted to non-RMG products that have higher export potential. In addition, to increase remittance, a market-based exchange rate should be introduced too, reducing the demand for cash incentives (currently 2.5%) for inward remittance.